Financial sustainability of local authorities 2014 - Public Accounts Committee Contents

1  The Department's leadership in central government and support for local government

1. On the basis of a report by the Comptroller and Auditor General, we took evidence from the Department for Communities and Local Government (the Department) and HM Treasury, on the impacts of funding reductions on local authorities' financial sustainability.[1]

2. Local authorities provide a range of services, in many cases underpinned by statutory duties. To remain financially sustainable, local authorities must be able to meet their statutory service obligations. This is becoming more challenging in the current financial climate. Since 2010, the Government has reduced funding for local government in England as part of its plan to reduce the fiscal deficit. In real terms, the Government will have reduced its funding to local authorities by an estimated 37% over the period 2010-11 to 2015-16.[2]

3. The funding reductions have not affected all local authorities equally, with reductions ranging between 5% and 40%.[3] The external auditors of local authorities have voiced concerns over whether some authorities will continue, over the medium term, to be financially sustainable and be able to make further savings. This is particularly the case for single tier and county councils, those authorities with social care responsibilities.[4]

4. The Department has overall responsibility for central government funding to local authorities. A number of other government departments have policy responsibility for specific duties local authorities are obliged to perform: for example, the Department for Culture, Media and Sport has responsibility for library services, while the Department for Business, Innovation and Skills has responsibility for trading standards. At spending reviews, the Department is responsible for leading a cross-government assessment of local authorities' ability to maintain statutory services while dealing with the consequences of a funding reduction.[5]

The Department's leadership role

5. The National Audit Office (NAO) has set out its view that it is not a contradiction of the government policy of localism to expect the Department to have sufficient information to make good decisions about the level of funding it provides to local authorities. Specifically, the NAO explains that the Department should put itself in a position to understand when local authorities may be under threat of being unable properly to discharge the statutory duties placed on them by Parliament.[6] We endorse this view.

6. The picture which emerges from the NAO's report is of a department which is not on top of the implications arising from its funding decisions. The NAO's report, which has been agreed by the Department, is clear that the Department is the single point within central Government that ought to be monitoring the impact of funding reductions across the full range of local authority services. However, the NAO found that the Department does not fulfil this role robustly enough.[7] The Department does not monitor local services itself, and is not set up systematically to identify signs of financial stress within local authorities in advance.[8] In respect of individual services, it is reliant on other departments to raise concerns about whether local authorities can cope with further reductions in funding. But the information it has succeeded in obtaining from other departments to date has been variable, and the Department itself says it has experienced different levels of engagement across Whitehall.[9]

7. We note that in his "Accountability System Statement for Local Government", the Department's Accounting Officer states he is "the lead accounting officer in central government with respect to local government".[10] The Accountability System Statement also refers to the Department's role, on behalf of the Government, in distributing funding to local authorities to support their core services.[11] We would expect this to mean the Department displayed effective leadership across central government, not least in providing accountability to Parliament for the effects of funding decisions on the delivery of statutory services. By contrast, the Department appears to be taking a largely "hands off" approach, both with respect to the information it obtains from a number of departments and to supporting local authorities to manage ongoing funding reductions. We believe this creates a number of risks to value for money, which we explore under four headings in the rest of this chapter.

Impacts on local authority finances

8. Over the period 2010-11 to 2015-16, central government will have reduced its funding for local authorities by 37% in real terms. This equates to a reduction of 25% in "spending power", a measure of local authorities' total income for services, taking into account not only government funding but also local council tax receipts.[12] Within this aggregate picture, individual authorities have received different levels of funding reduction. The Department for Communities and Local Government (the Department) confirmed that authorities in the most deprived areas had received the biggest cuts in spending power.[13]

9. We asked why the most deprived authorities were receiving the biggest cuts. The Department said this was a simple piece of arithmetic: as more deprived areas received relatively more funding within the system, then so would they lose the most from a cut in government funding. It also pointed to the fact that the most deprived 10% of authorities still have 50% more spending power per head than the least deprived 10%.[14] However, as the NAO has shown, the Department is unable to demonstrate that the extra per capita funding which more deprived authorities receive is sufficient to enable them to meet their additional service demands.[15]

