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Financial sustainability of some local authorities presents a significant risk to government

22 January 2021

The Treasury is failing to demonstrate that risks to public finances are well managed or how it works with other government bodies to "actively manage the significant fiscal challenges" evident in Government accounts even before Covid - including £152 billion liability for nuclear decommissioning, the £85 billion clinical negligence provision for the NHS and the precarious financial position of local authorities.

Where new risks such as COVID-19 emerge, there is an apparent lack of ownership by the Treasury of the analysis and scenario planning activities necessary to making difficult decisions about public spending.

The financial sustainability of some local authorities presents a significant risk to government. While local authorities have autonomy over their spending, the Treasury is the 'funder of last resort' should a local authority become insolvent. As COVID-19 has increased the fiscal pressures many government bodies face, the Committee "expects that more local authorities will soon be unable to balance their books and will be forced to issue section 114 notices in order to suspend non-essential expenditure."

The Committee says it expects the Treasury to have oversight of local government finances in the round in order to properly manage the wider risk to the public finances, but the Redmond review highlighted a lack of this oversight, and serious issues in the local government sector, including failures in current local audit arrangements. It says the government’s response to the Redmond review should be agreed and implemented as soon as possible.

Meg Hillier MP, Chair of the Public Accounts Committee, said:  "As we reported earlier this year, some local authorities have taken on extremely risky levels of debt in recent years in an effort to shore up dwindling finances, much of it investments in commercial property. The pandemic has doubly exposed that risk – in the huge extra demands and duties it is placing on local authorities, and in the hit to returns on commercial investments.

The Treasury has a worryingly laissez faire attitude to what now presents a significant risk to the whole of government. It must step firmly back into the driving seat, demonstrating that it has a clear handle on significant risks in our public finances and is managing them – and that it’s ready to take on the unprecedented additional impact of COVID-19 and EU Exit."

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Image: PA