The financing of local public services involves a potential trade-off between the equalisation of funding between areas and the provision of fiscal incentives for economic growth. England’s local government finance system has historically prioritised fiscal equalisation over fiscal incentives: central government grants were allocated to compensate for differences in local needs and tax bases. However, reforms and cuts to grants, and the introduction and planned extension of the business rates retention scheme are making councils’ funding more dependent on local tax revenue performance. This has the effect
of shifting the focus away from equalisation and towards incentives. In contrast, healthcare and, increasingly, education are funded centrally without reference to local tax revenue capacity.
This chapter of the British Academy's Governing England: Devolution and Funding publication describes the evolving system for funding local public services in England, with a focus on the role of equalisation, incentives, discretion and national service standards. It begins by setting out the pros and cons of local responsibility for public service spending and revenue-raising. It then describes the funding systems for key local services in England, paying particular attention to recent reforms to the local government finance system and changes to the funding of schools and adult social care services. The chapter concludes by outlining the broad choices available for future funding: (i) continuing with the current ad-hoc approach; (ii) the further centralisation of funding for adult social-care and potentially other services; (iii) increases in the general grant-funding for currently devolved services, and; (iv) the localisation of elements of health and schools funding. Each option has its pros and cons, but perhaps the most important thing is for funding policy to be consistent with broader policy objectives for different public services.