10. Under the previous system of funding local government the Department used an annual assessment of each authority's relative needs to revise its distribution of funding each year. However, the Department has now stopped updating this relative needs assessment.[16] The Department told us that the reason for this was that in 2013-14 it introduced a major change to the funding system in the shape of Business Rates retention, and that in response to this reform local authorities requested a period of stability. The Department implied that by fixing its distribution of funding according to a past assessment of relative needs, rather than continuing to update it every year, it was meeting this request.[17]

11. The Department said that it had still taken account of the impact of its funding decisions on more deprived authorities. In fact, the Department said it had made adjustments to the system to soften the impacts somewhat on more deprived areas, although it acknowledged these authorities were still the worst off from the reductions.[18] We were left wondering, however, what other options for altering the distribution of funding the Department might have explored. Evidence submitted to us by Paul Woods, former Treasurer of Newcastle City Council, suggested there could be alternative methods of distribution which might have offered more protection to the most deprived authorities, without any alteration to the overall reductions in aggregate.[19] While unable to comment ourselves on the merits of this analysis, we asked the Department for its views on some key points. The Department said it thought it had already included protections for those authorities that were dependent on government grant.[20]

12. The Department told us it tried to have a good understanding of the impacts of its funding decisions in aggregate.[21] It is less apparent that the Department has a good understanding of the differential impacts on individual local authorities and how these might diverge further over time. While the Department publishes figures showing changes in spending power for every local authority, it does so for only one year at a time. The Department did not think it possible to calculate in any meaningful way a measure of spending power over a longer period.[22] We would observe, however, that not only has the NAO produced a calculation for the reduction of spending power since 2010-11 (figures which were agreed by the Department), but the Department has itself managed to provide us with such an estimate in the recent past.[23]

13. The Department also suggested that, even if it were to publish a measure of the reduction in spending power across the duration of a Parliament, this would not significantly aid its understanding of authorities' financial sustainability.[24] We would contrast this with the NAO's opinion that the Department needs to be better informed in its role as funder of local authorities. Following this conclusion, the NAO recommended that the Department "should publish a real-terms time series of change in individual local authority income since 2010-11."[25]

14. Both the Department and HM Treasury referred to the frequent conversations departmental officials have with local authorities, enabling them to understand the impacts of funding reductions on the ground.[26] However, with regard to its programme of visits to local authorities by senior officials, the Department has acknowledged that any insights about the financial sustainability of authorities is effectively an ad hoc consequence of this system. The NAO has concluded that the Department has only a limited understanding of the financial sustainability of local authorities and the extent to which they may be at risk of financial failure.[27] In response to the NAO's criticism, the Department said it had a number of different information sources to help it identify potential problems and ensure financial sustainability. However, it accepted that it should make better use of this information when making policy decisions and at the next spending review.[28]

Impacts on demand for other services

15. The Department confirmed that it ought to be expected to have enough information to make good decisions about the level of funding provided to local authorities. Regarding information on the consequences of its funding reductions, the Department told us it believed these had led to some service reductions.[29] However, both the Department and HM Treasury believed that local authorities had succeeded in absorbing the majority of funding reductions to date in the form of efficiencies.[30] The main evidence which the Department referred to in support of this was the annual returns it receives from local authorities, providing data on how much authorities are spending in each service area.[31] However, it did not refer to any data on the actual level or quality of services delivered. In this respect, the Department has not made any progress since the last time it came before us to give evidence on this topic, in February 2013. Then, too, the Department said it only monitored data on spending rather than service activities. As a result, it conceded it had no way of knowing to what extent local authorities were managing their funding reductions by making service cuts as opposed to efficiencies.[32]

16. Where local authorities make reductions in one service area, there is a risk this could lead to increased costs or reduced income at a later date. We were concerned to note, for example, that local authorities had focused their biggest spending cuts to date in planning and development, when investment in these areas could be crucial in increasing income from local growth.[33] Equally, we were concerned that cuts to some services in the short term could lead to a rise in other costs in the longer term. For example, we were concerned that cuts to youth services could have a knock-on cost to the economy.[34]

