A report published by the committee today noted a significant reduction in councils’ spending power had been imposed at the same time as increases in demand pressure.
Local authority spending power, comprising government funding and council tax, has fallen by 28.6% since 2010-11, while key services have come under increased pressure, the PAC said.
In the same timeframe there has been a 14.3% growth in the estimated population aged 65 and over in need of social care, while authorities have endured a 10.9% increase in the number of children being looked after.
PAC chair Meg Hillier said: “It is no secret that councils are under the cosh.
“The mystery is how central government expects their finances to improve when it has such an apparently shaky grasp of the issues.”
The committee criticised MHCLG’s lack of an agreed measure of sustainability for local government finance or a clear definition of ‘unsustainable’.
The PAC suggested that MHCLG is holding out for a favourable spending review, but noted that the review is now under greater pressure given the announcement of long-term NHS funding.
The committee report also pointed to the first year of the 2015 spending review (2016-17) in which councils with social care responsibilities overspent their service budget by over £1bn and used £858m in reserves.
Hillier said: “Central government’s view is, in effect, that it expects everything to work out in the end. We beg to differ.”
CIPFA has announced that it will begin consulting on a new financial resilience index for local authorities.
The MPs also said impending changes to the way local government will be funded as of 2021 (the Fair Funding Review and the introduction of 75% local retention of business rates) poses a risk to authorities long-term financial planning due to a lack of clarity.
The committee recommended that MHCLG publish a timetable regarding proposed changes to funding so that councils can plan effectively.
Richard Watts, chair of the Local Government Association’s resources board, said: “The next spending review will be make or break for local services and we agree that plugging the funding gap and placing local government on a long-term sustainable footing must be an urgent priority for the government.”
CIPFA chief executive Rob Whiteman said it was “positive” that the PAC had recognised the finance strain on local authorities and called for action to help councils balance their books.
“Otherwise, the cash crisis experienced by Northamptonshire County Council could just be the tip of the iceberg, and it will be communities who suffer the consequences,” he said.
“To empower local authorities to recognise and deal with the pressures, CIPFA is developing a financial resilience index, which will give councils a clearer understanding of their financial strengths and weaknesses.
“With this insight, CIPFA believes local authorities will be able to take appropriate action, at a local level, to prevent financial failure. The index will sit next to a new financial management code of practice that the institute is currently developing in consultation with the sector.”
MHCLG has been contacted for comment.
