Funding for local public services Ripe for reform?

Introduction

Public services, including the NHS, primary and secondary schools, local government, the police and public health services, contribute to the health and wellbeing of a population – not only by treating illness, as in the case of the NHS, but also by helping strengthen the building blocks that enable people to lead healthy lives. Funding for public services is, and will continue to be, constrained following a decade of austerity, rising demands and costs associated with an ageing population. In a cash-limited system, funded by taxation, it is difficult to imagine there would ever be an abundance of funds. But whatever the total envelope, there must be a fair system in place to allocate the limited resources, matching funding to need.  

While formal assessments of the spending needs of different areas do play a role in allocating funding across each of these five key service areas, a range of other objectives also have an impact on funding allocation. These include minimising funding turbulence through pace-of-change rules (which aim to limit big year-on-year changes in funding levels), providing financial incentives to achieve particular objectives and allowing service providers discretion in how to allocate funding between different service areas.

To better understand whether funding for local services is allocated in an effective and fair manner, the Health Foundation commissioned the Institute for Fiscal Studies (IFS) to look at the total funding available for the five key public services in each local authority area in England, and considered this against the relative spending needs of different areas. Here we highlight the key findings of this work. 

The IFS looked at the relative spending needs of different areas, not the absolute level of funding an area would need to deliver a particular level of service. They therefore made no conclusions about areas being over or under-funded, but rather identified where areas are receiving a higher or lower share of funding than would be expected given the level of estimated need in their area. 

Ensuring funding is allocated between places in a way that reflects differences in needs is a clear lever the government can deploy to in its aim to ‘level up’, reduce inequalities between areas and improve people’s health as a result. Together, core funding for the five key local services added up to £4,310 per person in 2022/23 – compared with just £9 per person from the UK Shared Prosperity Fund in the same year. We will not see reductions in inequalities without reforms to the fairness of public spending allocations.  
 

Key findings

The combined funding into the majority of upper tier local authorities is within 5% of estimated need. 

IFS looked at the gap between total place-based funding and the funding an area would receive if the total funding for each service nationally was allocated in line with relative estimated needs. This shows, as in Figure 1, 128 out of 150 local authorities receive total place-based funding within 5% of their share of total needs across all five funding areas, and no areas have a total gap of more than 11% in either direction. Richmond-upon-Thames receives 10.2% more total place-based funding than its estimated share of total needs and Dudley receives 8.2% less. Areas in London and the South East are more likely to receive more than their estimated share of total needs with areas in the West Midlands likely to receive less. 

Analysis shows that, in general, it is not the case that areas receive funding above or below estimated needs for all services. IFS analysis showed that only seven local areas did not have funding below the share they should have received if they were receiving funding across all services in proportion to their level of relative need for any service. In contrast, twelve local areas received less funding than their share of needs for all services. To note, the services differ in size so a gap in public health funding means a much smaller gap per person than a similar percentage gap for the NHS.

Currently, local areas have very limited discretion to move funding between service areas to redistribute funding within places, but this could help alleviate some of the funding pressures. Local allocation processes can help local areas to better match funding with needs, building on arrangements like the Better Care Fund where NHS bodies and local authorities pool funding for adult social care services. 

Areas of high deprivation receive less funding relative to needs than areas of low deprivation

The IFS analysis showed that more deprived areas receive, on average, more government funding in total than less deprived areas, yet the most deprived areas receive a lower share of overall funding relative to their needs than less deprived areas. 

Figure 2 shows how the share of funding compares to share of assessed needs across different services. It shows the average gap between shares of funding and estimated needs for each service by quintile of socio-economic deprivation. While NHS funding has a specific top-up to address health inequalities, the funding formulas for local government and the police are less focused on providing additional financial support for deprived areas. As a result, the most deprived fifth of areas receive on average 9% less local government funding (£92 per person) than their share of needs and 6% less police funding (£17 per person). 
 

For individual funding streams the following patterns are observed.

The NHS 

NHS funding shows little variation in the gap between funding and assessed need. In addition, NHS funding has a component to specifically reflect unmet needs and support a reduction in inequalities, thereby directing additional funding towards areas of high deprivation. This means that places with a higher need have higher ‘target allocations’ so that they can provide additional health services to reduce health inequalities. Even with pace-of-change rules (implemented with the legitimate aim of avoiding system destabilisation), which dilute the full effects of the objectives of the NHS funding policy, the IFS analysis shows that NHS funding has the smallest gap between estimated need by deprivation when compared with other funding at place level.