17. We also expressed concern that cuts in provision of one service could lead to a rise in demand for another service. Where this increased demand is met by another service provider, this is sometimes referred to as "cost shunting". We asked in particular about the potential for reductions in local authorities' social care to lead to increased demands on the NHS, especially given rising trends in Accident and Emergency (A&E) admissions. HM Treasury acknowledged the rise in demand for A&E, but said it was not clear that this was all being driven by local authorities' social care decisions.[35] The Department said it was important for service providers from different parts of the public sector to work together, implying this would help to address the risk of cost shunting. It said it was helping in this regard, for instance in initiatives such as community budgets.[36]

Future impacts of funding reductions on services

18. Parliament has passed legislation to require local authorities to perform a range of services, such as adult social care and waste collection (although they also provide a number of discretionary services).[37] The Department agreed that it should be in a position to understand when local authorities were under threat of not being able to maintain statutory services.[38]

19. The Department has a particular role to play in this respect during the Government's periodic spending reviews. Led by HM Treasury, spending reviews decide government resource budgets over a future period. There have been two spending reviews in this Parliament, Spending Review 2010, and the shorter Spending Round 2013 (a review which set budgets for one year only, 2015-16).[39] The Department told us it was its responsibility at these reviews to advise HM Treasury on the impact of different potential funding decisions on local government.[40] In order to do this, it asks other departments to submit analysis on the potential impacts of budget proposals on the local authority services which are relevant to them.[41]

20. In our 2013 report on this topic, we criticised the quality of the data obtained by the Department at Spending Review 2010, and recommended that central government's assessment of the impacts of funding reductions should be improved before the next spending review.[42] In its recent analysis of the equivalent processes at Spending Round 2013, the NAO found that there had indeed been improvements, but that the data from other departments still varied considerably in quality and completeness. For example, while two departments were able to provide quantitative estimates of the impacts of savings on local services, more were not. In addition, just as at Spending Review 2010, not one department broke its analysis down by region or type of authority. Moreover, the departmental submissions did not cover a number of statutory services, including youth services, food safety and standards inspections, and libraries.[43]

21. The Department agreed that the information it obtained at Spending Round 2013 was incomplete, but stressed that this was still a considerable improvement on what it collated at Spending Review 2010. Regarding the number of statutory services which were not covered in this analysis, the Department said it had prioritised its focus on adult social care and children's services, as these made up the largest elements of service spend. Its view was that inevitably this meant some services and duties would not get as much time and attention as others.[44] Overall, the Department excused some of the gaps in its analysis at Spending Round 2013 by saying it was not a full spending review. The Department was confident of making further improvements at a potential Spending Review 2015.[45] Not least, it accepted the need to strengthen its relationships with other departments, acknowledging this was fundamental to understanding services within local authorities.[46]

22. On the assumption that there would be further reductions at the next spending review, we expressed concern regarding the future impacts on services. In particular, we were concerned this might lead to more service cuts, given local authorities had already made a number of efficiencies and had diminishing room to make discretionary spending decisions.[47] The concerns we expressed were not just for statutory services but also some discretionary services, such as street lighting. The Department said with regard to the maintenance of service quality it was relying on a combination of local accountability and inspections of specific services, such as adult social care and children's services.[48] However, while the Department's focus on adult and children's social care may be understandable, the NAO has found that local authorities have to date sought to protect their spending on these services as far as they are able, at the expense of some other statutory duties and discretionary activities.[49] This raises questions about whether it is those services which the Department has not been focusing on which are at greater risk of becoming financially unsustainable.

