Local authorities’ reserves are already in a “precarious position” and reducing at an “unsustainable” rate, the financial resilience director at consultancy LG Improve has said.
Speaking during an online webinar, Dan Bates highlighted that councils’ published draft accounts for 2022/23 show that there are some “massive reductions” in authorities’ usable revenue reserves, unusable revenue reserves and general fund reserves.
He stated that the main reductions in reserves are being experienced by unitary and metropolitan authorities, with almost “20% of unsustainable reductions”. However, reductions in reserves are being seen across all types of authorities.
“It’s the unitary and metropolitan authorities that I would be worried about because a number of those are suffering quite big reductions in usable reserves,” Bates said.
Bates added that among LG Improve’s membership, even upper-tier authorities reported that they had to “bite into their reserves” last year and are anticipating doing the same this financial year.
“We’re already in a precarious position but the use of reserves is expected to get even worse, and our analysis shows that the authorities with the lowest level of reserves are going to slide towards territory where they might be considering section 114 notices,” he added.
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Bates told attendees that the reasons for the depletion in reserves are due to the “really tough conditions” that authorities are currently experiencing, with councils using reserves to bridge their budget gaps due to “historic low funding”.
The low and reducing levels of reserves was a trend seen at Slough, Northamptonshire and Croydon just before they issued their section 114 notices, Bates explained.
“It’s generally accepted that when you run out of usable reserves and you have a decline year on year that you’re in trouble and you’re moving towards a potential s114,” he said.
Several reasons for s114s
However, Bates stated that there are several reasons why councils end up in this situation and argued that the focus on authorities’ financial health needs to be taken away from authorities’ debt position or borrowing.
“I think the context of asset values and the context of income are really important when you look at capital health,” he said during the webinar.
In a recent blog for Room151, Bates argued that borrowing is an important way councils build resilience as well as fund capital investment in housing and infrastructure, with “smart councils” stress-testing the long-term affordability of loans.
“Council finances are neither intuitive nor fairly summed up by any single measure. There isn’t one factor that tells you if a council is good or bad, let alone why things are as they are,” he stated.
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