Levelling Up, Housing and Communities Committee
Oral evidence: Financial distress in local authorities - 08 11 23, HC 56
Wednesday 8 November 2023
Ordered by the House of Commons to be published on 8 November 2023.
Members present: Mr Clive Betts (Chair); Bob Blackman; Ian Byrne; Ben Everitt; Kate Hollern; Andrew Lewer; Mary Robinson.
Questions 1-69
Witnesses
I: Councillor John Fuller OBE, Vice Chair Local Government Association Economy and Resources Board and Leader of South Norfolk District Council, Councillor Graham Chapman, Vice Chair SIGOMA—Special Interest Group of Municipal Authorities—and member of Nottingham City Council, and Councillor Claire Holland, Acting Chair London Councils and Leader of Lambeth Council.
II: Mr Stephen Jones, Director, Core Cities UK, Councillor Sam Chapman-Allen, Chair District Council Network and Leader of Breckland Council, and Councillor Barry Lewis, Finance Spokesperson, County Council Network (virtual).
Examination of witnesses
Witnesses: Councillor John Fuller OBE, Councillor Graham Chapman and Councillor Claire Holland.
Q1 Chair: Welcome, everyone, to this session of the Levelling Up, Housing and Communities Committee. This morning we are going to look at the issue of financial distress in local authorities. I am sure everyone will have seen reports in the media about councils with immediate financial problems having difficulties balancing the books, and others that are forecasting that those problems will occur for them in the next few months or the next couple of years. We are going to look at that issue with two panels of representatives from local councils. Before we come on to our witnesses, I ask Committee members to put on record any interests they have that may be directly relevant to this inquiry. I am a vice-president of the Local Government Association.
Kate Hollern: I employ a councillor in my office.
Bob Blackman: I am a vice-president of the LGA, and I employ councillors in my office.
Ben Everitt: I am a vice-president of the LGA, and I employ a councillor.
Andrew Lewer: I am a vice-president of the LGA, and Councillor Lewis, who is on the second panel, was a colleague of mine at Derbyshire County Council and worked for me when I was an MEP.
Chair: Thank you. Could I ask our first panel to introduce themselves? Just say who you are and the organisation you are here to represent.
Councillor Holland: My name is Councillor Claire Holland. I am leader of the London Borough of Lambeth, and I am acting chair of London Councils.
Councillor Chapman: I am Graham Chapman. I am deputy chair of SIGOMA, which is an association of metropolitan and unitary authorities.
Councillor Fuller: My name is John Fuller. I am vice-chairman of the LGA’s resources and economy panel and leader of South Norfolk District Council.
Chair: Thank you all for coming this morning. I referred to the fact that there has been a lot of news about this issue, particularly about councils declaring something called 114 notices, which for most members of the public will mean absolutely nothing but is clearly quite an important issue in terms of local authority services. Could you explain why 114 notices are being served, what they mean and why there has been a recent increase in the number? Five years ago, we hardly ever heard of them, and now we are hearing about them or forecasts of them regularly.
Councillor Fuller: A few years ago, Northamptonshire was the first authority in living memory to declare a 114 notice, and since then a number of them have been declared. Key signs that authorities are falling into difficulty include a problem servicing debt—some authorities have taken on quite significant levels of debt in relation to their income—and low reserves. Overspending on major projects is another example—there is quite a famous one at the moment in the midlands—and unstable leadership is another.
I think it is fair to say that hitherto, there has not really been any particular common theme in terms of politics, sector or tier; they have almost been idiosyncratic. We are probably at an inflection point, where the number of authorities contemplating issuing 114 notices is becoming more general, as opposed to the specific reasons we have seen thus far.
Councillor Chapman: People have to recognise that local government has probably taken the greatest level of cuts of any of the public sector over the years—more than health, and probably even more than prisons. We are coming under inexorable pressures of 12 to 13 years of reductions in Government grant with, at the same time, an increase in the level of pressures that local government is having to face in the form of adult social care costs, homelessness costs and child protection costs, which are enormous.
It is being squeezed, and that model can only go on for so long. You only have so many reserves that you can use to offset some of these pressures without the income. The other thing that has been happening is that, because of these pressures, there has been less and less emphasis on preventive measures, which in the longer run could probably reduce some of the costs. We are reaching a tipping point.
Councillor Holland: I would agree with that. What we are seeing across London is boroughs on a knife edge. We have had a reduction in resources since 2010—our overall resources are approximately 18% lower in real terms than what we had in 2010—and yet we have seen rising need across London. We have had the equivalent of Leeds move into London; 800,000 more people are living in London. We have seen rising needs that are more complex following the pandemic and the cost of living crisis. The whole country has a housing crisis, which is particularly acute in London. At the same time that we have had those rising needs and complexity of needs, our resources have gone down. We have had less money from central Government and had to raise more money locally, whether through council tax or business rate retention, both of which systems have not been looked at in a long time. We would say not only that we have had chronic underfunding, but that we have a broken funding system, which has structural issues that now need to be looked at.
Q2 Chair: We will come on to the structural funding and how it is done in the next question, but I have two other points first. Let us go back to the panel in reverse order. Do you think that your members—collectively—will be able to balance their budget next year? Will your own local authority be able to balance its budget, or at least deliver its statutory services next year, given your likely income?
Councillor Holland: Well, we have to balance our budgets—we are required to do so—but it is difficult. At the moment, our research shows that across London, nine in 10 boroughs are forecasting an in-year overspend this year of up to £400 million. Also, we have to make £500 million in savings next year and we all have issues with our housing revenue account, which is our separate ringfenced account.
One of the other difficulties is that this is, I think, our fifth year of an annual settlement. We do not have long-term settlements or certainty, so when I sit down with my chief executive and my corporate finance director as we go through the budget process at the moment, I do not know for sure what will be in the budget next March. We therefore have to build in assumptions.
We will need to balance our budget, but we will need to look at what there is out there that we can save on to enable us to do so. Over the years, as London Councils, we have looked at efficiencies across the board. We have reduced our staff by a third across London and we have picked all the low-hanging fruit. As my colleague referred to, colleagues across London of every political colour are really worried about what they will have to look at to make savings. That will hit our communities in the frontline services.
Chair: You mentioned the housing revenue cap. The Committee is looking at that in a separate inquiry. We will report our findings soon.
Councillor Chapman: One of the major problems is children’s services—well, they are all under pressure, whether children’s services, adult services or homelessness, and some of it will be education transport. Those are probably the four areas.
In adult care and children’s services, the market is broken. That is a major issue for us. The costs are rising inexorably. There is almost no way through. That will be a problem for section 114—I have something to say about section 114s at a later stage. I am not at all convinced that even the application of a section 114 will solve anything, given that the market is broken like that, the market failure.
Councillor Fuller: In aggregate, the LGA has calculated that over the next two years the sector is £4 billion short of just maintaining services at where they should be today. That is an enormous mountain to climb. It is driven by 23% increases in the cost of special educational needs and vulnerable children, while social care budgets and homelessness are up 20%. There are some enormous cost drivers on top of the drivers of income and inflation costs. That is aggravated in some cases—I single out cathedral cities and coastal communities, where car park income, for example, is down significantly, and tourist activity. It is a complex area of needs.
In my authority, we have generated significant incomes from commercial trading. We are unusual in that respect, but I can only hear that it is not just upper or lower tier together, but that all councils are struggling. SIGOMA has lately issued a report, as has the County Councils Network. I will not trespass on the district councils, because they are in the next panel, but there is a general understanding that if not this year, next year, about half the authorities will be in distress. That is a significant number.
Q3 Chair: Authorities “in distress” means the public in distress, because they are not getting the services they need.
Councillor Fuller: Yes. I think you have to realise that, as Councillor Holland identified earlier, we have to balance our budgets. This is the time of year when we assess our budgets for next year, but coupled with the budget for next year is also an assessment of the medium-term financial plan. We are required to lay out our four-year plan, and when you have social care going up by 19% and children with complex needs going up by 23%, but your income is only going up by 3% to 5%, it does not take a maths genius to work out that there is going to be a gap at some stage. I think all authorities can see a gap crystallising at some point in the next three to four years, because structurally our costs, many of which are driven by statutory and regulatory pressures, are exceeding the income coming in. It is a structural problem.
Chair: Let’s move on to the issue of funding.
Q4 Ben Everitt: Councillor Fuller, I will stay with you, because it follows on logically. Accepting the point about the need for an additional £4 billion over the next two years just to keep the show on the road, and digging into the current mechanisms for funding councils and authorities via direct grants, business rate retention and council tax, how effective is that at funding councils to do what they need to do? Picking up on the point you made at the beginning, I think you used the word “idiosyncratic” when you were talking about the various 114 notices. Does this structure—this three-pronged approach to funding—actually give you what you need to deliver the services?
Councillor Fuller: To be clear, the section 114 notices that have been issued thus far have been idiosyncratic. There have been particular needs: an authority may have taken excessive risk, borrowed too much or had a cost overrun. With 380 council members in the LGA in England and Wales, there are always going to be one or two where these matters crystallise, but I think what we are now seeing is a more general approach and a systemic realisation there.
In terms of what might we do to fix the problem, there are all sorts of initiatives that come up every now and again, such as the tourist tax, which perhaps has its place in a local area—but we are talking about trivial sums of money. I think it is fair to say that there are some authorities where the preponderance of homes in the area are band A. I remember speaking to my colleague Simon Henig in Durham once, and he said that something like 90% of the homes were band A. Even if you increase council tax by 5%, you are only getting a miniscule amount, so the tax base is there.
The LGA did a lot of work in 2018-19, and there was cross-party consensus that greater weight needed to be placed on the population element, because people consume services. That is not to deny that there should be indices of multiple deprivation in the mix. Clearly, there needed to be a greater degree of consistency about providing so many pounds for miles of roads, and so many pounds for children in school. There was consensus, but when the sum of money was totted up, they were all winners and there were no losers. I remember speaking to the Local Government Finance Minister at the time, who is now our Prime Minister, and he said, “It’s like this, John: there just isn’t enough money in the system to fund the winners and not have any losers.” The problem is that there is a lack of quantum going into local government, and our best estimate is that it is £4 billion over the next two years. Other numbers are available but, in the handfuls of money, that is the size of the mountain we have to climb.
Q5 Ben Everitt: Just to pick up on that, is the RSG suitable for the grant element, or would you add different metrics into that or even simplify it?
Councillor Fuller: Colleagues will want to amplify this, I’m sure, but the last time there was a serious bottom-up review of the formula was probably in 2006, with data that is now over 20 years old. The formula needs to be adjusted along the lines I identified, with greater weight on population and so forth. The real problem is that you could have all the formulae you like, but the quantum of money going in is not sufficient at a time when other parts of the state are now leaning into local government to fund things. This has astonished me: it is called the Department of Health and Social Care, yet the Department for Levelling Up, Housing and Communities picks up the bill. I think there is a grant settlement that we may need to consider between the Departments to go forward, because we cannot carry on as we are.
