Local government finance and the 2019 Spending Review Contents

2Local government funding

Reduced funding for local government

6.Local government is funded from three main sources: council tax receipts; a proportion of business rates; and central government grants. Since 2010 there has been a significant fall in the level of central government grants given to local authorities. This has to some extent been offset by increases in council tax and business rates over the same period but overall there has still been a large cut in the amount of money councils have available to spend. Local government ‘spending power’ in England has fallen by over a quarter since 2010. The National Audit Office (NAO) explained in their submission:

Government funding for local authorities has fallen by an estimated 49.1% in real terms from 2010–11 to 2017–18. This equates to a 28.6% real-terms reduction in ‘spending power’3

7.The Institute for Fiscal Studies (IFS) told us that “local government spending has fallen significantly, especially in deprived areas”. It went on to explain that that “spending rose consistently through the 2000s … but began to fall from 2009–10. Since then it has fallen continually.”4 Professor Tony Travers from the London School of Economics told us that while local government had experienced funding cuts before “the reduction since 2010–11 is without parallel in modern times. The scale, intensity and the long time period over which it has taken place are greater.”5

8.The halving in real terms of central government funding for local authorities has affected councils in different ways. The NAO noted that:

these reductions [in central government grant] have a proportionately greater impact on the spending power of authorities that depend more on government funding as opposed to council tax. As a consequence, authorities that are relatively more grant-dependent, such as metropolitan district councils, have had greater reductions in their overall spending power.6

The IFS’s evidence went on to explain that “these falls [in spending power] have not been spread evenly across councils—they have been larger for councils serving more deprived communities than for those serving less deprived communities” and calculated that between 2009–10 and 2017–18 there had been “cuts per person of 36% for the most-deprived fifth of council areas, compared to 22% for the least-deprived fifth of council areas”. Nevertheless, the IFS analysis also showed that despite these cuts the most deprived areas still had around 25% more per person to spend than the least deprived areas did in 2017–18.7

9.MHCLG highlighted that since 2015–16 the overall spending reductions had been less severe than in the preceding five years. Their written submission noted that in cash terms “Core Spending Power of authorities in England for 2019–20 is £46.4 billion, an increase of 3.8% from 2015–16 where Core Spending Power was £44.6 billion”. However, the submission did not provide the change over that period in real-terms—if it had it would have shown a real-terms reduction in resources available to local authorities. The submission added that local government being less dependent on central government grants and receiving a greater proportion of their income in the form of council tax was “part of an ongoing objective to give local authorities more control over the money they raise”.8

10.Local government has coped with a prolonged period of real-terms spending reduction which is without parallel in modern times. This large fall in local authorities’ resources has been primarily caused by very significant cuts in central government grants.

Increasing demands and costs

11.While local authorities have had their funding reduced they have also had to cope with increased demands for the key services that they provide. Professor Murphy from Nottingham Trent University told us:

The population has been growing but, more importantly, the parts of the population that rely on the services or have demand for the services have been growing more quickly than the population as a whole. We are getting fairly significant increases in demand, and the most obvious thing is social services.9

12.This point was echoed by a number of the witnesses. Professor Travers highlighted the growth in the number of older people, who needed social care services and also the increasing demand for children’s services.10 Dr Jonathan Carr-West of the Local Government Information Unit (LGIU) explained that “it is really important to say that the pressures on local government are not just about a lack of resources. They are also about growing demand”.11 Rob Whiteman of CIPFA agreed that the financial constraints had been compounded by “service pressures for elderly people in social care” and “volumes in children’s social services”.12

13.Our recent reports have highlighted the increasing demand and costs of social care. Our joint report with the Health and Social Care Committee on Long-term funding of adult social care concluded that the “combination of rising demand and costs in the face of reductions in funding has placed the social care system under very great and unsustainable strain. In its present state, the system is not fit to respond to the demographic trends of the future.”13 Our recent report on Funding of local authorities’ children’s services noted that the “demands on children’s social services have been increasing each year for well over a decade. The number of looked after children in England has increased by 27% over the last ten years and is now at its highest level for a generation.”14

14.Other areas of demand and cost growth were also mentioned. Councillor Paul Carter, the Chair of the County Councils Network and leader of Kent County Council, told us that there had been a “massive rise in adult learning disabled and physically disabled” in Kent. He went on to add:

Learning disability is becoming the greatest cost in our authority in Kent and in many other counties, where the families of disabled people are supported by the local authority for life.15

Councillor Fuller, the Chair of the District Councils Network told the Committee that demographic changes, the higher minimum wage and other factors “have increased demand and costs much more quickly than our ability to raise council tax or business rates.”16 He also considered that “so often, our costs are rising due to failures of other parts of the state”. He gave examples of unaccompanied child asylum seekers and of young people failed by the justice system, going on to say “there is a question we need to ask of other Government Departments: why are we constantly picking up the bill?”.17

