Local authority financial sustainability and the section 114 regime Contents

1Introduction

1.Local government finances have been strained ever since the Coalition Government introduced its programme of deficit reduction in 2010 aimed at restoring the UK’s public finances. Between 2010–11 and 2018–19, the core spending power of local government in England, as derived from grant funding and council tax, fell by 28.7% in real terms.1 The majority of these reductions came between 2010 and 2015, but even with recent funding increases, including in the last spending review, local government has still experienced funding restraint in the last six years, with some authorities experiencing severe reductions in grant. At the same time, increased demand for services, particularly adult and children’s social care, has intensified the funding pressures on local councils.

2.The covid-19 pandemic has further exacerbated the precarity of local government finances. In its recent report, Local government finance in the pandemic, the National Audit Office (NAO) calculated that, as of March 2021, covid-19 had cost local government £9.7 billion in lost income and additional costs. This is equivalent to 17.6% of revenue expenditure. It also found these costs had been unevenly distributed across local authorities, with district councils worst affected owing to their reliance on income-generating services.2

3.The evidence to our inquiry made plain the financial pressures on local authorities.3 Core Cities UK described the situation as a “perfect storm” and said that without a long-term funding solution “the system cannot sustain itself”.4 According to Richard Watts, Chair of the Resources Board at the Local Government Association, a “double whammy of increased demand for the most expensive services, coupled with reductions in funding, has seen local authorities go into the covid crisis in a pretty weak position.”5 London Councils described “a gradually deteriorating position” and concluded that the situation was clearly “not sustainable in the long term”.6 According to researchers from Nottingham Business School, the “long-term and complex financial challenges besetting local government”, if not addressed, “will continue to make an increasing number of authorities financially unsustainable.”7

4.In addition to the national picture, a minority of councils are in such serious trouble they have approached the Ministry of Housing, Communities and Local Government (MHCLG) for financial assistance,8 and two, Croydon and Slough, have been forced to issue section 114 notices, in November 2020 and July 2021 respectively (see Annex for an account of the events in Croydon). Under section 114 of the Local Government Finance Act 1988, a Chief Finance Officer is required to issue such a notice if it appears to them that the expenditure of the authority in a financial year is “likely to exceed the resources (including sums borrowed) available to it to meet that expenditure.”9 Once a council has issued a notice, spending on all but essential services must immediately cease. It is a statement that a council is in deep financial distress. Other than Croydon and Slough, the only council to have issued a notice recently was Northamptonshire, in 2018. More authorities could be added to the list of those serving section 114 notices.

Our inquiry

5.On 26 October 2020, we launched an inquiry into the 2020 spending review and local government finances. Our inquiry received 35 written submissions and we took oral evidence from the Chartered Institute of Public Finance and Accountancy (CIPFA), the Local Government Association, (LGA) the Institute for Fiscal Studies (IFS), the County Councils Network (CCN), the District Councils Network (DCN), the Special Interest Group of Municipal Authorities (SIGOMA), and the Minister for Regional Growth and Local Government, Luke Hall MP.

6.On 1 December 2020, following Croydon’s section 114 notice, we launched a second inquiry, this time into local authority financial sustainability and the section 114 regime. That inquiry received 13 written submissions and took oral evidence from CIPFA, the LGA, representatives of Croydon Council and its external auditor, Grant Thornton, and the Minister.

7.The situation at Croydon was the trigger for the second inquiry, not its subject, and for this reason the events leading up to it are explored in an annex to this report; the inquiry itself was concerned with the overall factors undermining local government financial resilience and the general operation of the section 114 regime. Our report, which combines the two inquiries, also revisits issues raised and recommendations made in reports of our predecessor Committee, although we note that circumstances have changed, especially since the outbreak of the covid-19 pandemic.10

Structure of this report

8.In chapter 2 of this report, we discuss the increased demand for social care and its impact on councils’ resources. In chapter 3, we explore the recent changes to how local government is funded, particularly the introduction of the Business Rates Retention Scheme (BRRS) in 2013 and the Government’s use of one-year financial settlements. In chapter 4, we look at the impact of the covid-19 pandemic on local government finances and the Government’s financial support package. In chapter 5, we examine councils’ use of commercial investments to generate additional revenue streams. In chapter 6, we turn to the state of the local audit regime and the Government’s response to the recommendations of the Redmond Review into local authority financial reporting and external audit. In the same chapter, we also assess the operation of the section 114 regime. Finally, in the annex, we explore the causes of Croydon Council’s weak financial position.

1 National Audit Office, Local authority investment in commercial property, (13 February 2020), p. 4

2 National Audit Office, Local government finances in the pandemic, (10 March 2021), p. 7

3 Chartered Institute of Public Finance and Accountancy (CIPFA) (FSS0012); Core Cities UK (FSS0004); County Councils Network (FSS0008); Derbyshire County Council (FSS0006); District Councils Network (FSS0013); Local Government Association (LGA) (FSS0002); London Councils (FSS0014); Mr Dan Bates (Director at OnTor Limited (Private Limited Company)) (FSS0009); Mr Pete Carpenter (Corporate Director Resources at Peterborough City Council) (FSS0010); Professor Peter Murphy (Professor of Public Policy and Management at Nottingham Business School); Dr Peter Eckersley (Senior Research Fellow at Nottingham Business School); Katarzyna Lakoma (Research Associate at Nottingham Business School); Bernard Kofi Dom (Associate Lecturer at Nottingham Business School) (FSS0001); Society of County Treasurers (FSS0003); Special Interest Group of Municipal Authorities (FSS0007)

4 Core Cities UK (FSS0004)

5 Q2

6 London Councils (FSS0014)

7 Professor Peter Murphy (Professor of Public Policy and Management at Nottingham Business School); Dr Peter Eckersley (Senior Research Fellow at Nottingham Business School); Katarzyna Lakoma (Research Associate at Nottingham Business School); Bernard Kofi Dom (Associate Lecturer at Nottingham Business School) (FSS0001)

8 Ministry of Housing, Communities and Local Government, Guidance: Exceptional financial support for local authorities; as of 7 April, the Department had agreed support with eight authorities for the financial year 2020–21. In general, the Department has chosen to provide such assistance by agreeing capitalisation directions, allowing authorities to fund revenue expenditure from capital resources including capital receipts and borrowing.

10 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; Housing Communities and Local Government Committee, Fifth Report of Session 2017–19, Business rates retention, HC 552; Housing, Communities and Local Government Committee, Eighteenth Report of Session 2017–19, Local government finance and the 2019 Spending Review, HC 2036; Housing, Communities and Local Government Select Committee, Eleventh Report of Session 2017–19, High streets and town centres in 2030, HC1010




Published: 19 July 2021 Site information    Accessibility statement