Councillor Chapman: My thoughts are that my colleague is absolutely right. From a SIGOMA point of view, not only is the quantum not enough, but what has happened over the last 10 years is that the poorer the council, the more it has lost. There has been a shift in order to protect some of the better-off councils, effectively, because that is what the capitation approach has done, at the expense of some of the worse-off councils. Let us just give the example of Knowsley, which is one of the poorest councils in the country. It has lost more than virtually any other council, apart from one or two of the London boroughs, while one of the councils that has been the most protected is Wokingham, in terms of its baseline in 2010.
I once did a correlation between poverty and loss of grant income, and it was 0.8. If anybody gets a correlation of 0.8, that is very high. I also have to say that there was a correlation between political management of these authorities—between the ones that lost the most and the ones that lost the least. There is quite a high correlation there. There is a particular problem for those authorities that have not got a decent council tax base, because what has been happening is that we have been throwing more and more responsibility back on to the council tax. The council tax has gone up; it is a massive proportion. If you take somewhere like Manchester and increase council tax by 1%, you get something like £30. If you take Wokingham, you get something like £89 or £90. If you push people back on to the council tax base, you have a double whammy: you are making your population poorer at the same time as your services are struggling even more.
The irony of this, of course, is that this is supposed to be the levelling up Department—the levelling up Committee. The net effect of what has happened over the last 10 or 12 years has been exactly the opposite. It does not matter how much money you spread in small pots all over the country; the net effect of taking this money away from those deprived areas is to level down. The levelling up Department has spent more time over the last 12 years levelling down than it has levelling up.
Q6 Ben Everitt: Thank you Graham. Claire, is this a situation that you can recognise from your position in Lambeth? Obviously you are pretty close to the centre of London and have a relatively high council tax base. You have access to a good amount of business rates. There are pretty affluent bits of Lambeth as well. Does the three-way split work for you?
Councillor Holland: No, it doesn’t. We do have affluent bits of Lambeth and across London, but we also have significant levels of poverty. I think four London boroughs are in the top five councils in the whole country for child poverty. My borough is a very unequal borough. Just as my colleagues have said, the issue is the lack of funding in the overall funding pot, but the way the system has worked is that the money, as a core single settlement pot, as it were, from central Government, has been reduced. We also now have short-term pots and different grants and funds that then get subsumed into the pot. For example, council tax support, which was devolved to us in 2013, came with a cut in the funding for it, and it is now part of the core grant, as it were. That means that we end up having to rely on council tax and business rate retentions, which, as my colleagues have said, can be unfair taxes, depending on where you are and what your income is.
In addition, I do not think the funding formula has been looked at since 2013, or even before that. We are relying on indicators from the last century, so it is all really out of date, in addition to the overall pot being reduced. What we are saying is that we would like to go back to certainty of funding so that we know what is coming in, but also, as London, looking at parity with the trailblazers of the West Midlands and Greater Manchester of single-pot style settlements and devolution of the ability to raise money locally. You have already heard about tourism tax; there is vehicle excise duty, which we do not retain, and the apprenticeship levy, which we do not retain.
Ultimately, what that means is that there is a huge gap between what is coming into my borough and across London and what we need to pay out in services to support our communities who are on the edge. The Institute for Fiscal Studies published research recently that showed that the gap between assessed need in London and resource is 17%, which is the highest of any region in the country. I fully accept your point at the beginning—that there are areas of affluence—but as I say, we also have great areas of poverty. To be able to address that and provide the services that our residents actually need on the frontline, we cannot go on as we are. That is why nine in 10 boroughs are telling us that they are going to overspend this year. That is a chronic problem that needs dealing with.
Q7 Ben Everitt: It is interesting that you picked up on the need for greater flexibilities to raise money locally. You have the general power of competence from the Localism Act 2011. What further powers would you be asking for from the Government?
Councillor Holland: The council tax is a local tax, but it has been set—capped—by Government, essentially. I know that the housing revenue account is being dealt with separately with regards to rent. For example, the rent cap last year cost millions across the country to local authorities, as a transfer of burden from local to central. It cost my council £7 million. That is £7 million less in the housing pot to spend on repairs and maintenance and to invest in the properties. On the face of it, it looks like we have power locally, but in fact we are a very centralised funding system. I think that goes with all aspects. When we get given, say, a new homes bonus or other grants, there are a lot of conditions about how we can use that. When we look at buy backs and the right to buy, the conditions and limitations on what we can do and how much we can spend in order to build new homes, for instance, are really frustrating. I would say that we are a very centralised system. That is why we are saying that the whole system needs to be looked at, and we need to work in partnership to look at what would work across London.
Ben Everitt: That is interesting. Thank you.
Councillor Chapman: I think there are two areas. Looking to the longer term, something has to be done about business rates. They are unsustainable. We need to be looking at things like turnover tax. That would probably bring in more money.
Q8 Ben Everitt: Turnover tax?
Councillor Chapman: Yes, something of that sort.
Ben Everitt: For businesses?
Councillor Chapman: Yes. Business rates are Victorian. They are based on the assumption that the more space you use, the more you turn over and the more your profitability. That is no longer the case. The second area we could be looking at is the council tax banding—different bands and expanding them and giving more latitude there. Within that, we have to move away from the approach towards it that we have had. I think we are beginning to do that. Michael Gove has made a start. Over the last 10 years, you have been funding according to capitation rather than deprivation. You have to get back to the deprivation indices, because otherwise we will end up with a real crisis and it will be in the areas where there is the most deprivation.
Q9 Ben Everitt: I am sensing that there might be a bit of a disagreement here from the county councils. John?
Councillor Fuller: I don’t want to get into an argument with my SIGOMA colleague—
Councillor Chapman: Why not?
Councillor Fuller: It’s our colleagues here who have the arguments.
But I would like to lay out some principles. The funding of taxation must be sufficient. You need to have a basket of income. There must be enough money coming in. It has to be buoyant: if the economy takes a downturn, the tax revenues are sustained. Much of the problem with turnover-type taxes is that if a large employer in an area goes bankrupt or changes direction in some respect, then the amount of income comes down at exactly the moment when local government needs to pick up the slack. Ease of collection and cost of collection is really important. One thing that commends property-based taxes to local government is that it is very difficult to avoid a building, because a building is there. It is well defined, easy to collect and so forth. That is not to say that change to the existing system is not justified, but there are some principles about transparency, fairness, sufficiency, buoyancy, ease of collection and identification that commend part of the mix to us. Let’s not forget that while it may be possible to change the banding, when you look at the arithmetic of how many houses are in each band, it is convenient to say, “Let’s charge a lot more money on the bigger homes.” The fact of the matter is that there just aren’t enough bigger homes to make a tangible difference.
If the problem we are trying solve is increasing the quantum of money into local government, then tinkering around those edges isn’t going to do it. We are in a situation where the demand pressures, which are often statutorily and regulatorily defined, are affecting 3% to 4% of the population—they are benefiting by direct intervention. We celebrate that—it is what the state is for—but we are ending up in a democratic deficit, where 96% of the people are funding 4%, and that has become distended. We are in a situation where local government offers 136 different activities, but two of them—social care and children’s services—are now consuming well over two thirds of the entire budget.
Then I want to ask another question. If the focus of local authorities is on looking after those in need, where are we to grow the economy and generate the environment? What is the purpose of local government? If we are all chasing around changing nappies, then how are we going to build the economy? That is a difficult situation, and the Government would do well to be clear about what we are for, because until there is that clarity, we will just be arguing among ourselves, for years and years, about tourist tax or band changes, and we will miss the target.
Q10 Ben Everitt: I think we will come to spending and prioritisation next. I just have one more question on the flexibilities around the funding streams. Graham, what lessons would you draw out, reflecting on what happened with Robin Hood Energy and the use of the flexibilities by Nottingham City Council?
Councillor Chapman: I will confess that I was one of the whistleblowers on Robin Hood Energy. I reported my own council to the external auditor.
It was a sort of valiant attempt to reduce costs of energy in the city. It started off okay, but what happened in the end is that the market changed, and the company wasn’t flexible enough to understand. The thing about the energy market is that it is a casino, and if it starts going wrong, you need very deep pockets to subsidise it. The pockets weren’t deep enough, and nor should they have been. That was one of the major problems there, and I don’t think the council got on to it fast enough. The cardinal error that you make in any firm is increasing your turnover without looking at your margins.
Ben Everitt: This is why a turnover tax could—
Councillor Chapman: Well, no, not necessarily. There are checks and balances. The other point I want to make about bands and turnover tax is that it is very much dependent on pooling a lot of the income and then on redistribution. If you don’t do that, you are going to get into trouble. I think this is where I disagree with you: if those levels of income are pooled and there is a redistribution, probably based on deprivation—you will have to have some capitation element—then I think that is probably one of the ways through.
Chair: We will move on to the issues that we just touched on: the prioritisation of spending.
Q11 Ian Byrne: I will go with you first, Claire. Thanks very much for the evidence so far. It’s been really interesting watching the dynamic.
I want to touch on what services and spending areas are being deprioritised and the impact on service delivery, which is obviously the impact on the general public. What groups has it affected most, if you have had to deprioritise spending?
Councillor Holland: Just as my colleagues have said, the massive pressures for us in London are adult social care and children’s social care. Also, what is really driving the crisis in London is homelessness and the housing crisis. Boroughs are forecasting to overspend over £90 million on temporary accommodation this year. One in 50 Londoners is homeless; that is one child in every classroom across London. That is a massive cost to us.
Ian Byrne: One in 50?
Councillor Holland: Yes, one in 50 Londoners. We have 170,000 people in temporary accommodation. In my own borough, it is sadly going up consistently and constantly. Something like one in 30 of the total population in temporary accommodation in the country is housed by my borough. It is a massive issue across London. That is one of the drivers for boroughs to say that they feel they are on a knife edge.
It means we are focusing on the lack of funding for adults and children, because there is also an issue with children’s placements. We know that is an issue nationally; it is an issue in London. We also have this huge issue of homelessness. We have seen the Government’s figures for street homelessness and rough sleeping. That has now gone up by 75%; the figures came out a few weeks ago. In London, we have disproportionately huge levels of rough sleeping.
In terms of temporary accommodation, that is a huge driver for boroughs having to look at where they can make savings. This is what we try to do. London Councils is a cross-party organisation. We work on a consensus basis. We support boroughs in what they are trying to do, and share best practice. Ultimately, it is up to individual boroughs to make the decisions about where they can make savings in their own boroughs.
