Chris Naylor, director at Inner Circle Consulting and former chief executive officer and s151 officer, explores why issuing section 114 notices is not the answer to financial resilience and details what struggling authorities can do to get on a sustainable footing.
In a world where everyone has an opinion on Section 114 reports, here’s mine: they achieve little and make it harder to deliver a sustainable financial future. The power to impose spending controls and force members to meet to agree budget options only works if the overspends in question are controllable and you’ve got budget options to agree. If this isn’t the case – you need a totally different approach.
At the heart of the problem is the fact that Section 114 of the Local Government Act 1988 was drafted for very different circumstances. It didn’t envisage swathes of the sector issuing notices simply because the councils in question felt they had run out of options. It was conceived as a last resort for finance directors facing resistance from officers or members to necessary decisions for a balanced budget. In the era of Livingston’s Greater London Council and Hatton’s Liverpool, central government’s big worry was that valid options were being ignored due to poor governance or because local leaders didn’t want to act.
But many councils in trouble today are in a very different place. They’re contending with fiscal constraint, rising demand, and falling trust in public services, while responsible for answering huge challenges – delivering net zero, overcoming inequality and intergenerational poverty, growing the economy and building homes. Issuing a Section 114 report means for those councils a loss of autonomy, intense scrutiny, spectacular disruption, service user anxiety, and almost inevitable intervention – none of which provide the conditions for success and sustainability, thus defeating the entire exercise.
Context here is everything. Some councils are really struggling and will talk privately about being ‘on the brink’. Others foresee problems one to two years from now. Almost without exception, every council to issue a s114 to date has done so because it experienced some form of extinction level event: failed investments, an implosion of governance, or some other massive cost that made impossible a balanced budget without significant external intervention.
While it’s proper to understand what went wrong and what must be done to avoid the same happening in the future, in most of these circumstances the underlying problems were so large they could be seen from space.
Stop waiting for central government support
For councils concerned about financial resilience as they shape up to deliver modern and relevant local government for people now, there are other options to consider.
The first of these is to stop waiting for central government support. “As long as we’re not in the first tranche to go” is a refrain I often hear. The implication is that the more seemingly well-run places tip over the edge, government will be forced to turn the cash back on again, averting the problem for everyone else. But I wouldn’t take that bet. Look at the creation of Office for local government (Oflog), new sector standards for CEOs, draft best value intervention guidance and a response to ‘financial failure’ limited to temporary support, forced asset sales and Commissioner backed savings programmes. This is a government firmly telling council leadership teams: “Properly manage your affairs and find the savings or we will find them for you.”
Its perhaps for this reason that CIPFA has wisely advised finance directors concerned about the need for a s114 to consult not only statutory officers, but also the Department for Levelling Up, Housing and Communities (DLUHC). I agree. My suggestion is: Call them, before they call you. It’s better to take a recovery and sustainability plan to government with a blend of savings, transformation and other dispensations, and ask them for to help deliver it, than wait for them to intervene. Be on the front foot, plan for the long, medium and short term and negotiate a deal to see you through.
‘Mobilise to deliver answers’
Thirdly, it simply isn’t plausible any more to claim there are no more opportunities to save, do things more efficiently or generate more income. Government knows it, hence the new guidance and tools in the form of Oflog. So too do many chief executive officers and finance directors. The big questions are how much these opportunities yield, over what time horizon and at what cost – and the bigger challenge is, after 13 years of financial restraint and with capacity cut to the bone, mobilising to deliver those answers. Here’s another reason that early engagement with DLUHC is so important – it buys time to plan and mobilise your programme of mitigation and recovery activity, and position Whitehall as a stakeholder in those plans.
Meanwhile for a finance profession thrust into the spotlight, the temptation will be to lean on stringent cost control measures. It’s an understandable response, given that time-limited power to control non-essential spend is the principal dispensation for finance directors in the event of an s114 report. But beyond an immediate crisis response, an over-focus on cost is not a strategy. At best it risks distracting attention from the real task in hand – plotting a recovery and putting in place the resources to deliver it. At worst it represents a failure to grasp the structural realities of why councils are overspending in the first place. Counting the pennies does not mean that multi-million-pound demand-led pressures will look after themselves.
None of this is easy. But recovery must start with a rounded analysis of context and situational awareness. Local government is again on the front line of a public service battle to overcome the latest social, economic, environmental and political challenges. This demands a focus on value creation as much as on cost control, on finding the ideas and means for to the next stage of our collective development. It is on us to define a better future for everyone, and make it happen.
Chris Naylor is currently a director at Inner Circle Consulting and former chief executive officer and section 151 officer.
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