Department for Communities and Local Government: Financial sustainability of local authorities - Public Accounts Committee Contents

Conclusions and recommendations

1.  The Department has not assessed the cumulative impact of the funding cuts and changes to the funding arrangements on the financial sustainability of local government and the services it provides. Central government is reducing its funding to councils by more than a quarter over four years. At the same time, reforms introduced will result in changing from a system in which funding responded to changes in need to one in which it responds primarily to changes in Business Rates base. While departments provided some information on the potential impacts of funding reductions on local government, the data was superficial and incomplete. For example, the Department for Education did not provide a proper cost analysis of the overall impact of funding reductions on children's services. The risk assessments the Department carries out before introducing funding reductions and changes are incomplete. Furthermore, there is no data to demonstrate that money voted by Parliament for a particular purpose is being used by local authorities for that purpose. Furthermore, we have seen examples where there is no data to demonstrate that money voted by Parliament for a particular purpose is being used by local authorities for that purpose. The Department needs to work with other departments to improve central government's assessment of the effects of funding reductions and reforms— including how they interact with each other—before the next Spending Review. The Department should also work with other departments to ensure monies voted by Parliament for a particular purpose are used to fulfil that purpose.

2.  The effects of funding changes vary widely across the local government sector. Different councils are receiving different levels of reductions: whilst some have seen their spending power reduced by just over 1% in 2012-13, others have seen reductions of nearly 9% in two consecutive years. The Department does not have a good understanding of the effects of funding changes on individual councils. It also lacks understanding of the actual impacts on poorer or more vulnerable communities and local residents. The Department needs to improve its understanding of the impacts of funding changes on individual councils, focusing in particular on the outliers which would be worst affected. This must include an understanding of what the impact could be for vulnerable groups.

3.  It is unclear what actions the Department will take in the event of financial failure occurring in a number of local authorities. The Department's procedures for managing serious problems with local authorities' finances or service provision are designed for dealing with one-off failures, often the result of internal and unique factors within an individual council. In the current funding environment, however, there is an increased risk that a number of councils become financially unsustainable - with the example of West Somerset Council, deemed "not viable" by an LGA report, serving as an early warning sign. The Department must clarify its role and responsibilities in the event of multiple financial failures of local authorities, and draw up contingency plans for intervention.

4.  The Department has not adequately assessed the long-term implications of funding reductions on the services councils deliver. Local authorities have, as a whole, managed to cope with funding reductions since the 2010 Spending Review. However, the danger is that they may soon have little room for further efficiency gains, meaning that future savings would increasingly have to be met by service reductions. The Department needs urgently to engage with other departments, local government, and the public in a transparent dialogue as to what services councils will be expected to provide in a prolonged period of declining funding. This may involve renewed discussion about councils' statutory duties.

5.  The Department lacks understanding of the efficiency with which councils use their funding and has not set out how the information currently published on the sector provides assurance on value for money. The Department has a responsibility to ensure that a system is in place— including clear and comparable information about performance and spending—to provide assurance on all councils' value for money. However, the Department has not set out how it ensures that the information available is sufficient to demonstrate that councils are providing value for money. The Department was not clear on whether it could provide the committee with full information on the use of personal service companies by local authorities and the extent to which severance payments have been employed in local government. Nor was the Department able to articulate the extent to which reductions in local authority spending came from efficiency improvements rather than cuts to services. In order to provide assurance to Parliament that there are effective safeguards in place on the value for money of council spending, the Department must define how it assures itself that local authorities are delivering value for money. In doing this, it should set out what data it will collect, as well as the standards that published data on council performance should meet to provide proper accountability.

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Prepared 7 June 2013