Devolution: how does the financial side work?

Devolution will put more money in the hands of local government as well as greater freedom in deciding how to spend it, says the government. But where does this money come from? And will devolution lead to increased local taxation? Nick Terdre (text) and Russell Hall (research and graphics) investigate.

More money to spend locally on public services – it’s clearly an attractive proposition for councils which have been cash-strapped under Conservative austerity and remain so under Labour. The offer was succinctly summarised in the devolution white paper:

“Unitary councils can lead to better outcomes for residents, save significant money which can be reinvested in public services, and improve accountability with fewer politicians who are more able to focus on delivering for residents.”

So by reorganising local government along devolutionary lines, savings will be generated, to which can be added further savings by substantially reducing  the number of councillors.

The government is not offering new money – its financial difficulties are well known. This was noted by the East Sussex County Council chief executive Becky Shaw back in January, when she told the Cabinet: “It is important to recognise that the White Paper does not bring any specific commitments to new funding beyond support and capacity for the set up of the [mayoral  combined authority] and for reorganisation for those councils in the [Devolution Priority Programme].”

According to the government, the financial benefits of devolution will accrue from the savings to be generated by reducing the cost of running local government. By moving to larger units – a mayoral combined county authority in the case of East Sussex – economies of scale will kick in.

The theory goes that public services such as transport and health will be run more economically (and more efficiently) across the whole of Sussex than now when East Sussex, West Sussex and Brighton & Hove each run these operations separately. In addition, there will be far fewer councillors, which represents another source of cost saving.

Bigger is better…?

According to a study by financial consultant PwC for the County Councils Network, replacing the current two-tier system with larger councils serving a population of 500,000 or more, the size recommended by the devolution white paper, a saving of at least £1.8bn would be generated over five years.

However, if two-tier areas were split into 58 unitary authorities with a minimum population of 300,000, there would be no savings but instead a cost of £850m over five years, the study found.

All music to the ears of the county councils, not least in East and West Sussex, which are keen to see a single mayoral authority in Sussex. (The geographical make-up of the unitary authorities on which the mayoralty will be based is currently under discussion, as reported by HOT.)

The District Councils Network (DCN), however, is not convinced that bigger means more economic. Its chair, Cllr Sam Chapman-Allen, noted that the new estimate of savings is well down on the £2.9bn previously calculated by the consultant and quoted in the White Paper. (No explanation of this 38% reduction was given by PwC.)

He questioned whether local government would really benefit from establishing what he called ‘mega councils’: “The danger is that [mega councils’] vast scale prevents them offering the tailored solutions to the unique needs of each city, town and village, which are essential to creating jobs and housing which stands the test of time.

“There is no way that £1.8bn can be found by merging councils without ravaging the services local people most value to find savings.”

He also said that: “Mega councils take power away from communities and entail local government ceasing to be local,” a widely shared criticism among lower-tier councillors who will find themselves out of a job when their district and borough councils are abolished, in Sussex’s case, in April 2028.

The DCN also point out that the government has done no independent research to support the case for large councils and presents data based on official statistics which “shows little correlation between the population size of unitary authorities and their performance in areas including children’s services, social care and tenant satisfaction.”

The ministry has not engaged in this debate, though Jim McMahon, minister of state for Local Government and English Devolution at the Ministry for Housing, Communities and Local Government, has said some flexibility could be permitted in the size of unitary councils if advantages are on offer.

Attractive benefits

For areas which follow the government’s promptings, attractive benefits are on offer, including integrated financial settlements over 30 years and greater freedom is deciding how to spend funds. These become available to areas which become Established Mayoral Strategic Authorities, a status which Sussex hopes to achieve in 2030 after becoming a Mayoral Combined Authority in 2028.

The first ever integrated settlements were published last week, under which Greater Manchester and West Midlands combined authorities have been awarded £630.9m and £388.6m respectively to pay for a range of public services in 2025/26.

Again, the Combined County Authority of Greater Lincolnshire, which came into being in February after starting devolution talks in 2016, has just been awarded a 30-year settlement of £720m – £24m a year – for investment in infrastructure and skills development.

Debt

Along with the benefits will come the debts which the new councils are likely to inherit from the existing authorities when they disappear. The government has made it clear that it has no plans to write off or otherwise dispose of local government debt.

While only a few councils have actually gone bust in recent years, many are mired in debt. East Sussex councils all have varying degrees of debt, including the county council (£211.6m). At lower-tier level, Eastbourne, with £173.7m, owes the most, followed by Hastings (£64.4m) and Lewes (£46.7m).

Of its partners in the prospective mayoralty, Brighton & Hove has debt of £390.7m and West Sussex County Council £467.6m. Sussex’s debt total is £2.1bn. Of course much is repayable over lengthy time-frames, but it still represents a substantial negative element in any new mayor’s financial calculations.

Direct taxation

The new councils will enjoy another source of funds in direct taxation. Unitary councils will replace borough and district councils as the collecting body for council tax, including collecting the precept levied on behalf of parish and town councils.

There has been no indication from the government that council tax will be reformed, although it is widely acknowledged that poorer sectors of the population are proportionally taxed more heavily than better-off sectors.

Taking Band D rates for 2025/26 as a benchmark, Hastings currently has the highest council tax rate (including county, fire and police precepts) in East Sussex, at £2,554 per dwelling, but the lowest take per resident, at £767. That is probably explained by the reductions offered to poorer residents.

Band D is lowest in Rother, at £2,457, but the average paid per resident, at £1,047, is the second highest.

In Brighton & Hove the Band D rate is £2,456, but West Sussex has the lowest rates across Sussex, ranging from £2,242 to £2,390.

Presumably the differences within East Sussex will disappear when (if) a new unitary for this area take over – and the same in West Sussex. Whether reductions for the less well-off will still be available in Hastings remains to be seen – they may find themselves facing higher taxes.

Parish and town council precepts are set by the parishes and town councils themselves, and that arrangement is not expected to change. Current rates differ widely, in East Sussex from £296 in Forest Row for Band D dwellings in 2025/26 to zero in half a dozen parishes.

Funding a more active role

If these bodies decide to adopt a more active role in the absence of district and borough councils, for example by taking on the latter’s assets, or providing non statutory services, the existing level of precept will have to be raised.

The option of setting up a Hastings town council is under consideration by HBC, whose leader, Cllr Julia Hilton, has warned of the need to safeguard the borough’s assets: “We must secure council-owned and -managed assets, such as our precious parks, green spaces, leisure centres, museums and community centres, so that they remain under the control of the community they serve,” she said last month.

If a Hastings town council is to be the vehicle for retaining and managing these assets, it will have to levy a precept to fund this work.

Rother District Council has already established a framework for selling off assets to its parishes and town councils also to keep them in local hands.

The Sussex mayoralty will also have the power to levy an additional ‘mayoral general precept,’ to cover, among other items, the costs of the mayor and the mayor’s costs.

So, for various reasons, residents are likely to find themselves facing higher local taxes as devolution takes effect.

 

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