23. The overarching question we pressed the Department on was this: would it be able to provide advice on whether or not the overall level of government funding was enough to enable local authorities to maintain their statutory duties? It replied that it could not in fact know how much funding every local authority needed for all of its services, since this depended on local circumstances.[50] Without at least an idea of the amount of funding required to maintain statutory services to a minimum standard, however, it is hard to see how the Department could live up to its stated intent, working alongside HM Treasury and other departments, to ensure that local authorities are able to fulfil their statutory duties.[51]

Transforming services to cope with further reductions

24. We asked the Department how in practice it thought local authorities were going to continue to deliver savings. The Department acknowledged that local authorities had reduced scope for making further efficiencies, given those they had already made. However, it believed local authorities could continue to absorb funding reductions by transforming the way they delivered their services. To this end, the Department referred to ways in which it was striving to help local authorities achieve service transformation.[52] One major initiative was the Better Care Fund, which involved the Department working with the Department of Health to create a fund aimed at joining up local adult social care and NHS spending. Other initiatives included the Public Service Transformation Network, which has been working with 16 local authorities (and other service providers) to help develop good practice in joining up services.[53]

25. Initiatives to help join up services and increase efficiency are very welcome. We note, however, what the NAO had to say about the Department's reliance on such schemes to enable local authorities to continue to deliver savings. The NAO found that the Department had not yet assessed whether service transformation projects could deliver savings which are large and timely enough to enable local authorities to maintain services. Nor had the Department estimated the potential impact of such projects on service users.[54]

1   C&AG's Report, Financial sustainability of local authorities 2014, Session 2014-15, HC 783, 19 November 2014. Back

2   C&AG's Report, para 9. Back

3   C&AG's Report, Figure 2. Back

4   C&AG's Report, paras 12, 1.25. Back

5   C&AG's Report, paras 2.22-23, 2.28. Back

6   C&AG's Report, para 6. Back

7   C&AG's Report, para 21. Back

8   C&AG's Report, paras 3.15, 3.19. Back

9   C&AG's Report, paras 2.27-28, 2.30-31. Back

10   Department for Communities and Local Government, "Accounting Officer Accountability System Statements for Local Government and Fire and Rescue Authorities", September 2013, para 2. Back

11   Q 21. Back

12   C&AG's Report, para 9. Back

13   Q 6. Back

14   Qq 9, 11, 23; Local Government Finance Settlement 2014/15, Standard Note SN/SG/6816, House of Commons Library, February 2014, Table 4. Back

15   C&AG's Report, para 2.9. Back

16   C&AG's Report, para 2.9. Back

17   Qq 5, 9, 74. Back

18   Qq 6-7, 9. Back

19   Written evidence from the Chartered Institute of Public Finance and Accountancy Back

20   Qq 24-26, 74. Back

21   Q 3. Back

22   Written evidence from the Department for Communities and Local Government Back

23   Oral evidence taken before the Committee of Public Accounts on 30 June 2014, Assurance to Parliament on funding for local authorities, HC (2014-15) 456-I, Q 14. Back

24   Written evidence from the Department for Communities and Local Government Back

25   C&AG's Report, paras 29, a. Back

26   Qq 19, 47, 70. Back

27   C&AG's Report, paras 18, 3.9. Back

28   Written evidence from the Department for Communities and Local Government Back

29   Qq 1, 48. Back

30   Qq 15, 19, 47. Back

31   Qq 16-18. Back

32   Committee of Public Accounts, Department for Communities and Local Government: Financial sustainability of local authorities, Third Report of Session 2013-14, HC 134, June 2013, paragraph 14 Back

33   Q 65. Back

34   Q 68. Back

35   Q 69. Back

36   Q 68. Back

37   C&AG's Report, para 2. Back

38   Q 1. Back

39   C&AG's Report, para 2.22 to 2.25. Back

40   Q 21. Back

41   C&AG's Report, para 2.23 to 2.25. Back

42   Committee of Public Accounts, Department for Communities and Local Government: Financial sustainability of local authorities, Third Report of Session 2013-14, HC 134, June 2013, conclusion 1. Back

43   Q 64; C&AG's Report, paras 2.24- 2.28. Back

44   Qq 53, 55. Back

45   Qq 55, 64. Back

46   Written evidence from the Department for Communities and Local Government Back

47   Qq 19-20, 53. Back

48   Q 75. Back

49   National Audit Office, The impact of funding reductions on local authorities, November 2014, para 17. Back

50   Qq 4-5, 21. Back

51   Q 63. Back

52   Qq 20, 53, 60. Back

53   Qq 20, 54; C&AG's Report, para 2.20. Back

54   C&AG's Report, paras 15, 2.18. Back

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Prepared 28 January 2015