Financial sustainability of local authorities 2014 report published

• Report: Financial sustainability of local authorities 2014
• Report: Financial sustainability of local authorities 2014 (PDF 216KB)
• Inquiry: Financial sustainability of local authorities
• Public Accounts Committee

Chair's comments

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:

"Councils must cope with funding reductions of around 37% between 2010–11 and 2015–16.

These cuts have not hit all local authorities equally, with reductions ranging between 5% and 40%.

Councils with the greatest spending needs – the most deprived authorities – have been receiving the largest reductions. Further cuts could not just undermine the entire viability of most optional services, but might threaten some statutory services in these areas.

Value for money could be undermined by reductions in spending which lead to “cost-shunting” between local government and other service providers – for example, reductions in social care provision leading to bed blocking in NHS hospitals.

The Department for Communities and Local Government has overall responsibility for funding to councils. However, it takes a largely "hands off" approach and does not have a good enough understanding of the impact of funding reductions, either on local authorities’ finances or on services.

It looks only at data on spending and has little information on service levels, service quality, and financial sustainability. Without at least an idea of the amount of funding required to maintain statutory services to a minimum standard, it is hard to see how the Department could ensure that local authorities are able to fulfil their statutory duties.

Looking to the future, if funding reductions were to continue following the next spending review, we question whether the Department would be in a position to provide assurance that all local authorities could maintain the full range of their statutory services.

The Department cannot at present satisfy us that it understands whether it is feasible and practical for local authorities to deliver the service transformation necessary to maintain financial sustainability. Nor does it understand what the effects on service users would be.

Late funding announcements by the Department in this Parliament, coupled with incentive-based mechanisms such as the Business Rates retention scheme, have increased financial uncertainty which undermines the ability of local authorities to act according to longer-term savings plans.

This uncertainty over future income has meant that local authorities have built up significant increases in their financial reserves, up to a third of annual net revenue expenditure. This takes even more money away from services at a time of spending reductions."

Margaret Hodge was speaking as the Committee published its 34th Report of this Session which – on the basis of evidence from Sir Bob Kerslake, Permanent Secretary, Department for Communities and Local Government, Matthew Style, Director of Local Government Finance, Department for Communities and Local Government, and Sharon White, Second Permanent Secretary, HM Treasury – examined the financial sustainability of local authorities 2014.

The Department for Communities and Local Government (the Department) does not have a good enough understanding of the impact of funding cuts, either on local authorities’ finances or on services. It is unclear whether the Department is exercising a cross-government leadership role with respect to local government. It relies on data on spending and has little information on service levels, service quality, and financial sustainability. HM Treasury should better support the Department by ensuring compliance with its requests for information at future spending reviews. While the Department has identified that local authorities will need to change the way they deliver services to remain financially sustainable, it is unclear if it is providing sufficient leadership to ensure they can implement service transformation programmes successfully. Furthermore, if funding reductions were to continue following the next spending review, we question whether the Department would be in a position to provide assurance that all local authorities could maintain the full range of their statutory services. Overall, as pressure from cuts grows, so do the risks to local authorities’ finances and their provision of services. The depth and quality of the Department’s insight into these issues needs to keep pace with these changes, something it has struggled to achieve so far.

Since 2010, the Government has reduced funding for local government in England as part of its plan to reduce the fiscal deficit. In real terms, the Government will reduce its funding to local authorities by an estimated 37% over the period 2010–11 to 2015–16. The funding reductions have not hit all local authorities equally, with reductions ranging between 5% and 40%. Local authorities have, on the whole, responded well to the cuts in funding. But the external auditors of local authorities have voiced concerns over whether some authorities will continue, over the medium term, to be financially sustainable and be able to make further savings. This is particularly the case for authorities responsible for adult social care and children’s services. The Department has overall responsibility for central government funding to local authorities. However, a number of other government departments have policy responsibility for specific duties which local authorities are obliged to perform. At spending reviews, the Department is also responsible for leading a cross-government assessment of local authorities’ ability to maintain statutory services while dealing with the consequences of a funding reduction.

Conclusions and recommendations

Risks to value for money arising from failure of leadership

The Department should be the single point that is overseeing the implications of government funding reductions and their implications for the delivery of local statutory services. The Department’s Accounting Officer is the lead accounting officer in central government with respect to local government, and is responsible for distributing government funding to support local authorities to deliver their core services. However, in taking a largely “hands off” approach, both with respect to the information it obtains from other departments and in supporting local authorities to manage ongoing funding reductions, the Department is creating risks to value for money.