We saw during covid that local authorities were crucial in keeping communities alive. We are leaders of place; we can bring people round the table. We have all been trying to innovate as much as possible—to work collaboratively with private partners, with voluntary sector community partners and, through integrated care boards, with our health partners. We are very worried about the coming winter crisis. We are trying to reduce the impact on those who always feel the impact most—that is, those with the least—because they have least financial resilience and are unable to find the funds to meet the shock that might come to the system.
As a country, and as local government, we know we have been dealing with a series of what should be once-in-a-lifetime shocks. We have had Brexit, the pandemic, Ukraine, the economy crash, inflation and so on. Resilience feels low. We have got to maintain our core statutory services.
The reason we would like genuine flexibility in funding, as well as more funding, is that we know which of our residents need our support most. We need to raise as much money, but then support them through cost of living packages, for example. We are having to work with our partners in the voluntary community sector, whether that is food banks or existing partners, to look at how we can get that support out quickest.
Q12 Ian Byrne: It is a sort of sticking-plaster.
Councillor Holland: It is a sticking-plaster—absolutely. But we are also trying to work across London, for example, on a campaign around pension credit. We have worked with the CAB and Experian, and across London Councils, to try to identify those pensioners who are not claiming pension credit. Phase one of that was a huge success last year. We are also trying to think outside the box and work together innovatively, but there is not enough money in the system. There simply isn’t.
As we go into winter, we are really worried about the need rising. That lack of resilience, not just for individual families, but for us as local government as a whole, is really worrying. If you use reserves, you can use them only once. You cannot use them to sustain funding. We know that local authorities are having to look at their reserves, which is also really worrying.
Q13 Ian Byrne: John, shall I bring you in next?
Councillor Fuller: By all means, yes. You posed the question: what have certain councils done to adjust their spending profile? In the past six years, in real terms, spending on social care has gone up by 23.7%. A greater slice, or proportion, of the cake is going to social care.
Q14 Ian Byrne: Why is that, John? Do we know?
Councillor Fuller: It is driven by the fact that, in many cases, social care has a regulatory overlap. It is a statutory service with minimum standards, and I think people have become more litigious.
In educational needs, sometimes the wider benefit system has perverse incentives to incentivise families to have children assessed in certain ways, because they are entitled to free school transport, for example. Sometimes the wider state, for entirely altruistic and understandable reasons, is trying to identify some social pressures, but the burden is being picked up by local councils, and we are the victims, if you will, of those perverse incentives.
Sometimes, there has been moral hazard, which should be avoided. The moral hazard is saying, “It’s really rubbish around here. Give us more money.” I do not want to over-characterise, but if it is the purpose of local government, in part, to grow the economy—because we build the national economy, one local economy at a time—you need a positive outlook. Sometimes, there is an over-reliance on saying, “It’s really bad around here. Can we have some more?” I’m not saying that that is necessarily a bad choice in every circumstance, because we are in a complicated world with many different tiers and areas around us, but it cannot all just be about giving us more money.
Local government has a big offer to make to national Government: if you can get us sustainably funded, we can start to grow the economy and earn the tax revenues that will keep the nation afloat. So many economic interventions are achieved locally, in some cases by local councils investing in relief roads, industrial parks and things like that, but, at the moment, with over two thirds of our money going into social care, the bandwidth and capability for growing the economy for the long term is taking a back seat. That is entirely regrettable. We cannot just be social care authorities.
Councillor Chapman: I would like to pick up on that. If you look at what levelling up is about, the best way you can level up is to get money circulating in the local economy. We have calculated that local government spends something like 70% of its expenditures locally. By depriving local government—and depriving it of the economic mechanisms as well—you are undermining the whole purpose of the Department for Levelling Up. What is going on just does not make sense. The other thing that absolutely needs fixing is the market for children.
Councillor Fuller: Children’s services, not children.
Councillor Chapman: No, I deliberately said the market for children, because children are very often being processed rather than looked after. There are cases in which a child will cost between half a million and £1 million a year. That is utterly unsustainable, and it is utterly inexcusable.
Q15 Ian Byrne: Is that model responsible for the rise that John was talking about, or partly responsible for the 23% increase?
Councillor Chapman: There will be a number of children in any authority—10 or 15 in larger authorities—who are costing between £250,000 and £750,000 each per annum. Think of the impact that that has on every other service. You have heard of the graph of doom, presumably? I used to think that it was something in the future, but the graph of doom is now happening. We are talking about up to 75% of your expenditure going on children or adult social care, which leaves nothing for the sort of things that John was talking about. It also undermines democracy, because everybody else is thinking, “What are we getting out of the council? We are paying far more in additional council tax every year—5%, beyond inflation until recently—and getting less.” The model is not sustainable. You then end up with a large number of local authorities on the edge of section 114s.
Q16 Ian Byrne: I want to touch on the homelessness issue that you touched on before, Claire, and the impact that it has had on local authorities. I want to drill down: what is responsible for the catastrophic homelessness figures that you touched on? Is homelessness a lifestyle choice, as has been said by some, or is it a bit deeper than that?
Councillor Holland: Yes, it is a lot deeper than that. I think there are multiple drivers. We look at the cost of housing in London. The rents are unaffordable. Young people can no longer afford to leave home. Gone are the days when you would leave home and set up your own home; it’s simply unaffordable.
We have the cost of living crisis, which is forcing people who in other times might have been able to afford to stay in their home. We have growing numbers of residents who cannot afford their interest rates and that has thrown them into jeopardy.
We also have an issue around asylum seekers in London and the numbers when they are coming out of the hotels, where there is not a proper system in place yet with Government about how to deal with that and the funding.; there are also people for whom technically local authorities don’t have a duty of care. I was hearing from a colleague in west London who talked about this yesterday at a meeting. He said he was very worried and that is where he is seeing one of the drivers of street homelessness.
There are multiple factors as to why people can’t afford homes.f I may say so, there has not been a house-building programme from Government. We need a house-building programme, because we do not have enough homes in London to house the families who need housing.
We are asking, for example, for a much simpler system, whereby we can get grants that we can match and build new homes. We are asking for support to be able to purchase properties that the private rented sector is releasing now, because landlords are fleeing the market, for us to be able to purchase them, because local authorities can use those properties as temporary accommodation. There are lots of ideas out there, but I think there are multiple drivers that are leading to this crisis.
Q17 Ian Byrne: Just to round that off, are you worried about the viability of London as a global city, with regard to the cost of housing and how that will impact on the ability of London to continue being a global city?
Councillor Holland: You are quite right to say we are a global city. We need to compete with Paris, Tokyo and New York, and when London does well the whole country does well, because we are net exporters to the Treasury, so it is in everyone’s interest for us to do well.
We are working very hard as London Councils. In conjunction with the GLA and private partners and local planning authorities etc., we have set up something called Opportunity London, which looks at how we bring investment into London.
Are we worried about the viability of London as a global city? Obviously, it has an impact; if you come to work in London and cannot afford to live there, it has an impact. We were having a discussion yesterday at London Councils about the impact of the housing crisis on investors, because they want to come and invest in a capital city where they know that the workers can live and can afford to travel to work, etc. It is bound to have an impact; we would say it is having an impact.
We are doing what we can, and what is within our remit to be able to do, but we need to be able to have that partnership with Government to really have solutions that will enable us to transform the position and be able to say that we can house Londoners and house people who want to come and invest in London. We need to build more homes; we desperately need to build more homes.
Q18 Ian Byrne: I will come to you, Graham, on the accumulating deficits on services, with all the special educational needs and disability needs. We have heard about spiralling costs and statutory services. John has his take on it. What would your take be?
Councillor Chapman: It needs more money—it is as simple as that. We have got to understand something. There was a worker at Nottingham—I was talking to him a couple of years ago—who had a disabled child. He was told that his child would probably live to the age of 16. The child is now 41. Medical advances have meant that people are living longer and living more disabled. There is no other way of dealing with it other than to put more money into it.
Councillor Fuller: I think Graham makes an important point, because in the public discourse, when you talk about adult social care I think people often have a mental picture of a granny on a walking stick—the frail elderly—whereas in fact the biggest growth in demand is, as Graham has just said, among disabled people. We celebrate the work that our health service has achieved, but sometimes the consequences of that are falling disproportionately on local taxpayers. People can be supported for longer, but it is expensive.
Councillor Chapman: With the health service, to some extent—I know it is in difficulty—the Government have recognised that you need to keep putting more money into it. They haven’t recognised that with local government, yet in a sense it is a branch of the health service.
Ian Byrne: I will leave it there.
Q19 Kate Hollern: With the three responses, am I correct in thinking that the main issue here is lots more responsibility with far less resources?
Councillor Holland: I would say that definitely has been the pattern. As I said before, we have had responsibilities devolved to local government in many areas without the powers or sufficient funding. A lot of the funding has been short term and somewhat chaotic, and there is a lack of strategy around it.
We are not afraid of responsibility. We know our communities and we know what they need. As councillors, we live in our communities and we are of our communities. We are accountable locally to people. What we need is the power and the funding with that responsibility. We want a genuine partnership with national Government to be able to deliver that. As we saw during covid, and as we see now in the cost of living crisis, we as local government get things out the door quickly, so the Government need us. We just have insufficient funding given in the wrong way, and we need to look at the whole system.
Councillor Fuller: I would agree. It is not just the number of statutory responsibilities and regulatory controls, important as they are, but the underlying increase in demand. On homelessness, for example, I associate myself with everything that Claire said on the financial side, but in our authority, the preponderance of the increase in homelessness is due to domestic violence and domestic abuse. You might say that they are connected and there is a cause and effect there, but relationship breakdown is driving that as much as income uncertainty.
To give an example, in the last week or so the Government have announced recycling improvements, including a £283-million fund to allow councils to buy new bin lorries for food waste. There are 350 local authorities. I understand that not all of them are waste collection authorities, but that is around £800 grand each. I have costs of at least £5 to £6 million just to buy the bin lorries without the depot for them to go in. The line is, “Well, it’ll be done by a plastic packaging tax and the producers will pay.” We all know how many fewer plastic bags we have at the supermarket checkout now because we have to pay for them.
Local government is being set up to fail on certain things like that, where there are new functions going in. Take devolution, for example. There is an insane plan to give more non-statutory powers to upper-tier authorities—the ones that are going to go bust—so where does the devolution agenda end up? It is very difficult to see. We are struggling with things we have at the moment without having more non-statutory responsibilities given to the authorities that are most likely to fall over.
Chair: We need to try to finish this section by half-past and we have two more questions to follow up on, if everyone could bear that in mind.
