Select Committee on Transport, Local Government and the Regions Fifteenth Report

Part 2: Financial Administration

21. Part 2 imposes new duties on local authorities about how they set and monitor their budgets. On the basis of the Minister's evidence we are concerned that these Clauses have been drafted with two or three failing authorities in mind. He referred to Hackney and Walsall on numerous occasions. He had insufficient regard to the fact that these are general powers which could be applied to any authority. As a result this Part of the draft Bill is seen by councils as evidence of a lack of trust in local government by central Government. The memorandum from the Society of Local Authority Chief Executives described Part 2 of the draft Bill as evidence of the "prevailing attitude of mistrust of local government."[28] We did not receive any evidence that had these particular measures been in place they could have prevented financial imprudence.

Clause 25: Minimum reserves

22. Clause 25 gives the Secretary of State the power to determine the minimum level of reserves held by local authorities. We received evidence that it is impractical to set the level of reserves centrally and that consideration of reserves should anyway be within the scope of prudential financial management. Mr Soare of CIPFA said,

"I think on that particular issue, the background of the context is quite important here. I think the latest Audit Commission figures which have come out show that approximately 90 per cent of local authorities have adequate balances, the other ten per cent are judged by the auditors to have inadequate balances. However, when you look at the pattern of local authority spending, although in terms of a range, depending on type of authority, between 20 to 40 per cent of local authorities do overspend on individual directorate levels in year, virtually none of the local authorities actually end up having to reduce services as a result, i.e. they have enough in balances to cover those in year differences against actual and budget. It is in that context, I think, that we come at this particular point and say there is not a general problem. There are some well publicised problems for a very small minority of local authorities but the vast majority do manage very prudently. When we come to the issue about reserve balances it is in that context, specifying reserves and balances, what we say is it is a very local decision and judgment as to at what level balances should be set."[29]

23. Some councils may choose to operate with low levels of reserves—provided that they are prepared to take appropriate action as and when necessary. A clear national statement from Ministers about what is an "acceptable" level of reserves may also make it far harder for individual authorities to deviate from national standards, despite good, local, management reasons. We heard from Wolverhampton City Council:

"We believe that we are a well-run financial authority; we have no records of overspending against budgets; as we regularly take monitoring reports to members. If the Secretary of State were to use this power in a fairly casual way, without a full assessment of local circumstances, I could envisage a situation where Wolverhampton's minimum reserve level would have to be increased. At the moment we are quite confident that we can manage a contingency reserve of £2 million. If that had to be increased, the council would be faced with the difficult choice of either cutting services or increasing the council tax."[30]

We recommend that Clause 25 be removed from the Bill.

Clauses 26 and 27: Budget calculations: report on robustness of estimates etc and budget monitoring

24. Clauses 26 and 27 introduce new duties on Chief Financial Officers with respect to reporting on financial matters. We received no evidence that these clauses will make any difference to the decisions made by an authority that wishes to act imprudently. In relation to Clause 26 (which sets a duty on Chief Financial Officers to report on the robustness of estimates when the annual budget is being set), Mr Soare of CIPFA said,

"I suppose we view that what is intended by Clause 26we would say going back to the general picture is already happening in the vast majority of local authorities. In terms of a local authority treasurer giving advice on the robustness of estimates and the reserves position, there is legislation already around balanced budgets, there are also, if you like, interventionist type powers which local authority treasurers can exercise under Section 114 of the 1988 Local Government Finance Act. We feel that those already statutory powers, plus the guidance that we are developing for local authority treasurers should be sufficient."

He added,

"Not being party in detail to any of the authorities which have found themselves in this position, again it is difficult to say. Having something on the Statute Book potentially would not have altered the set of circumstances which took place on the ground in those small minority of authorities."[31]

Mr Raynsford said that having Clause 26 in place would not stop a council from ignoring the advice of its Chief Financial Officer.[32]

25. Clause 27 requires authorities to monitor income and expenditure against budget. Mr Soare told us,

"In the sense of it being a professional requirement on the local authority treasurer, that is already there. In terms of best professional practice, invariablyand again if you look at Audit Commission work in this areayou do not find the vast majority of local authorities being unaware of the in-year budget position. Indeed, there is a regular cycle of reporting, as is commonly known. We are developing our guidance into a professional practice standard for those treasurers who are CIPFA members, that is coming out later this year. We would say in the vast majority of authorities that in-year budget monitoring is part and parcel of the professional round and it is acknowledged that it is an essential element of financial management."[33]

We recommend that Clauses 26 and 27 be removed.

28   LGB10 Back

29   Q99 Back

30   Q360 Back

31   Q104 Back

32   Q680 Back

33   Q105 Back

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