The government’s levelling up plans for England are being hampered by a funding system that is “not fit for purpose” and deprives the poorest areas of the financial support to match their needs, a leading thinktank has said.
The Institute for Fiscal Studies said that the method for allocating money to pay for public services is out of date, based on inadequate data and skewed in favour of the better-off south-east.
Calling for urgent reform, the thinktank said the funding system was doing a “poor job” in ensuring money was being spent in the parts of England where it was most needed.
The IFS said the most deprived 20% of areas were getting a smaller share of local government and police funding than they were estimated to need, while the least deprived 20% were receiving a bigger portion than their needs required.
Boris Johnson launched a white paper on the levelling up policy in early 2022. Last summer, Rishi Sunak admitted taking money from deprived urban areas in order to give it to other parts of the country.
The IFS said that, in 2022-23, day-to-day spending on the NHS, local government, schools, police and public health in England amounted to more than £245bn, the equivalent of £4,310 per person, but there were “substantial differences” between the share of funding that areas receive and the share they would receive if funding was allocated in line with differing levels of need.
Kate Ogden, a senior research economist at the IFS, said: “Funding systems for public services are trying to balance a range of different aims. But if one of the aims is for people to be able to access consistent public services across the country, then the current systems are not fit for purpose.
“Differences in levels of funding for local government, police and public health services across England do not reflect today’s patterns of need as they are based on data that are now years out of date.”
Ogden said that it would take “several years at least” to address the issue but urged the government to set out a timeframe for reforms if it is serious about making funding systems fit for the future and aligning funding for public services with its goals for “levelling up”.
The IFS said the differences in geographical spending were especially stark for local government, after repeated delays to reform the funding system. The most deprived 20% of areas received 9% less than their estimated needs while the least deprived 20% received 15% more.
Wokingham in Berkshire received 45% more local government funding last year than it would have done had money been allocated in proportion to need, while Hounslow in west London received 31% less. This was only partly explained by them setting different council tax levels, the IFS said.
Even if all areas set the same council tax rates, the thinktank said the south-east would still receive a share of funding that was 9% higher than its share of estimated spending needs, and the north-east 5% lower. This meant inconsistent funding across England for services such as social care, housing, transport, leisure centres and libraries.
NHS funding was better targeted, the IFS said, with two-thirds of areas receiving a share of funding within 5% of their share of estimated needs. This reflected the fact that NHS spending was based on relatively up-to-date assessments of what was required in various parts of the country.
A growing numbers of councils have warned that they are running out of funds, leading to tough choices over cuts to local services. Councils including Kirklees in West Yorkshire and Hastings in East Sussex on the south coast have recently joined the list of local authorities sounding the alarm over their finances.
The IFS research showed that the vast majority of areas received a lower share of funding than their share of estimated spending needs for some services, and a higher share of funding for some other services. But a small number of areas received a markedly lower share of funding than their share of spending needs across a range of services. Dudley in the West Midlands received £127 per capita less for the NHS, £122 less for local government and £47 less for police services than if the nationally-available funding were allocated in line with estimated relative spending needs.
A Department for Levelling Up, Housing and Communities spokesperson said: “Levelling up is a long-term programme of reform that sits at the heart of our ambition as a government. After listening to feedback from local government, we will work with the sector in the next parliament to take stock of the challenges and opportunities they face before consulting on any potential funding reform.
“Through the 2023/24 local government finance settlement, the most relatively deprived areas of England will receive 17% more per household in available resource than the least deprived areas.”
