Can a local authority increase its level of reserves while facing numerous other financial challenges? Here, former chief executive of the London boroughs of Richmond and Hammersmith & Fulham Richard Harbord gives his view on the current crisis in local government finance.
Sustainable local government is regrettably not very apparent at present. For reasons that I shall discuss later there has been a succession of chief finance officers in all sorts and types of authorities saying that they are not able to make a balanced budget for 24/25 unless substantial savings are made.
The one that has recently captured the headlines has been Birmingham. To those who know local government this was probably one of the least surprising examples. It has been known for a while that the huge liability put on the city at the end of the equal pay claim hearings has been a difficult burden to cope with. News came in July of the need to cease all non-essential spending because of a 23/24 budget shortfall of £87.4m, which would become £164.8m in 2024/25 if not dealt with.
The equal pay claims amount to £750m and the council’s auditors reported that the authority had not made adequate provision for equal pay dating back to 2019-20. It has therefore become a financial crisis incapable of internal solution.
A governance report is now due which will shed further light on this. To date central government has indicated that it does not see its job as ‘bailing councils out’.
There are a number of issues facing local government generally which are difficult. The issue of reserves is one of them.
In 2010/11 it was felt that reserves were at a satisfactory level. In ‘Local Authority Financial Resilience’, a report by Mark Sandford and written for the House of Commons Library in January 2023, it states with some surprise that in the first three years of austerity local authorities made savings in excess of those needed by the funding reductions. Thus reserves against expectations rose, as did the ability to finance growth in some budgets.
In the next three years net reductions in spend were at a rate of less than half those needed by funding reductions. The report says that this led to the draw down of reserves and an increased reliance on a growth in commercial trading profits, rents or external interest.
Since then, resources have not grown in real terms although the last two years has made a small contribution. Therefore, local authorities have had no opportunity to restore levels of reserve.
The confusion around this is not helped by headlines which fail to explain how local authorities work. Thus the headline this year that ‘The 2022 edition of CIPFA’s Resilience Index reveals reserves have grown to £31bn from £29bn in 20/21’ is not helpful because it is not a summation of unallocated reserves.
Start from the basics, which is that there are not enough resources available to local authorities to fund their current spending programmes even where these might have the approval of their electors.
The Local Government Association (LGA) states that the funding shortfall in 2024/25 will be £4.5bn. There are a variety of reasons for this. Not only austerity, but also the controls over council tax and business rates and the need to reform council tax to provide a more buoyant tax base. Local authorities have pointed out the need for reform since the late 1990s, but it has always been seen as politically unacceptable and too big a risk.
I would expect a chorus of authorities at this time of year saying that unless major savings are made the authority will be in difficulty. It is budget time. The elections brought a number of new administrations, and it is important to manage expectations.
It has been quoted that one in six local authorities will run out of money in the next two years without major spending cuts or additional income. The options are, however, not easy to find.
It has to be said that there are a number of authorities of varying sizes who before restrictions were put in place took measures to invest in commercial services via arm’s length companies or joint ventures or to invest in commercial property and have managed to do very well from it. In some cases even remaining largely immune from major spending cuts.
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Local authorities who are now in real trouble have little option but to pare services back. This is not as simple as it sounds and may not even be without risk. I saw in one report that Birmingham was to provide ‘essential services’, and in another ‘statutory services’. The problem is that although services may ‘have’ to be provided, there is still a question about defining the level of provision. Thus cutting back does involve the risk of users taking action in the courts that the provision offered is not sufficient.
Going forward it would be nice to be able to see a resolution of these problems. We have another year before the general election and even then there is uncertainty about the level of help that can be provided. The problems for the wider public sector seem to be increasing rather than abating.
Local government unions have just refused a pay offer, the NHS is in turmoil, there is a need to find money for public buildings: everywhere you look new pressures are occurring. Inflation in local authorities tends to be above the average and in many public sector professions recruitment and retention of good staff is very difficult.
It is also difficult because I do not think residents generally understand the causes and difficulties. I live near Woking and am amazed at the views of local residents about their council!
I think the crisis may well get worse before it gets better.
Richard Harbord is the former chief executive of Richmond and Hammersmith & Fulham councils.
Click here to read Richard Harbord’s recent post on the role and responsibility of the s151 officer in the external audit crisis. You can also read here his take on the results of scrapping the Audit commission, and here to read his post on the government’s initiative to move ‘further and faster’ on pension pooling.
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