Public health

The public health grant is ring-fenced to be spent on public health activity in local authorities. As with NHS funding, public health funding aims to reduce health inequalities and unmet need with areas with the worst overall health receiving more. The most-deprived decile of councils received 139% more public health funding per person on average than the least-deprived decile of councils in 2019/20. However, the allocations fall short of relative need as they are built on out-of-date information (funding has been largely fixed since 2015/16, despite local characteristics changing). Successive cuts to public health funding have been deeper in more deprived areas, and some councils were already far from target funding because of pace-of-change rules.

The police

Funding for police services also shows a difference between current funding and assessments of relative need with the most deprived areas receiving on average 6% less police funding (£17 per person). Core grant funding has been changed for all police force areas at the same rate since 2013/14, even though some areas have been able to raise more through council tax rises. This means funding has become less well aligned with assessed spending needs and the relative amount of total funding that more-deprived areas have received over time has decreased.  

Local government funding

Local government funding shows the largest difference between current shares of funding and assessments of relative need. The most deprived fifth of areas receive, on average, 9% less local government funding (£92 per person) than their share of needs. The least-deprived fifth of areas received on average 15% more local government funding (£108 per person) than their share of needs.

To note, the government does not produce needs assessments for school funding meaning that IFS could only look at how funding compares to estimated needs for the NHS, local government, police and public health funding.

The difference between funding and estimated need was greatest for the local government funding system 

The IFS reviewed the core elements of the local government funding system: council tax, retained business rates and general grant funding from central government. This funding is spent by councils on their responsibilities outside of schools and public health (so services like social care, housing, recreation, culture, transport and economic development). They found that there is variation and inconsistency in the amount of funding local councils receive. This is partly because cuts to local government spending in the 2010s were larger in more-deprived areas, averaging over 25% for the most deprived three deciles and less than 15% for the least deprived three deciles. The inconsistency is also due to the use of out-of-date data in spending needs assessments and an increasing focus within the system on providing financial incentives to councils to take specific action (eg, house building) rather than redistributing revenues. 

In 2022/23, 36 upper-tier local authorities (a quarter of all upper-tier authorities) were receiving funding that was at least 10% lower than it would have been if local government funding was in proportion to their updated estimated needs. Most of these were London boroughs that experience significant levels of deprivation. At the same time, the IFS found that 29 areas (a fifth of all upper-tier authorities) were receiving 10% more funding than they would have based on their share of assessed needs – these include more affluent areas like Buckinghamshire and Surrey.

A new approach is needed to local area funding

It is clear that reform is needed, particularly to the local government funding system, to enable effective place-based action to be taken to support health. At the moment, the system for allocating place-based funding is chaotic, inconsistent and, at times, unfair. This makes it harder for local government and its partners to address local need and take action to level up access to high quality building blocks of health. Action is needed in the following areas.

Restore and maintain the relationship between need and allocation

Levelling up outcomes by targeting resources according to need should be a guiding principle, reflected in updated funding formulae. The government, across all place-based services, should also review whether additional funding should be given to ‘top up’ areas of higher need, as is the case currently with NHS funding. The IFS will shortly begin a third phase of their research, again funded by the Health Foundation, and this will propose a new approach to funding formulae.

Build an up-to-date funding formula

Using frequently updated data will ensure ongoing population and other changes are reflected, maintaining the relationship between needs and allocation.

Be transparent on the factors being taken into account when making funding decisions

Trade offs in central government decision making should explicitly consider opportunities to maximise health improvement in a place.

Support system-wide approaches

Fairness and efficiency would be increased if local areas were better supported to act in a joined-up way. Drawing on lessons from initiatives like Total Place pilots and Local Area Agreements, government should consider increased financial flexibilities around allocations across a place, as part of its devolution agenda. The IFS found that it is common for areas to receive lower shares of funding than their share of needs for one service but higher levels for another service. But local areas cannot manage this themselves as they have limited ability to move funding between service areas. There is the potential to avoid duplication and increase allocative efficiency if areas were supported to prioritise and allocate funding more holistically across different service areas.

Current funding systems for local services are not set up to tackle inequalities. Reform is required to ensure that local areas are supported to take action to create healthy lives for their local communities. We will continue to make the case for adequate and fair funding over the coming year.