Q20 Mary Robinson: I would like to explore the governance and financial management aspect of some of the failures. The Department published a short guide seeking lessons to learn from recent interventions in local authorities. It stated: “Our analysis shows that one common characteristic of recent statutory and non-statutory interventions is weaknesses in the local authority’s culture and governance.” Councillor Fuller, you specifically mentioned unstable leadership and the issues around that, so I will start with you. How have governance and financial management issues in local authorities impacted their financial positions?
Councillor Fuller: There should be strong governance in local government. After all, governance is what government does. In many authorities, there are scrutiny committees, audit committees and external peer review. Of course, there is statutory audit from one of the big four audit companies and so forth, but ultimately, sometimes the relationship between not just the members themselves but members’ officials has led to a culture where people have not fully understood or appreciated the risks that they are getting into.
The LGA is a membership organisation. I don’t want to name and shame particular members, but we are all mindful that there is one particular authority with a £15 million turnover that was able to borrow £1.5 billion. I just cannot understand for the life of me how anyone understood that, or how the sector got into that situation. The checks and balances should be there, but they have failed for whatever reason. There may be an imbalance of power between the chief and the leader. Sometimes, you get chopping and changing and there are a lot of changes or personality clashes. It is absolutely fair to say that with the section 114s that have happened, there has been a variety of reasons, but there does not appear to be a common link at this stage—political colour, geographical location, whatever. I think people have been overcredulous about certain aspects. They have gone into areas of business where they have no expertise whatsoever, or they have bought a shopping centre when every professional adviser is running for the hills. How has that happened? These are matters of judgment.
The difficulty we now find ourselves in is, “So what next?” If the Government bail them out, there is a moral hazard. “We can take all the risk we like. Don’t worry, the taxpayer will get us off the hook.” It is going to be really difficult.
I know Oflog is starting to have some of these metrics which, to my mind, are quite simplistic, but nevertheless they are a start. At all costs, we must take care not to undermine confidence in the vast majority of local authorities. We are favoured in Moody’s, Standard & Poor’s, and Fitch. The credit reference agencies rank local authorities one notch below sovereign, because we can raise taxes. If confidence in the ability of local government to finance itself is damaged, we will go two notches down, and then everybody will pay more interest on the borrowings they have made, and everyone will be worse off as a result, and it aggravates it. Care will be needed by Oflog—a matter I have raised with it—as well as by local authorities to make sure they have strong governance.
The Local Government Association itself is able to, at a political level, engage within party groups and across parties to try to help especially new council leaders find their feet. However, if there is a lot of chopping and changing—Claire and I have talked about that—sometimes the dynamic within authorities militates against good decision making. That is where support is absolutely needed, and it is not necessarily the sort of support that could be provided by Marsham Street or PwC. Politics is a difficult game, as you know, and there are ways of trying to encourage people to come to the right solution, and they need to be brought to the fore.
Q21 Mary Robinson: Councillor Chapman, we have talked about finances, but ultimately you can have as much money going into a local authority as you like, but if the leadership, governance and financial management is poor, it will still end up in a difficult situation.
Councillor Chapman: I have dealt with probably—I have been brought in one way or another—eight authorities that have gotten themselves into difficulty, including Doncaster some time ago and Rotherham. The conclusion I came to is you just need three decent factors to get out of this. You don’t need commissioners that much, and Rotherham is a classic case. You need a decent chief exec, a good 151 officer and a sensible leader who can control his group. If you have those three, you probably have a good formula.
In the last few years there has been massive pressure on local government to try to make money to compensate for the cuts. You have also been able to borrow at 0.5%, so there was hardly any cost of borrowing at the time. That combination encouraged a lot of optimism, let’s say. It also encouraged a culture of people who would come in and give you easy solutions to problems. The difficulty then is, what are your internal checks and balances? The internal checks and balances are very weak. You have the 151 officer, who reports to the chief exec. You have the monitoring officer, who is on the same level as the 151 officer and who reports to the chief executive. Very often, nobody is willing to stick their neck out because of the consequences—because of what their career will be or because of splitting the group.
The check that you would then go to is the external auditor. I went to the external auditor over Robin Hood Energy. He watched and agreed with me, and he watched the car crash. He had no powers of intervention. He watched the car crash and then did a report on it. A few years ago, I would have gone to the Audit Commission. There is no Audit Commission to go to, so nobody is going to intervene until the problem has happened. That is one of your difficulties.
Q22 Mary Robinson: Given that situation, will this keep happening? It is the one thing that Government cannot sort out—they may be able to help with finances, but they cannot sort out the way an authority is being run.
Councillor Chapman: I think a 5% interest rate—5.5% now—will have an impact, as well as the financial constraints. There was a period when the financial constraints weren’t too bad and you could borrow at 0.5%, and that encouraged a lot of what I’ll call optimism. The conditions are such now that that won’t happen. I also think there are enough councils that have gone into 114. On the other hand, something has got to be done. There has to be somebody who will intervene to stop the car crashing, and there isn’t.
Councillor Holland: As local authorities, we are not afraid of scrutiny and transparency. I am absolutely and passionately committed to it, and I think that is the way we get the best for our communities and our local areas. I think, as has been said, we are at a different point now. We absolutely need to have robust financial management, which most authorities do have. We have—if I can speak up for the LGA—a very good peer review system, where a team comes in and reviews your whole corporate risk taking, financial management and so on, and we need to do more of that.
In addition to the points my colleagues have made, with which I agree, I would say that there are issues around the capacity and capability in the local audit market; boroughs and councils are finding that their accounts aren’t being signed off because they are insufficient. That is something that needs to be addressed. I also go back to the uncertainty of financial planning. It would be really helpful for us to know what money is going to come in over the next four years, say, so that we can do really sound financial management, rather than make assumptions, which are made by experts and are very good assumptions, but none the less it would be better to have the actual figures. I would also say that it is currently quite hard to recruit into the local government finance market. We are blessed to have really good section 151 officers and financial directors across London. My final point would be that we welcome that scrutiny and oversight, but it doesn’t replace and cannot in and of itself deal with the fact that we have a crisis of funding in local government, and that needs to be addressed.
Q23 Mary Robinson: I’m prompted to add one little question to this, because I am wondering about the culture. Are there concerns about the culture within local authorities that means that whistleblowers perhaps don’t get an opportunity to raise any issues that they may see? Whistleblowers could be a valuable tool for pointing out where there are any issues.
Councillor Holland: No, I absolutely agree. We have really strong whistleblowing policies across councils. I think it was Graham who said that at this point, with us all seeing colleagues having issued section 114 notices—we have a London borough that has done so—we are all acutely conscious of the assurance that we need on a daily basis from our senior officers. We have really rigorous processes in place where we are sharing the information not just between the leader and the chief exec, but with our cabinets, groups and scrutiny committees. I think that is making us all hyper-conscious about that need for assurance, and whistleblowing is part of that. Hopefully it won’t be needed, but it is a really important part of the checks and balances, and to make sure there is that openness and transparency. I’d like colleagues to be reassured that in local government we are taking this really seriously. We take our governance responsibilities really seriously, and anything that could be suggested to us, we are very open to. But we also need that partnership with national Government about how to get it right with the funding.
Chair: Moving on to the relevance for national Government, I call Andrew.
Q24 Andrew Lewer: Thank you. A perfect lead in there, Claire. What do the Government need to do right now to support local authorities that are considering issuing a section 114?
Councillor Holland: I am not in that position, so I haven’t had those conversations. We have a London borough that has, and it has been very open about it, in Havering. It would be good for the Government to talk to Havering—it is a coalition—and understand from their perspective what would work. If a local authority comes forward and is open and honest, they need that support and to be able to have a constructive conversation, rather than feeling that they need to pretend that everything is alright when it isn’t—going back to the question about openness and transparency. There needs to be that understanding there, there needs to be the support available, and it just needs to be a mature conversation about how they are going to be able to stabilise their finances and what is really needed. Sometimes, exceptional support will be required on the ground. It might be other support we have already touched on or it might not. Each authority is going to have its local factors.
Q25 Andrew Lewer: Just to stay with you, Claire, for a minute and then I know that Graham has some section 114 views, which we will get to. How do you feel the Government are monitoring financial activity and engaging with authorities that have concerns? How effective do you think the Government’s interventions have been when they have supported authorities that have actually issued section 114 notices?
Councillor Holland: I do not have direct experience of that, so you would have to ask the authorities that have been on the receiving end of that. It feels like a sharp/blunt tool from the outside. I go back to having a mature dialogue and looking at what could work and what could enable the local authority to stabilise. There are going to be different factors depending on how they came into that situation in the first place.
For example, you might want to talk about capitalisation of funding. CIPFA has a one-size-fits-all approach and lacks an ability to be nuanced with local authorities. Local authorities might want to have a capitalisation of funding for a variety of reasons. It may not be anything to do with economic mismanagement. It might be because of a tragedy such as Grenfell or historical child sex abuse in my borough, for example, which is completely separate to 114 territory.
The Government need to have a more flexible and nuanced approach and, really, a trusting relationship—they need to trust local authorities when they talk to them. Obviously, you need that oversight to really challenge and get that assurance, but I think it is about having that flexible approach and being nuanced and understanding that local authorities are in positions maybe for different reasons. Overall, right now, it is because of lack of funding.
Q26 Andrew Lewer: Graham, section 114.
Councillor Chapman: If you look at what section 114 was about—I think John hinted at it earlier—it was to do with specific problems and specific authorities. It was to do with probably two things: first, potential extravagance, and secondly, unlawfulness. Now, we are talking about 114s where an authority just cannot cope. That is of a different order, and I am not convinced that 114s are a solution. You then have to ask yourself if an authority is really struggling and if it has statutory requirements that are causing it major problems to do with child protection or adult care, issuing a section 114 is not going to resolve the problem. It is not the solution that it would have been under the more egregious cases. I just think that people need to look at that.
The other problem with a 114 is that I am not convinced that anybody is overseeing what a 114 is about. The Department does not seem to get interested in 114s or the technicalities. The external auditors will throw it back to the 114 officer. I have been through all that, actually. CIPFA will throw it back to the 114 officer, so there is no oversight of the application of 114s or even the appropriateness of a 114.
Q27 Andrew Lewer: Thank you—John.
Councillor Fuller: Local government is the most efficient part of government. All the pips have been squeezed and there is not a lot more we can do. However, I agree with Graham that, when section 114s are mooted, there needs to be a distinction between what the idiosyncratic reasons are—is there a particular local circumstance where something has gone wrong that needs to be drilled—as opposed to what is the more systemic approach. I sense we are on that cusp from idiosyncrasy into something more systemic. Clearly, the quantum of funding in relation to the statutory responsibilities and regulatory controls has become distended and the quantum of money that needs to go in needs to be addressed. However, I would urge the Department not to reach for the old levers they keep wanting to pull on reorganisation. That has done no good for Somerset; in fact, it has probably put it in a worse situation. Giving devolution and more powers to the councils most likely to go bust is not a sensible response.