The Department does not understand the impact over time of reductions in funding to local authorities, and the potential risks of individual authorities becoming financially unsustainable if reductions continue. The changes in the system of local government funding have meant that the funding reductions have impacted in different ways on different authorities. The Department does not calculate or publish figures on the impact of the reductions over time. The information sources that the Department does use to understand local authorities’ financial sustainability were not designed to provide assurance on the financial viability of local authorities. The Department accepts it should make better use of the information it has got. As a consequence, the Department does not have clear processes for identifying local authorities which are at risk of experiencing financial difficulties as a result of the reductions.

Recommendations: The Department should improve its oversight of the financial sustainability of local authorities. It should:

• produce, and update annually, a measure of change in revenue spending power agreed with local authorities which are transparent in showing change over time.
• adopt a targeted approach to monitor more closely the financial sustainability of individual local authorities deemed to be at high risk.

There is a risk that value for money might be undermined by reductions in spending in one area leading to additional costs elsewhere. Where local authorities make changes in one service, this could lead to increased demand for other services over the longer term or reduced income for the local area. Changes in delivering of youth services could impact on welfare expenditure; changes in planning and development could inhibit growth and slow down housing developments. Also, local authority funding reductions lead to “cost-shunting” between local government and other service providers; for example, reductions in local authorities’ social care provision has, in some cases, led to bed blocking in NHS hospitals. The Department agrees that it should have enough information to make good decisions about the level of funding provided to local authorities. It believes that local authorities have safeguarded value for money by absorbing the funding reductions primarily through efficiencies, rather than cutting services. However, the Department does not use data on the level of services that authorities are actually providing, putting it in a weak position to know what the real effects of its funding reductions are on service users and other local service providers. Without the data the Department could well consider implementing further grant reductions without understanding the impact on the level or quality of local services.

Recommendation: The Department should review regularly existing activity data across a range of key services such as adult social care and children’s services to monitor the impact of funding reductions on services including those delivered by other bodies locally like the NHS.

There is a risk that central government will not appreciate when reductions in funding threaten the viability of some statutory services. For spending reviews, the Department leads a cross-government exercise to provide assurance to HM Treasury that local authorities can maintain their statutory services. The Department believes the assessments of the impacts of funding decisions it obtained from other government departments were better at Spending Round 2013 than at Spending Review 2010. However, it acknowledged that for the 2013 Spending Round its information on a range of statutory services had still been incomplete. The evidence it received from other departments was patchy and limited, and not one department broke its analysis of impacts down on a sub-national level or looked at different types of authority, at either Spending Review 2010 or Spending Round 2013. This matters because those local authorities with the highest spending needs have been receiving the largest reductions. Further funding reductions could not just undermine the entire viability of most discretionary services, but might threaten some statutory services in these areas. Consequently, neither Spending Review 2010 nor Spending Round 2013 amounted to a comprehensive cross-government assessment of whether all authorities would be able to maintain their full range of statutory services. The Department accepts that it needs to strengthen its relationships with other departments to improve its understanding of local services, and committed to improve its processes for a potential spending review 2015.

Recommendations:

• HM Treasury should ensure that all relevant departments comply fully with the Department’s requests for information at future spending reviews.
• The Department should ensure that other departments’ assessments of impact consider the full range of local authority statutory services. The impact assessment should also focus on types of authority in which, because of higher funding reductions coupled with more intense service demand, services are at greater risk of becoming unsustainable.
• The Department should open up a wider consultation with local government on which statutory services local authorities should be expected to deliver, if there are to be further periods of funding reductions.

The Department’s assessment of what transformation projects can deliver is limited. The Department recognises that local authorities are reaching the limits of achieving efficiency savings, and believes that transforming the way they deliver services is the only way they can make further savings. It is supporting local authorities to do this through initiatives such as the Better Care Fund and the Public Service Transformation Network. The Department cannot at present satisfy us that it understands whether it is feasible and practical for local authorities to deliver the service transformation necessary to maintain financial sustainability. Nor does it understand what the effects on service users would be.

Recommendation: Focussing on its own transformation programmes for local government first, the Department needs to understand whether transformation initiatives are capable of delivering the size and pace of grant reductions. If necessary the Department should expand its support for transformation programmes across the country.

Lack of financial certainty

HM Treasury should endeavour to give more clarity to local authorities about future funding, so that local authorities can plan their delivery of services going forward. The Department and HM Treasury announce settlements and grants late and on some occasions have given local government one-year settlements. The Department told us it has given two-year settlements where possible, and cannot announce settlements earlier in the year because of the timing of the Chancellor’s Autumn Statement. Combined with the introduction of incentive-based funding mechanisms such as Business Rates retention, this has increased uncertainty for local authorities over future funding which has led to many adding to their reserves as a hedge against future events. This undermines the value for money of government funding, as it takes even more money away from services at a time of spending reductions.

Recommendation: HM Treasury should work with the Department to introduce multi-year finance settlements for local authorities.

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