15.Frances Foster of the Special Interest Group of Municipal Authorities (SIGOMA) considered that changes to the benefits systems were also causing problems for councils. She told us that “there is a lot of anecdotal evidence from councils in our SIGOMA authorities of people in their housing system turning up at surgeries with issues about the various council tax support reductions, the benefit freeze or the caps on rents”.18 The submission from the Local Government Association (LGA) also said that “changes and spending reductions introduced under welfare reform appear to be contributing to pressures on local government services”.19 Our inquiry on children’s services heard from a number of witnesses who said that DWP reforms to benefits and cuts in other public services had contributed to the increased demand for children’s social services.20 The Government has committed to report back to us on their assessment on the demand for children’s social services as part of their response to our report.21

16.Submissions also raised homelessness support as an increasing pressure on local authorities. The LGA highlighted that “pressures are particularly acute in adult social care, children’s services and homelessness support”.22 London Councils agreed, citing “rising demand for homelessness prevention and support” alongside social services for adult and children as the three main pressures that were making the funding situation unsustainable. London Councils pointed out that the capital now had “55,000 households in temporary accommodation (68% of the national total)”.23

17.Spending on temporary accommodation is increasing. Crisis, the housing charity, noted that recent research has estimated around £1 billion was being spent on temporary accommodation and highlighted the “sharp increase” in its use—there were 82,000 households in temporary accommodation in July 2018—a 71% increase since 2011.24 A number of submissions considered some of this demand was being caused by benefit cuts. A joint submission from 15 organisations, including leading homelessness prevention and support charities, said that an increase in the local housing allowance rates was “desperately needed to prevent more people from becoming homeless because they can’t afford to make up the shortfall between their housing benefit and their rent”.25 Evidence from the LGA also highlighted “a potential link between welfare reform and increases in rent arrears, housing insecurity and demand for temporary accommodation”.26 The NAO reported that the Government had not attempted to evaluate the impact of benefit changes on homelessness, but nevertheless concluded that it is likely that welfare reforms have contributed to the increase in homelessness.27

18.The demand for costly and essential services which local authorities provide, such as adult and children’s social care, has increased during this period of funding cuts. Some of these demands are being caused by failures or spending reductions in other parts of the Government, such as benefit reforms and changes.

Response of local government

19.The reduced spending power of local government combined with the increased pressures on acute services has resulted in severe cuts in the non-statutory services that councils provide. The IFS’s submission reported that “councils have adapted to reduced funding by making significant cuts to more discretionary services in order to relatively protect statutory and more acute services”. It added that:

councils’ net expenditure on planning & development and housing services is down more than 50% and on highways & transport and cultural & leisure services is down more than 40%. On the other hand, spending on adult social care services has been cut by just 5% and spending on acute children’s social care services (such as social work, safeguarding, and fostering) is actually up around 10%.28

Figure 1: IFS analysis - real-terms change in local government service spending by service area, 2009–10 to 2017–18

Source: Institute for Fiscal Studies (FSR0090)

20.Neil Amin-Smith of the IFS told us that “councils have generally tried to protect more acute services at the expense of broader and more preventative services”. He said that “funding for homelessness has gone up by 23%, but, at the same time, budgets for renewing private sector housing and housing advice have fallen by 87% and 60%” and that while “acute children’s services have been protected, Sure Start funding has fallen by about 60% over the same time period”.29 Other witnesses also highlighted the cutting of non-statutory services. Professor Travers explained that, as statutory social care had been relatively protected, the significant funding reductions that local government had to cope with “means that everything else in local government has had to face a disproportionate reduction compared with the average.” He noted that “services such as highways, leisure, arts and culture, youth services and, to a lesser extent, environment have faced bigger than average reductions within local government.”30

21.The written submission from St. Helens Council explained that “when faced with a desperately strained social care system trying to look after elderly people, and increasing numbers of children being taken into care, issues such as recycling rates cannot possibly be considered as a priority”. Its evidence highlighted statistics from a NAO report of 2018 which showed how these other services had been cut back:

22.Cutting back on non-statutory services may be the only option for local government but it may not represent good value for money. Frances Foster of SIGOMA told us “a great concern now for our areas is the lack of spending on preventive measures”.32 Rob Whiteman of CIPFA made a similar point. He told us “there are discussions about whether cuts to youth services have led to problems with knife crime” adding that “many councils have cut youth services in order to balance the budget”.33 He agreed that short-term cuts may not provide savings in the long-term or could result in just displacing costs to another part of the public sector:

Local government cuts public health, you can make savings now, but, if fewer people give up smoking, in 10 years’ time we may see more people presenting at A&E with respiratory disease.34