We need a period of stability and a period of reflection so we can assist those councils there. I endorse the role of the LGA and the work it does in early warning and prevention on the political side, if you like, so that those with letters after their names—CIPFA, for example—can control on the numeric side, because it’s a team effort, and I encourage that. In fact, today, the leading peers in the LGA—those people who go in and do these inspections—have come together in Bristol to have a new, more robust approach. So work is happening. But the section 114s are emblematic of the wider situation.
Q28 Andrew Lewer: Having done LGA peer reviews myself, is it not the case that authorities that are most likely to be hitting the bricks and hitting problems are the ones that you don’t hear from very much at the LGA and go below the radar? Therefore, DLUHC’s response—which is what some of my questions are intended to eke out—isn’t filling that gap or proving adequate.
Councillor Fuller: Oflog isn’t going to address those issues. I do think, though, that the LGA needs to develop a greater degree of candour, and that is happening. In the past there might have been a criticism that warm words and soft soap have covered up what was a bigger issue—that has now been addressed, I can assure you. There are complex reasons—there are 380 different circumstances, but it does need an intelligent approach where everyone is on the same pitch. Positioning and having ever more complex bureaucracy or governance interferences at a time when the basics are forgotten—let’s look out of the window, let’s have proper, sensible decision making based on evidence. That is the best inoculation against some of the issues we have found on the idiosyncrasies. But be under no illusion: there is a huge mountain to climb at a time where all the pips have been squeaked. Local government is in a sticky situation.
Councillor Chapman: I know you want to get on, but I think the LGA and the Government have got to get a package of options together. For example, capitalisation has been mentioned, but capitalisation a few years ago was at 0.5% interest. Capitalisation now is 5.5%. Are we talking about interest-free loans, for example? Are we talking about flexibility on the council tax levy? Are we talking about pumping in some capital earlier so they can make savings downstream, because that is a reason for a lot of the problems with, for example, looked-after children? I just think those two organisations need a menu of options that can be drawn down, that could help an authority and, according to the problems with the authority, they would try and pick off that menu, plus flexibility on top.
Chair: Thank you all very much indeed. We have discussed a whole range of issues and thrown up some very interesting ideas that I am sure we will reflect on when we come to write our report. We will now move on to our second panel.
Councillor Fuller: Graham and I ended up agreeing—how did that happen?
Councillor Chapman: For now—it’s a truce!
Examination of witnesses
Witnesses: Mr Stephen Jones, Councillor Sam Chapman-Allen and Councillor Barry Lewis (virtual).
Q29 Chair: Welcome. This is the second panel today; we have two witnesses in the room and one online. First of all, could the witnesses with us today introduce themselves?
Councillor Chapman-Allen: I am Councillor Sam Chapman-Allen, chairman of the District Councils’ Network for England and leader of Breckland Council.
Mr Jones: I am Stephen Jones, the director of Core Cities UK. We represent the 11 major city councils around the UK, eight of which, for the purposes of the Committee, are England-based.
Chair: And we have Councillor Lewis online.
Councillor Lewis: Yes, I am Councillor Lewis from Derbyshire County Council. I am the leader there, but also the vice-chairman of the County Councils Network and the budget spokesperson.
Q30 Chair: Thank you all very much for coming to be with us today. You probably heard some of the exchange we had with our first panel. To begin as we began with the first panel, why are we seeing an increase in the number of 114 notices that councils are issuing?
Councillor Chapman-Allen: As I you think heard from the previous evidence base, the cost to council services is increasing exponentially against the ability locally to raise that 3%, along with the Government grant. As our challenges are increasing across the services we deliver, we are not able to keep pace with that provision. For us as local authorities, we are now making those tough decisions. I know that back in 2019 and ’21 this Committee raised issues similar to those that you heard from the previous evidence base—I am sure you will hear them again today—that it is about the flexibilities that local authorities need to ensure that they are able to keep pace with the demands and challenges they are finding locally back at council authorities.
Mr Jones: I will not repeat what others said on the previous panel, because we recognise their evidence from the cost to Core Cities. I would just add two things to the picture we are seeing, and I think Councillor Fuller’s description of it moving from what were some individual circumstances to something that is much more system-wide is right. The general inflation pressure was not mentioned earlier, but the wage pressure across all services that local authorities offer—both directly within their authorities and through the services they procure—has put pressure on the system. When we look at service delivery, some of the service delivery pressure is a demand pressure that was talked about earlier, but actually the unit cost of provision through wages and fuel prices has been part of that pressure. The general inflationary environment of the last 12 months, compared with the settlements and the budgets that were set, has caused further stretch and further pressure on the system.
Councillor Lewis: I broadly agree with what the other speakers have said so far. One distinction I would like to make, though, is that those local authorities where section 114 notices have been issued to date appear to be those councils that have well-documented performance and governance issues. But more particularly for upper-tier authorities like ourselves, some of the issues, which have been touched on, are around pay awards and inflationary costs right across the board—everything from construction to the cost of materials, the cost of procurement and energy costs. I think the big one for us is around the increased demand on children’s services and adult social care, so it is really good that we have this opportunity today to be able to talk about some of those key issues.
Q31 Chair: Yes, I am sure we will. Do you think that in the light of that, your members are likely to be able to balance their budgets in the next financial year that is coming up? Are there any particular solutions to the specific problems that county councils are facing, as you have just described?
Councillor Lewis: Yes. I have reasonable confidence that we are going to be able to balance our budgets, but we are taking a lot of action to do that within the year. As you know, in our own particular case we had a £46 million in-year deficit projected. We are taking actions that will reduce that, but right across the sector we are talking about an in-year overspend of £640 million. About half of that is allocated to children’s services, so it is a very particular pressure around that, as well as the usual suspect, which is adult social care.
Q32 Chair: Councillor Chapman-Allen, are your members—district councils—likely to be able to balance their budgets next year? Are there any specific issues you are facing, and any solutions you may have to them?
Councillor Chapman-Allen: Absolutely. We have to balance those budgets; we are mandated to do so. The challenge we now find ourselves in is cutting those services that we have not necessarily looked at before, and that impacts the residents and the people—that is ultimately why we are all here. The pressures that colleagues have alluded to already around homelessness and temporary accommodation have increased exponentially for my district members—there has been a 28% increase. Across councils in England, that is £1.7 billion we are spending on temporary accommodation. That then means that we cannot deliver those much-needed services for everybody in our community.
My council members are now doing the budget-setting process and looking at those services that we all value: leisure, tourism, culture, regeneration activities and that pride of place that everybody values and needs across the piece. Sadly, we are now having to target a lot of that intervention—both financial and resources—for that smaller proportion of the population who need that support. Quite rightly, that is where local government and central Government come into play. Those difficult decisions are now having to happen where we, necessarily, have not always had to make them at the pace and scale we have before, which will impact everybody in our communities.
Mr Jones: Just to pick up on that, the impact is certainly differential, depending on what the circumstances are. Take the homelessness issue: one of my authorities tripled its homelessness and temporary accommodation budget for this year to reflect the demand, yet it is still projecting a pressure and the fact that it is outstripping that. The challenges that Councillor Holland was referring to earlier in London are being felt in the other major cities in terms of homelessness, which is more acute and prevalent in the larger cities and urban areas. The impact of some of these pressures on children’s services, on homelessness and on temporary accommodation is hitting some parts of local government harder and faster than others.
More broadly, one of my authorities has issued a section 114 notice in Birmingham already. That is well documented. For the others, it is difficult and it is challenging. We are at least at a point in the financial year where those difficult conversations, choices and trade-offs, many of which Councillor Chapman-Allen just referred to, on services that in some ways are more visible to the population are being looked at. We have just come through bonfire night, and the council provision of fireworks displays now, compared with what used to be done, is a good, visible example in terms of something that just cannot be afforded any more.
It is those kinds of choices and decisions that actually really exacerbate some of the challenges between where the statutory and acute provision need to be rightly directed—at a small proportion of the population—and the fact that, actually, the general population of the city feel like they are getting even less for the council tax that they are paying than they thought they were. That will create a growing challenge in the sector.
Chair: Right. We will move on to the funding for local government.
Q33 Ben Everitt: We covered a fair bit of ground on this in the first session, and I do not want to go over the same things. I will perhaps just go to the different perspectives that we have in the room. I will start with you, Sam. Does the way that local authorities are funded via business rate retention, council tax and direct grants work for districts?
Councillor Chapman-Allen: Across the piece, it does in its regard. However, we know that there is always that risk and uncertainty that we have heard about. For us in local government, here we are planning our budgets, going through the public consultation that we are required to do, without that certainty of what that settlement will look like centrally, the longevity around that certainty and therefore the ability to programme our activity and the services that we deliver as a whole.
Beyond that, it is the fact that we are not quite keeping pace. Out of the increased share for district members, that was 4%. That was vastly lower than the 9% proportionality across all other parts of government. Coming back to where we are, that is therefore impacting the services that we are able to deliver.
We absolutely understand that as a country we are struggling across all Departments in Whitehall and therefore, in turn, in us in local government. Our members and, wider than them, those across the LGA are not necessarily stood here with our begging bowl; it is around those flexibilities for us to grow our way out of this. Where are those flexibilities for us to increase council tax and allow local leaders to determine that decision—that is a replay from the ’19 and ’21 recommendations from this Committee—and around fees and charges? Where can we ensure that we get those flexibilities for licensing, environmental health and planning to allow us to begin to grow ourselves out of that and, in turn, ensure that we are providing the services we need to create the jobs and skills that our residents require and the homes that we all require? But as it stands, we are not able to do that—there isn’t 100% cost recovery—so we are delivering subsidised services across the communities we deliver.
In turn, there are then those areas where we are asking for direct intervention and grant, particularly, as we are now, the much-needed funding to support us with housing and homelessness, but also some other areas, such as health and wellbeing—or leisure centres, as they are traditionally called. How can we ensure that we are able to continue to deliver those services, which our residents much need, to support not just those facilities but those grassroot activities?
Q34 Ben Everitt: Just to dig in on some specifics, I get that there is a constraint around council tax, given the cap. Interestingly, that was something that was brought up by Claire, from Lambeth, so it is not just the districts’ problem.
You say you want more flexibilities to put in fees and charges. What is preventing you from doing that? We have the general power of competence, and we have the Localism Act 2011, which I think Eric Pickles rather famously said gives councils the authority to do whatever they like except raise a militia. You have these quite sweeping powers. What is stopping you?
