Local government got off relatively lightly in the Autumn Statement. But as today's local government finance settlement shows, more pain is yet to come and some councils are near tipping point
Today's local government finance settlement sees the coalition focusing on its key hobby horses of keeping council tax down, improvements in procurement (code for shared services and alternative delivery models) and local authorities taking opportunities to raise income and reduce their dependence on government grants.
The government seems to have convinced itself that local government has taken a proportionate part of the cuts since 2010, even though all the evidence suggests otherwise. Keeping council tax at the same level is also a very political measure as it focuses on the national agenda of reducing/stabilising direct taxes and increasing indirect ones.
All this is happening against a mixed background for councils. Usually, when Chancellor George Osborne stands at the dispatch box, to present what Whitehall commentators like to call fiscal events, they have not been happy occasions for local government.
However, there was a noticeable change in position during this month's Autumn Statement, which provided some positive news for the sector. In particular local government was not included in the additional £3 billion savings announced by the chancellor.
Local government (belatedly) joined education, health and international development in being exempt from this next round of savings. That's because the savings introduced in the 2010 and 2013 spending reviews for local government were some of the largest cuts in public finance that we’ve seen, and this financial austerity is expected to last until at least 2017. The chancellor has already indicated that austerity will be with us for the foreseeable future, including a further 10% funding reduction to local government in 2015/16.
So the pressure remains for local authorities. Although the sector has adapted well to reductions in budgets thus far, the medium term remains even more challenging. As a result, local government has reached a critical juncture where it needs to consider even more radical change and some tough decisions lie ahead. Everyone knows the worst is yet to come.
This position is supported by our third national review of the financial health of local government. Based on a sample of 40% of English local authorities, we examined various aspects of local authority performance: strategic financial planning, financial governance, financial controls and key financial indicators.
The sector has continued to show great resilience and focus, and we found that most councils had successfully delivered their 2012/13 budgets and were confident of delivering throughout 2013/14. Our findings point to the fact that some key indicators of financial performance are experiencing a worsening trend, with liquidity, performance against budget, reserve balances and sickness absence an increasing risk for some councils.
In addition the responsiveness of the medium-term financial strategy to changing circumstance is patchy. This reflects the significant uncertainties and challenges facing the sector. Most local government leaders are realistic enough to accept that a change of government following the 2015 election would not see a radical change to the funding levels forecast by the coalition government. Politicians in Parliament, regardless of their political hue are not going to regard local government as a priority after the next election. That might not be all bad given the scrutiny the NHS is currently under!
It is not clear that all local authorities have the relevant strategic financial planning skills – both in the finance community and in services – required to successfully navigate the medium term. It is also critical that elected members have the appropriate skills, experience and support to appropriately scrutinise financial plans, budgets and savings programmes.
To respond to the significant financial challenges still facing the sector local authorities need to have a relentless focus on generating additional sources of revenue income as government grant continues to fall. The focus, where market conditions allow, should be on areas such as: investments in the commercial property portfolio; increased commercialisation of services and local authority trading; regeneration and inward investment to boost local economic activity; and generating higher income from business rates. Effective realisation and reinvestment of capital receipts will also be crucial.
Local government should also accelerate the use of alternative delivery models with public, private and third sector partners to help drive efficiencies. This should include shared services and strategic partnering arrangements. As more move councils towards full-blown strategic commissioning models we will see a fundamental change in the shape of local government. Unitary status whether voluntary or forced (or indeed virtual) will be a wider part of the landscape by 2020.
Another key area is housing development. Local government must be at the heart of developing housing opportunities for its communities. This is now high on the government's and the opposition's policy agendas. In the Autumn Statement the Chancellor announced house building loans of £1bn to unlock sites across the country, and an increase in the Housing Revenue Account (HRA) borrowing limit by £300m ( a small sum but at least an opportunity to move forward), but not a removal of the cap as lobbied for by the LGA. The Leader of the Opposition, Ed Miliband, has this week attacked 'stick-in-the-mud councils' for refusing to release land for housing development.
Local authorities will need to work closely with Local Enterprise Partnerships to support effective and sustained projects funded by monies earmarked for the New Homes Bonus. This should go hand in hand with the broader framework for supporting wider economic development across districts, sub-regions and wider economic areas.
We identified potential 'tipping point' scenarios in our second national review that could see some local authorities reach a critical point in how they manage financial and other challenges. Our dialogue with the sector this year for our third report has validated the various tipping point scenarios as being possible or probable. The findings in this report indicate that the sector is likely to ride out the storm until the end of 2014/15 – 80% of authorities in our survey do not anticipate a tipping point in this period. The majority of councils indicate a tipping point in either 2015/16 or 2016/17. This could well become a reality for those councils that fail to create further, radical change.
As the wider economic recovery continues to develop momentum, especially in the south east, authorities will need to ensure that they are on the front foot in communicating to their stakeholders that, for the council, austerity remains embedded and there needs to be an honest conversation about the impact on service levels and service quality.
Meanwhile, the continued challenges for local government do allow for innovation and a new focus on working in partnership with health. In the long term, less dependence on government grants might be seen as beneficial, even though it probably doesn’t feel like it at the moment.
It will be after the next election that we shall see whether these measures prove to be the tipping point for the sector - and whether some councils fail financially in the same way that some hospitals already have.