23.A panel of experts on Public Health reiterated this. Alison Cox from Cancer Research UK told us that “in terms of the cost to the NHS, there is significant impact from not meeting what we could achieve by reducing smoking rates”.35 Jeanelle De Gruchy of the Association of Directors of Public Health told us that “everyone agrees that prevention is better than cure and that prevention is cheaper than cure”. David Buck of the King’s Fund explained that despite this “in general, the preventive end of the public health grant is where the cuts have come” as “the prescribed functions are being protected a little more than the non-prescribed functions”.36

24.The submissions from the Salvation Army and Crisis made similar points regarding housing and homelessness. The Salvation Army explained:

Between 2010–11 and 2017–18, spending on the former Supporting People programme fell by 69% (from £1.44bn to £444m). Much of this previous spend is now being used to fund local authorities’ increasing reliance on temporary accommodation as a means to fulfil their legal responsibilities to homeless households who are assessed as being in ‘priority need’ of assistance.

It considered that spending on temporary accommodation “brings little lasting benefit. By contrast, the former Supporting People programme generated net savings of £3.4bn per year against an overall investment of £1.61bn.”37 Crisis also noted that the majority of spending by local government on homelessness prevention and support was now going on temporary accommodation. It concluded:

Government’s current response focuses its investment on tackling the symptoms of homelessness rather than addressing its root causes.38

25.Local government must balance the books each year—the severe funding reductions it has faced has meant it has focused its spending on the acute pressures and has had no choice but to cut non-statutory services. Forcing local government to reduce resources for these services may cause higher costs in the future or just move pressures to other parts of the public sector.

26.One other area we explored as part of the inquiry was local authorities’ borrowing from the Public Works Loan Board to invest in commercial property. The submission from the Bureau of Investigative Journalism reported that:

We found in the last two years the number of councils investing in commercial property had doubled. In 2017–18 alone, authorities spent £1.8 billion on investment properties, a six-fold increase from 2013–14.39

27.Rob Whiteman of CIPFA agreed that some of this borrowing for investment had gone too far. He said that borrowing for services and to regenerate the local economy were a “good thing” but there had been some cases of “excessive borrowing” to generate income. He gave the example of “Spelthorne, a district council with a £30 million turnover that has borrowed £1 billion in order to invest commercially”. He noted that the prudential borrowing code that CIPFA set on behalf of the Treasury had now been tightened so that it is “against guidance for that degree of commercial investment outside of one’s area”.40 However, Neil Amin-Smith said that one of the problems of local authorities only being allowed to invest in their own area was that it “prevents diversifying of risk”, noting that “if there were a local economic shock, as councils are more dependent on local revenues for funding, if all their investments were also local they could take a hit on both fronts at the same time”.41

28.A number of local authorities have turned to commercial property investments funded with debt from the Public Works Loan Board to provide additional income. We welcome the tightening of the guidance to place more limitations on borrowing for commercial property acquisitions where such activity threatens financial sustainability of the local authority.

Understanding and monitoring performance and efficiency of local government

29.In order to understand how well local authorities are coping with spending cuts it is important to have information on their activities and performance. The submission from the Institute for Government (IfG) provided some analysis on local government performance and efficiency. The Institute said that some data pointed to efficiency gains, noting that “there is evidence that, to some extent, councils have maintained the quality of the services they provide despite spending cuts”. It said that “residents’ satisfaction with waste collection, libraries, and road maintenance declined only slightly between September 2012 and October 2018 despite large spending cuts” and that “libraries are being run with fewer paid staff”. However, it did point out that “total library opening hours… declined between 2009–10 and 2016–17”.42

30.Although the IfG said that “councils have become more efficient since 2010” it also considered that they “will find it difficult to make further efficiencies in their services”. It cited “several warning signs” which pointed to deteriorating services. These included:

31.The submission from the IfG also highlighted the challenge of getting good data on performance. It described central government’s approach as “flying blind”, saying that it “does not collect and use data and insight about local government spending and activity to make well-informed and consistent decisions”. Its written evidence quoted local government officials. One said “there is no understanding in central government of operational reality. Different silos just lob things over the fence”. The IfG considered that the abolition of the Audit Commission and the Government regional offices had at least in part “undermined the Government’s ability to understand value for money and performance within the sector”.44

32.Others agreed that data on activity and performance was now more scarce. Professor Murphy told us that in 2015 he had looked at the quality of performance data on behalf of the NAO and found that “the quality and quantity of data was going down and getting poorer”.45 Rob Whiteman of CIPFA also considered that “voluntary data collection, on the whole, has suffered from the cuts”.46 The Bureau of Investigative Journalism’s submission also highlighted problems with spending data. It considered that “there are major inaccuracies in the financial data the government published on local authorities”. It also said that it was “particularly difficult to place the financial figures and spending decisions of a single council into a local, regional or national context due to issues around the accessibility, transparency and quality of information”.47

