The “significant and unsustainable” fall in councils’ reserves and rise of dedicated schools grant (DSG) deficits pose “concerning” threats to the financial health of the local government sector, industry professionals have warned.
A new analysis by consultant LG improve, which is based on data from 157 published local authority draft accounts for 2023/24, revealed that local authorities’ usable revenue reserves, as a percentage of core spending power (CSP), reduced by 13% in the last financial year. In money terms, authority reserves fell by 4%.
According to the analysis, over 90% of upper-tier authorities had lower levels of reserves, expressed as a percentage of CSP, in the last financial year than they did in 2022/23.
In addition, the data highlighted that outer London and metropolitan authorities experienced the most significant falls in usable revenue reserves as a percentage of CSP at 19% and 18% respectively.
District councils’ reserves experienced the lowest reductions at 1% due to business rate gains, the analysis explained. However, Dan Bates, director at LG improve and author of the analysis, highlighted that there is a “massive disparity” between districts’ levels of reserves, “some have very little, and some have a lot”.
“A 13% drop in reserves is not sustainable, so the continuing reductions in usable revenue reserves must be a significant concern for the resilience of the sector.
“The new government, whatever colour it is, has really got to pay attention to see how they might look at [this] going forward,” Bates said.
DSG deficits
Another factor that poses a “threat” to the financial health of local government is the increase in the DSG deficits, with the BBC reporting today that councils in England are forecasting a £1bn shortfall in budgets for supporting children with special educational needs.
In 2022, the government implemented a “statutory override” under which DSG deficits can be excluded from councils’ main revenue budgets. It has since been extended and is currently scheduled to end in March 2026.
LG improve’s analysis showed that DSG deficits have grown over the last four years, with growth slowing down in 2022/23 but picking back up again in 2023/24.
Bates highlighted that for the 38 authorities that have a “safety valve”, LG improve’s data shows that their deficits are being “addressed and stable”, however for the other three-quarters of authorities, without the safety valve, the deficit still exists.
“So, taken together, that poses a real threat to the financial health of the sector. Particularly for the number of authorities who have seen their deficits increase significantly.
“But, they’re also seeing their usable revenue reserves deplete at the same time where the DSG deficit feels like it might overwhelm them if those trends continue over the next couple of years,” Bates stated.
Debt crisis?
The last segment of LG improve’s analysis focused on the perceived “debt crisis” in local government, with many organisations, including the Public Accounts Committee stating that councils’ debt is at “staggering levels”.
However, according to the data, council’s “need to borrow” as a percentage of CSP reduced in 2023/24 by 4%. It also revealed that for most local authorities’ debt financing, as a percentage of CPR, has also decreased – apart from across London, where it increased.
In fact, LG improve’s analysis showed that overall, higher interest rates have had a positive impact on local government as interest payments received grew significantly more than the interest paid.
The recent creation of the Office for Local Government (Oflog) has drawn a lot of media attention to the debt position of local authorities, with Bates stating that the body takes a “narrow view” when it comes to accessing the capital health of authorities, using “one-dimensional measures”.
He said debt gearing, a measure of the relationship between debt and equity, offered “a far better picture”. Bates noted that many HRA (Housing Revenue Account) authorities have lots of debt, but also have lots of equity, for example.
Bates stated that the only concerning trend noticed in the council’s accounts for 2023/24 is that some authorities are no longer able to sustain internal borrowing. This exposes them to the high interest rates on external borrowing.
“Capital health is really complex,” he stated. “Debt proportional to CSP is not increasing: the debt crisis, if there is one, is not getting any worse.
“But there are other parts of the balance sheet that are getting squeezed so much that exposure to high interest rates over the next couple of years, if they continue to be high, is going to add to the financial vulnerability of authorities. That is a vulnerability that has already been hit by DSG deficits, by falling reserves, by social care pressures and by an outlook for funding that looks pretty grim.
“So, there is a lot for the next government to contend with.”
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