Councillor Chapman-Allen: To be clear with the Committee, we do not have those flexibilities around planning fees, licensing and environmental health. Those fees are mandated and set as a cap by central Government. In other areas—car parking and the like—we can do 100% cost recovery to deliver those services. But in those areas where there are large challenges to deliver a quality service and retain the right type of workforce, so as to continue to grow the communities for everybody, we cannot recover that. For example, allowing the flexibility to increase planning fees alone would give us circa £110 million extra for our district members, which, given the deficit of £550 million net at the moment, would go some way to plugging the gap.
Q35 Ben Everitt: That is nice and clear—thanks, Sam. Stephen, do you have any thoughts on that?
Mr Jones: Let me add a couple of points that have not been mentioned either now or in the previous section. As Core Cities, we are a strong advocate of fiscal and tax devolution, which was discussed previously. We recently—at the end of September—published a report with the Royal Society of Arts. One of the areas we were looking at was whether we are making the best use of local publicly owned assets. Are we getting the revenue streams from those? We conclude strongly that we are not. There are about £450 billion of assets, excluding council homes, that are owned by local authorities in the UK.
Work done internationally by the IMF and by Swedish academic and former Minister Dag Detter looks at applying private sector techniques of asset management and that skillset so as to put those assets on a basis where they can be commercialised and we can get a rate of return from them. In the report, the RSA estimated that £7 billion of revenue could potentially be generated for local authorities. The big barrier to achieving that is the capability to do that, to do it in a way that is consistent with the overall objectives and plans of councils, and to do it in a way that is acceptable to residents.
There are tools and opportunities out there. But in many ways the fear is that the reaction to some councils’ commercial decisions having gone wrong, and the attention that that will attract, combined with the general financial pressure, will make councils more risk-averse about trying to commercialise, partner with the private sector and bring other streams of revenue in. That will hamper us further and curtail some of that enterprising.
Q36 Ben Everitt: You are absolutely right. The model you have described has been around for ages: a local asset-backed vehicle. It depends on having a strong political appetite for it and a level of competence in the officer team to work with a private sector partner. The critical point, though, is what impact these nightmare situations—Spelthorne buying a shopping centre and so on—have had on the appetite for using those flexibilities within the rest of the local authority theatre. Do you have any thoughts on positive scenarios or case studies that we could point to?
Mr Jones: Actually, there are lots of positive case studies of good, sensible public-private partnerships on regeneration schemes up and down the country, where councils have done it right. The attention of the media will be on the ones that have gone wrong, but there are many regeneration schemes just across my cities that have been successful and are well designed, well balanced and delivering good economic outcomes.
The other sign of optimism is that the long-term institutional investor community are more willing and more open to engaging with local councils on those opportunities. The type of actors in this space from the financial services sector are those that will take their corporate responsibilities more seriously and will be acutely aware that they do not want to be partnering on a project that goes wrong, for their own reputation. That is partly in relation to what is happening in the global asset markets, but we are seeing more willingness and more engagement from the household institutional investors—banks, pension funds and insurers. If the willingness and the sincerity from that side of the table can be mirrored from the local authority side, they can form some of those partnerships. We all need to hold our nerve, to an extent, and recognise that, in a sample of 400 authorities or thereabouts, some are going to get it wrong, and we should not then tar everyone with that brush.
Q37 Ben Everitt: Thank you; that is nice and clear. Barry, on the subject of holding your nerve, let’s talk about funding mechanisms for county councils. Does the current system work for you?
Councillor Lewis: That is an interesting question. As many of you will know, County Councils Network members and their residents already pay a significantly higher council tax rate—for example, it is a stark contrast with the London boroughs. A typical band D council tax bill for residents in county areas is £2,000, and that rose to £2,149 on average, with a 4.99% increase, which is quite significant. I am a local authority leader, and we have to be mindful of that.
Business rates retention is another area that has been explored. In 2012, grants such as the new homes bonus shifted to local government, to be more incentive-based rather than distributed on needs. We were particularly disadvantaged by this, with the county council only receiving 20% of those grant payments in two-tier areas. That is a significant loss to us. The current Government want to reform business rates and the new homes bonus, but those reforms have not been introduced and will not be until at least the end of the Parliament. That is another aspect that we need to factor into the thinking.
While we support local retention of business rates and more fiscal devolution—we are moving into a mayoral county combined authority in the east midlands, which will be an important dimension of that—it is important that the next Government fundamentally reviews that system and includes change in the tier split between county and district authorities, alongside implementing a business rates reset, to ensure that we get growth distributed fairly right across the country. For example, we would like to see the new homes bonus phased out, with the funding distributed based on need as a more particular aspect.
Q38 Ben Everitt: Just to be clear, Barry, are you calling for the full retention of business rates? Where we are now, in Westminster, a full localisation would make Westminster City Council richer than some European countries. That would not be a move towards bridging the equality gap in local government finance. What is your thinking there?
Councillor Lewis: Again, this is the fundamental requirement around looking at the need to put incentivisation at a local county council level. We were all poised a number of years ago to start working through the mechanisms to allow us to retain business rates locally. It is something we would like to do, and obviously that incentivisation creates a set of circumstances for us as a region and a county to ensure we support business and growth, and create opportunities, which is good for our residents. If we could retain the business rates as part of that process, that is a win-win for us as well. How you address the disparities across the country is something the Government would need to work through and think through.
Q39 Ben Everitt: There is precedent from the local authority business growth incentives scheme for putting tiers in and gearing in relation to it, but there will always have to be some kind of redistributive effect to that. Thank you very much, Barry. I really appreciate that.
Coming back to you, Sam, we picked up on commercial activity with Stephen. Could you add any thoughts about why councils are dipping their toes into the water of commercial activities, and what the future holds for that?
Councillor Chapman-Allen: When we saw those flexibilities start to come about back in 2010, that was driven by the cuts in grants to councils. Since 2010, we have seen that 45% reduction in grant funding. We need to be clear that there are two types: one is regeneration, where councils—quite rightly—are working in partnership to do that regeneration activity and to create an ability for their place and spaces to grow. The other is that cold-nosed investment/commercial-type activity, which we have alluded to. Back in the day, some of those were really sensible activities. For me back at Breckland—a small district council—£85 million-worth of commercial assets generates between £2.5 million and £3 million revenue return annually, which is a really big proportion of my baseline budget.
In other areas, they have been more ambitious, and they have been able to manage that effectively. Other areas have therefore taken greater risks, and some of those risks have not come about. In terms of where we are today, those challenges have moved forward even further, with the provision of MRP—minimum revenue provision—and what that means in terms of servicing that debt. And what is the skillset of officers in terms of understanding how to manage a commercial property portfolio? It is not necessarily the basic skillset of every local authority.
We need to understand and acknowledge that councils will continue to invest in commercial assets, and we need to work out how we can do that effectively—going back to your previous panel’s evidence position that CIPFA is quite down the middle in how it approaches things—or we need to understand how we are going to plug that gap somewhere else. The only other answer, sadly, is that that then comes back to central Government.
We need to acknowledge that councils will continue to attempt to grow their way out of this, as we have historically. However, as we said at the start, with inflationary costs, staffing costs and pressures across certain services increasing exponentially against where we can keep pace with that local ability to grow our out of it and continue to deliver those services, we have to review how we can achieve that effectively. Investment across councils’ commercial property still has an important part to play, but we must continue to learn from others’ possible errors or mistakes so that we can share that best practice across the whole local government family.
Ben Everitt: Thanks, all of you.
Q40 Chair: Stephen Jones, I will just pick up one thing you mentioned about how we could professionalise the manner in which the assets of local authorities are managed. We can never assume that you can manage them in a completely commercial way. We have a vacant property in Woodhouse in my constituency, and arguments are going on, because some officers in the council, quite rightly, want to maximise commercial return, but community groups would like to have the property because of the shortage of community facilities in the area. Community groups will never be able to pay what a commercial company could for the building. Isn’t there always that tug going on in councils—increasingly stark now—about how you get money in, but also how you provide a community service?
Mr Jones: There absolutely is. The decision you would want to make about the value you want to generate from that asset has to be about a social value rather than just a pure commercial one. It will look different depending on what the asset is, so your commercial approach to that asset would look different if it is a piece of hard infrastructure versus a community building, for example.
The other dimension is that you can then develop differential mechanisms: local residents get free access, so people who are residents of the borough are able to use it; however, if external groups or businesses want to use it, they will pay. The reality is that you can design different schemes. At the moment we struggle even to know what we own.
I absolutely recognise that you would not want to go for a completely rapacious, “Let’s just make as much money as possible,” but at the moment, if you went round local authorities and asked who the asset manager was, they would not give you a division of people who do that management of the asset; they might give you one or two individuals. What we have seen in other European countries that have gone down this route is that they still manage that community tension, but we are quite a long way away in this country.
Chair: That is helpful; thank you very much. We now move on to a key issue that we touched on before: the prioritisation of spending.
Q41 Kate Hollern: Throughout this session with both the previous panel and this panel we have heard about cuts in budgets over the past decade. That means you have to focus on which services you deliver and how you prioritise services. Starting with Sam, can you tell me about the detrimental impact on services that you face because of having to prioritise?
Councillor Chapman-Allen: It is on a case-by-case basis for any of my members, whether they are in coastal communities, market towns, villages or cathedral cities. The challenges and nuance will reflect what those prioritisations are. The position we are in today is the mandatory position to deliver statutory services—the provision we are required to do—and keeping pace with the service requirements. If we look at planning, building control, licensing and so, that demand is always going to be there and we have to keep pace with that.
Then we move into the discretionary areas we spoke about earlier around leisure, tourism, culture, regeneration-type activities, and the ability to have an appropriately established workforce around those investment periods. To bring it back to Breckland in Norfolk, we are now going through a baseline budget. We are going through, line-by-line, every service that we are delivering. We are now looking at the provision of community transport, around citizens advice bureaux, around subsidised services and grant fundings for community groups. Those are areas that we need to deliver for our residents—the much-needed services that support everybody in our communities.
As politicians, none of us gets elected to begin to reduce or even stop the services that we wish to deliver for our communities, but that is the position we now find ourselves in. Some of the decisions will be really unpalatable and difficult: closing or stopping activities, community groups, community centres—the access that our residents require. Others will be a bit easier. Some will be about transformation services, where they have not necessarily delivered at pace around innovation, or how we share services with neighbouring authorities or how we digitalise our services. They will need to catch up quite quickly. Many of them have already undertaken that work, so now they are at the breadline of, “We have a really lean organisation. We have reduced the bums on seats.” The revenue cost, a major position for most local authorities, will now be stopping those other services that our residents want us and need us to deliver. Those decisions will be the really tough ones.
But the important bit is that they will impact the early prevention activity that many of us do. The services that we spoke about are the ones where we are preventing people from finding themselves in hardship around homelessness and temporary accommodation, or those who are finding themselves isolated or who have mental health challenges. Because we are able to deliver early intervention through a discretionary position, we are able to support the budget across adults and children, health, police, and so on, but that is now where the district council—my members—are beginning to have to think about how they reduce or even stop those things.