33.We asked Sir Amyas Morse, the outgoing Comptroller and Auditor General and head of the NAO, about some of the issues with data on spending and performance. He told us that “we do not think the returns that are coming in on a national basis are free from error, but on the other hand we think they are adequate for picking up major trends and developments”. He considered that there “has to be a pretty good reason that you need the information” as “when you have organisations that are under so much pressure, it is not something that they are going to greet with a particularly enthusiastic cry”.48 The Comptroller and Auditor General went on to add:

If you want to have good quality data, that was always done in the days of the Audit Commission by paying the auditors to do additional analysis. There is certainly less of that going on now than there used to be. There is a body there, but, again, you are talking about paying for it. Where is that money going to come from?49

Sir Amyas also emphasised that it was not the role of the NAO to monitor the performance or financial health of individual local authorities. He told us “we have not tried to evaluate whether local authorities are better at achieving planned outcomes” and noted that “My job is to set the [audit] code; I am not their distress phone call taker. That is not my job.”50

34.We asked the Minister for Local Government how many staff at the Ministry monitor local government performance:

We do not have a precise unit that does that or, therefore, a precise number of staff. As you will know, we have moved away from the Audit Commission to a different model.51

However, he implied that changes could be made noting that the “there is currently a live discussion about whether we have the right governance framework for local government in a post Audit Commission world. Stand by for more on that”. He explained that the “Secretary of State … would outline his plans on that before November 2019, as he has committed to the NAO”.52 The Minister also said that he would always welcome more data and increased transparency:

I am always in favour of more transparency. I generally think that having more data available in a comparable and transparent way is a great way for decentralised accountability to work.53

35.Following the final evidence session of our inquiry the Government announced a review into the quality of local authority audits. The review will be led by the former President of the Chartered Institute of Public Finance, Sir Tony Redmond. Initial recommendations are due to be published in December 2019 and the final report is due in March 2020. According to the press release:

the review will look at the quality of the audit of local authorities, whether auditors are using their reporting powers correctly and if councils are heeding recommendations to help improve the financial management of their accounts.54

36.Data available on the financial and operational performance of local authorities is limited—this makes it more difficult to assess whether spending cuts are being achieved through efficiency or deteriorating service standards.

37.We welcome the Government’s decision to undertake a review of local government audit. The review should, among other issues, consider how auditors can be more effectively used to highlight risks to financial sustainability, operational performance and value for money of local authorities.

38.The Government should develop a more regularised and consistent approach to the collection and monitoring of comparative data about councils’ performance, efficiency and financial sustainability. The current situation means there can be no certainty about the state of individual councils or the sector as a whole.

3 National Audit Office (FSR0112)

4 Institute for Fiscal Studies (FSR0090)

5 Q2

6 National Audit Office (FSR0112)

7 Institute for Fiscal Studies (FSR0090)

8 Ministry of Housing, Communities and Local Government (FSR0016)

9 Q4

10 Q6

11 Q128

12 Q2

13 Health and Social Care and Housing, Communities and Local Government Committees, First Joint Report of Session 2017–19, Long-term funding of adult social care, HC 768, para 30

14 Housing, Communities and Local Government Committee, Fourteenth Report of Session 2017–19, Funding of local authorities’ children’s services, HC 1638, para 34

15 Q92

16 Q83

17 Q93

18 Q101

19 Local Government Association (FSR0006)

20 Housing, Communities and Local Government Committee, Fourteenth Report of Session 2017–19, Funding of local authorities’ children’s services, HC 1638, para 59–60

22 Local Government Association (FSR0006)

23 London Councils (FSR0065)

24 Crisis (FSR0049)

25 Written evidence submitted jointly by Caritas Anchor House, Centrepoint, Crisis, Depaul UK, HARP, Homeless Link, Look Ahead, My Space Housing Solutions, National Housing Federation, Porchlight, Roundabout, St Mungo’s, The Salvation Army, Two Saints, and York Road Project (FSR0067)

26 Local Government Association (FSR0006)

27 National Audit Office, Homelessness, September 2017, HC 308

28 Institute for Fiscal Studies (FSR0090)

29 Q21

30 Q20

31 St. Helens Council (FSR0040)

32 Q83

33 Qq5, 17

34 Q18

35 Q143

36 Q143

37 Salvation Army (FSR0094)

38 Crisis (FSR0049)

39 Bureau of Investigative Journalism (FSR0014)

40 Q28

41 Q28

42 Institute for Government (FSR0022)

43 Institute for Government (FSR0022)

44 Institute for Government (FSR0022)

45 Q22

46 Q22

47 Bureau of Investigative Journalism (FSR0014)

48 Q40

49 Q46

50 Qq42, 50

51 Q168

52 Q168

53 Q170

Published: 21 August 2019