Q42 Kate Hollern: Have you had experience from communities of the impact on the quality of people’s lives through the cuts to what you would consider non-prioritised services?
Councillor Chapman-Allen: Absolutely, and across the piece. If I pick up mental health particularly, you would not necessarily think that is a service that local authorities and my members are delivering, but we are delivering that service, whether that is through health and wellbeing or even through direct intervention with mental first-aid advisers and deliverers across the communities. Reducing that ability to create that network is having a direct impact on delivering for early intervention—to allow those individuals to be signposted. When you are in crisis, it is about the ability to lift yourself up and understand where those services and that support can come about quite quickly. When they fall through the net, they then become a bigger challenge to the sector, and the public sector as a whole. When we begin to see that, that is impacting the residents, but more importantly those other services within the public sector itself.
Q43 Kate Hollern: Thank you. The same question to Barry, please.
Councillor Lewis: This is the crux of it all, isn’t it—how serious it is for local government? Over the years, we have seen that funding has been reduced and, bearing in mind that upper-tier local authorities and county councils have got £2 billion of savings pencilled in over coming years, it is still very tough out there for local authorities. We want to deliver all of our statutory services, as you would expect, and in the most effective way possible, but there are lots of discretionary services out there that are valued both by our residents and by everyone in the room.
There is also this worry around cost-shunting. If we do not get this right, in the sense of the discretionary side of what we do and the support and statutory services that we deliver, particularly around adult social care and children services, and we throw the baby out with the bathwater around the preventive and early intervention work that we do, then we create further problems elsewhere in the system, which we absolutely want to avoid doing.
We were talking about the value of culture to mental health and to other spheres, making sure that people age well, and so on, and that the system works around supporting them and therefore the cost is not passed into health or further down the line into adult social care as well. Adult social care has been the key driver around costs in previous years, and the Government have provided little resources around that. They delayed the introduction of care reforms last year until we got that model right and worked through that. They allowed councils to retain £2.9 billion of additional funding for core services this year and the next—helpful, but it is still a key pressure as we move forward.
This year, while adult services remain a key pressure, children’s services and the costs there have become more acute, alongside the issues around SEND transport and home-to-school transport. That is accounting for around 70% of all those in-year overspends at the moment. Almost half of those overspends are the result of pressures from children’s services, as I mentioned earlier. The research done by the County Councils Network showed a surge of over 20,000 extra referrals to children’s services in county areas following the pandemic, and over 1,000 more children in local authority care. That has a particular impact on our services at Derbyshire County Council as well. The costs are surging because of inflation, an acute shortage of placements, and meeting the requirements of the regulatory changes in the semi-independent accommodation area. Councils have no choice but to pay those spiralling fees, fulfil those statutory duties and protect those particularly vulnerable children.
I do not think I need to say much more about the acute rise in the EHCPs; all of you as MPs will receive letters on that on a regular basis. That has been coupled with an increased demand for SEND and HTST. It has been coupled with inflation and higher parental expectations, which we know have been driving up the costs of delivering that service. That is why this year we have called upon the Chancellor for any additional funding on children’s services, SEND and home-to-school transport, to ensure that member councils do not have to cut other highly valued services to meet our statutory obligations in that area. We have touched on the pressures in adult social care. They are very significant, right across the entire system. That needs addressing.
Q44 Kate Hollern: You have answered part of my next question, so I will take it to Stephen. What do you think has caused the increase in demand and costs for things like adult social care and children’s services?
Mr Jones: On the unit-cost side, in many ways it is just a general inflation challenge. It is the cost of provision of wages, food, fuel and heating—all the things that those services require. The general inflation costs are being passed through. We have some concerns that some of the private providers are passing through more than they could do. Is the market for care service provision both on the adult and children’s side operating as efficiently and—
Ian Byrne: Fairly.
Mr Jones: Yes—as fairly as it could do? We have some doubts that we would want to investigate and challenge further.
In terms of the demand drivers, it is complex, but some of this is an unwinding of the implications of lockdown and post-covid measures. Some of it is about changing demographics and changing groups. People on the panel earlier were describing the consequential impact of changing health outcomes and people living with multiple conditions for longer. There is not a single driver behind why the demand is rising, and it looks different in different places. The assessments of demographic and cost pressures on the NHS and the work that people like the Office for Budget Responsibility do in their long-term fiscal sustainability report show the cost of healthcare to deliver the same services in this country over the next 10, 20, 30 or 50 years increasing at a significant rate; that is absolutely and equivalently true for the delivery of care services by local authorities. That debate is not as live or well understood and made as it is in the health service and the health space.
Q45 Kate Hollern: Do you think that cuts to early intervention programmes over the last decade have led to increases in children needing additional support and care? Things like poor-quality housing have perhaps led to more ill health in older people. What is the actual effect on council finances? You have growing demand and less resources. You spoke about inflation, which is quite high, but you may only get an increase of a couple of per cent. Can you speak about your early intervention, your costs and the impact going forward?
Mr Jones: On early intervention, part of the challenge is that we did not really evaluate the early intervention programmes properly. We stopped evaluation in general, so we don’t know for definite. The assumption is yes, and some of the independent evidence and analysis done by think-tanks and other groups suggests that the consequential challenges of reducing early intervention expenditure does naturally follow through to higher and more acute pressures. Those pressures fall on local authorities, but they also fall on the health service, the education system, the criminal justice system and the welfare budget.
One of the things that we as Core Cities are very keen to re-energise is a debate around how you join up service provision locally and how you do public service reform within a place. There were ideas and options at the tail end of the 2000s and early 2010s, including community budget pilots, total place, the payment-by-results model and social impact bonds. There was an array of these types of interventions and they kind of all just fell away. There is a debate about what we learned from them, which of them worked, why they worked and why others did not work.
There needs to be a reimagining and a re-energising of looking at how we think about public service delivery locally. Where should you intervene and at what stage in the process? How do you join up the interventions on the same families from different service providers? What works? Otherwise, we will just see a continuing upwards pressure on the acute services. It will be the people walking through A&E, it will be the people presenting in front of the police and it will be the people who are becoming homeless. We know where this goes, but we need to come back to the public policy and the join-up of those public policy interventions. Otherwise, we will all just be putting on sticking plasters left, right and centre.
Q46 Kate Hollern: Barry, do you have anything to add?
Councillor Lewis: Yes. I agree with a lot of what has just been said, but I would add that one of our key pressures—there are a number of them, but this is a particular one—is around the recruitment and retention of staff like homecare workers across the country, which is a particular issue. As we moved out of the pandemic and the cost of living crisis began to bite, the increase in salaries in areas such as working at Amazon and so on meant that we were not getting the people who wanted to come and work in homecare services. So providing that provision, which can save local authorities an awful lot of money, is a particular challenge.
Winter pressures in the NHS and the NHS front door is another particular issue. We are seeing more people who are going through A&E rather than to their GP because they cannot get appointments. That then means they then get sucked into the vortex of the NHS, and it is very difficult to get out. When they do, they tend to present to the local authority. They are then discharged into—more likely—a care home setting, because we do not have the homecare provision that would allow us to provide that wraparound care in the home. That drives costs, as well. That, alongside pay awards, which local authorities have had in the last 12 months or so and which were higher than expected, has been another driver around the gap in our budgets.
Q47 Kate Hollern: So an avalanche of problems is coming. Sam, what do you think has caused the increase in demand in respect of homelessness?
Councillor Chapman-Allen: Across the piece, I would say there are three areas in particular. One is the cost of living, which everyone in our communities is feeling now. The second is the right mix of units coming forward, not only privately rented units—we are seeing a downturn in the number of landlords in that arena—but the number of units and homes being built across the country, in the right place and of the right size. The third area is around family cohesion, whether that is through—very sadly—domestic abuse or violence and those individuals having to flee, or whether it is relationship breakups or children having to leave the family home because of the relationship with their parents.
They are the three main triggers we are seeing. Two of them we cannot control. The one around housing we can control to a degree, but we have our hands tied behind our back, because of—once again, as you heard earlier through the evidence base—inflationary costs around building materials, the workforce challenges, and also some of the environmental challenges around nutrient neutrality. Some 10,000 homes are currently stalled across the country in certain areas. With 104,000 families in temporary accommodation, that would go some way to begin to deal with the challenges within my members’ areas.
It comes back to the early intervention point. The grants that we receive from Government very rarely go on to capital costs to purchase assets, whether that is temporary accommodation facilities or homes; they very much go on the officers to do that early intervention, to ensure that they are managing those relationships at home. What does that really look like? How can we ensure that they can stay in their home, whether it is a child with their parents or whether it is around the financial challenges they are facing? How can we begin to provide money and debt advice services? The revenue and benefits service on behalf of our communities—how can we work through their finances to manage them more effectively?
If it is about the provision and the relationship with the landlord, what does that look like? How can we ensure that a landlord understands their statutory responsibility and duty, but also ensure that we are able to find people further accommodation if we are required to do so? There are lots of challenges and we are finding, predominantly, the three I mentioned, in respect of why we have seen that vast increase.w
Q48 Kate Hollern: What does that do to your finances as a district council?
Councillor Chapman-Allen: We are seeing exponential increases across the piece. To give two examples, Basildon Borough Council in 2017 spent around £7,000 on temporary accommodation. In 2022, that rose to £2 million. In Hastings, it was £750,000 in 2019, and it will have risen to £5.6 million by next April. They are incredible increases in the revenue cost for district councils to begin to find the money for. As you are acutely aware, that isn’t a cost recovery. The service is being delivered in part by the district council from its baseline budget, and the question is how it manages those resources.
We are trying to bail out water when it comes to our challenges, and we need to create capacity to find long-term solutions. That comes back to the early intervention piece. If we can support people as early as possible, we can try to find a safe property for them to stay in—a safe home, more importantly—but it comes back to that discretionary service. As we are beginning to have to cut our coat according to our cloth and balance our budget, some of that early intervention—that discretionary activity—will have to be reduced, very sadly.
Q49 Kate Hollern: So there could be further cuts to non-prioritised services, with a bigger impact maybe five or six years down the line?
Councillor Chapman-Allen: For me, we are talking about a prioritised service. I absolutely have to deliver it, and I want to deliver it to the best of my ability, but my statutory responsibility as a housing authority kicks in at certain triggers. We refer to it as a discretionary service, but it is not really discretionary; it is about how we deliver those services for our residents and businesses. However, that early intervention piece is a discretionary service, if we are looking at housing and homelessness as an example.
Q50 Kate Hollern: Thank you. I will move to Stephen. Why are authorities accumulating deficits on services for special educational needs and things like that?
Mr Jones: Again, it is the same combination of growing demand and growing unit cost compared with the budget assigned to it. We heard earlier about the growing numbers of children who qualify, the growing complexity of their needs, and the growing cost pressures when it comes to delivering services for them—whether that is transport or education services. It is a combination of cost growth and demand growth, which has to be met from the budget that has been allocated.
Q51 Kate Hollern: What can be done to resolve this?
Mr Jones: I would consider the short-term answer and the long-term answer to that. There is a presenting need now in the local authorities that I represent, but we have also heard evidence from those from all walks of local government. Everyone is facing the same challenge regarding the pressure on children’s service delivery. That is recognised by the Government. Our hope is that will be recognised financially in the upcoming autumn statement, but that will just provide a bit of breathing room, in the same way as the decisions made on adult social care in the autumn statement last year provided some breathing room.
Those decisions do not solve the more fundamental public policy challenges of what we want to provide, what the right balance is between the public and private sectors, and how we regulate the private delivery market to make sure it is fair. I am sure that other Committees in Parliament are looking at the provision of children’s services, and working out what we want to deliver, what is fair and who pays, but for now, there is a crisis that needs averting—or we at least need to get through the immediate presenting issue.
Q52 Kate Hollern: It is a growing crisis, isn’t it?
Mr Jones: Oh yes. I represent some of the most experienced chief execs in local government, and they describe the financial challenge as far worse than it ever was, including at the height of austerity. It is difficult.
Q53 Kate Hollern: Barry, do you have anything to add?
Councillor Lewis: Yes. Obviously, SEND is a significant risk factor for upper-tier authorities right across the country. If we don’t get that one right, it will trigger the potential for section 114 notices across the country in relation to the high-needs deficit for pupils with special educational needs and disabilities. Rising numbers are presenting to local authorities, which is obviously impactful. The statutory override that allows the authorities to put these off the balance sheet is, as you know, a temporary measure; it will be in place only until October 2025, having been extended just last year. Removal of that statutory override would effectively bankrupt many County Councils Network members overnight. That is the seriousness of the issue.
A colleague drew my attention to a letter written by f40, the educational funding campaign group, to the right hon. Jeremy Hunt MP, which says, in the critical paragraph, “The cumulative local authority High Needs budget deficit is estimated to be around £2.3bn and is increasing day by day. (The latest estimates conclude that the cumulative local authority High Needs budget deficit across England will be around £3.6bn by March 2025.)”. I don’t think I need to say any more than that.
Q54 Chair: Do local authorities expect at some point to have to pay that deficit back to Government?
Councillor Lewis: That, I believe, is the expectation, somehow, although if that statutory override wasn’t there, local authorities would just fall over overnight.
Q55 Chair: Either Barry or Stephen: have local authorities thought about either individually or collectively starting to provide some children’s residential care themselves directly, as an alternative to being ripped off by private organisations?
Councillor Lewis: Yes. We have our own care homes, for example, in Derbyshire—in common, no doubt, with other local authorities and upper-tier authorities across the country. The issue is a bit complicated; it is around Ofsted, the inspection and quality of care homes and so on. We can look after the lower-grade, lower-level issues among our children in care in our care home system, but the higher requirements for intervention for young people in the care system increase the cost considerably, so high-cost placements outside the local authority are also high-risk with regard to local authorities and their Ofsted judgments, if you see what I mean. That is the dichotomy. It is about risk as much as anything else. That is something that we are investigating. For example, across the east midlands, we are looking at working with other local authorities on a consensus around how we can look after these high-cost placements more effectively in-house, where we can.
There is a distorted market out there. There is recognition that with the most serious placements—the children with very significant needs—it is kind of, “Write your own number.” I’ve heard of crazy numbers, such as £12,000 a week; we have one or two like that in our system. It is a dodgy market, to say the least. It needs very close attention; that is something I have called for before as part of the County Councils Network. We need intervention in this market, which is driven by high profits and offshore investment.
Chair: Do you have anything to add, Stephen?
Mr Jones: No.
Q56 Chair: Finally, on homelessness, when asylum seekers get their asylum claims accepted, the pressure transfers from central to local government. Is any analysis being done of where that is impacting the homelessness situation?
Mr Jones: That analysis is ongoing. We definitely see that in our major cities, particularly as regards asylum cases involving Ukraine and the settlement of Ukrainians.
Q57 Chair: As you are looking at that, could you come back to us on it?
Mr Jones: We can certainly come back to you. On homelessness, the freeze since 2010 on the local housing allowance in universal credit is biting. The disparity between that being frozen at 2020 levels and private rental costs—that growing gap—is biting hard.
Councillor Chapman-Allen: We have anecdotal evidence relating to Homes for Ukraine, Chair, and we can provide that to the Clerk. We are surveying all our members on housing pressures, homelessness and individuals who are seeking housing; most recently, there has been the dispersal scheme for Afghans. We will provide that to the Clerk of the Committee as well.
Chair: Thank you; that would be really helpful. Any final questions?
Q58 Bob Blackman: Yes. You may have heard the evidence earlier about financial management in local authorities. On the authorities that have issued section 114 notices, we could go through each and every one of them, and there have been some spectacular failures, but also some entirely predictable results. We hear that a lot of local authorities are on the brink of section 114 notices through providing normal services. There is also a concern about the failure to complete audits before the due time. Virtually no authority has done that this year, and that adds to the huge backlog from previous years. Councillors and officers are not getting the results of audits, or confirmation of how much money has been spent. Does that contribute to local authorities having to take tough decisions? Barry, you highlighted this at the start of your evidence.
Councillor Lewis: This is an interesting one. The audit market for local authorities has become more challenging in recent years. Contracting a relevant auditor is not as straightforward as it used to be, and there is generally a time lag in audits being completed. That is the experience from my local authority perspective, anyway. Beyond that, I would have to defer to colleagues. I will certainly provide you with more written advice from the County Councils Network on that topic, but there is certainly an issue around the audit market, which is challenging local authorities in that regard.
Our internal audit processes, as we work through this, are pretty significant, in the sense that we feel assured, through our own internal processes, that we have a handle on the budget. Inflationary pressures have climbed significantly in recent years, and the wage market has changed quite rapidly as well. That can have a significant and quick-acting impact on county council budgets. They tend to be more a worry than anything else for us. The audit market is one thing, but it is not a deal breaker. As I say, I will provide more information in written evidence.
Bob Blackman: That would be very helpful.
Councillor Chapman-Allen: There are two parts. One is the big four and the capacity to deliver at pace, as Barry said. There is also sharing best practice across the local government family. Nothing thus far has shown that an external audit would have highlighted the challenges those councils face; on a case-by-case and tier-by-tier basis, they are all very different. All of us across the local government family are in the same position. As has been said, there is that staff inflationary cost, and the contract cost, which we have no ability to influence. Contracts are sometimes long—some 10 or 15 years. Some still have PFIs.
Bob Blackman: Contracts with inflation built into them.
Councillor Chapman-Allen: Absolutely. Then there is that wider inflationary cost around fuel and everything else, and service demand is increasing. We are in that perfect storm, and we control none of the four levers. Our only ability is to raise the tax base locally, through council tax or fees and charges with flexibilities. We are just not able to keep pace.
To get back to your question, if we are able to expediate and expand the market for external auditors to give security around that—ensuring that internal audit has a really clear process through the governance within local authorities, and that governance statements issued by councils are kept at pace with the internal audit, rather than waiting for the external audit process—then I think that should give some evidence base for Government and Oflog as to whether these are actually isolated situations that we have had historically, and across the whole of the local government family there are obviously those same challenges across the piece around finances.
Mr Jones: I will add a more general point, which is that one of the challenges that local government in general faces is the fact that there are cases of bad decision making and egregious borrowing that are well documented, well publicised and well scrutinised by the media, in a kind of ex-post way. The risk is that that then gets conflated into the thing we have been talking about in this Committee, which is a generic systemic challenge facing local government where the overall money doesn’t quite add up. The risk is that, as that becomes publicly discussed, the cause of the two gets blurred, so that the public discourse and the public assumption is a sense that local government doesn’t know how to run itself, or that, “They’ve just done the same as they’ve done.”
I think we all have to take responsibility for differentiating the specific cases where things went wrong from a generic challenge facing the sector—avoiding conflating those into a single argument in the public mind. Otherwise, the risk is that you will see further erosion of democratic buy-in to local government—trust in local government.
Q59 Bob Blackman: This is my final question. The Department for Levelling Up, Housing and Communities has a responsibility to both monitor this and control, effectively, what is happening. What interaction is going on with the Department right now?
Mr Jones: It has three dimensions. There is an intense interaction that happens in the live cases, and then you obviously have the involvement of Government-appointed commissioners; there is a lot of energy and engagement in that space. You then have a sort of general monitoring, but that is spread quite thinly. Thirdly, there was the creation of Oflog—we are in its early stages—and it should, in theory, take up some of that general responsibility.
With the Oflog model, there is some good early engagement from the new leadership, which is pleasing to see, and a recognition that, if it is to be successful, it needs to be part of the system with local authorities, rather than sitting on the sidelines, observing.
The question I have for Oflog is around their clearly wanting to use quite a heavy data and metric-based assessment process. We have a brilliant case study of the last 10 to 12 years of data, where we know what has happened. We should really see what metrics they are looking at. If those metrics weren’t flagging any issues five years prior to what went on in some of the authorities that have issued a section 114, those aren’t the right metrics. There is a good test case we can see, but for now there certainly aren’t that many Government commissioners around at the moment to fill the potential space for the number of people who may require a commissioner. There needs to be a rethinking of the model, particularly where the challenge is a fundamental one of costs outstripping revenues. Because someone else coming in and sitting around a table isn’t going to solve the fact that costs are outstripping revenues. How do we adjust from that process? We haven’t yet got an answer to that question.
Councillor Chapman-Allen: To build on Stephen’s closing points, we actually need to twin-track. Government needs to allow us to have flexibilities and freedoms to set and raise council tax and income locally, the uplift in that grant funding across the local government family, and that targeted additional funding for activities, whether those are SEND, adults and children, temporary accommodation or leisure. That is because, as Stephen said, commissioners, an intervention board and peer support for the chief executive or leader will not deal with the revenue challenges. Across the piece, we need to make sure that Government are heeding your 2019 and 2021 recommendations around those flexibilities and uplift in grant and targeted grant, while ensuring that the sector is able to support itself through the LGA’s fantastic work while ensuring that Oflog has relevance.
As Stephen said, we have some good relationships with Oflog, but we cannot have it becoming a data lake. We have to ensure that as regards the challenges you have heard from across the evidence today, it is able to do that intelligence gathering and have that early conversation—that it is able to pick up the phone. You heard earlier some evidence about the requirements around possible whistleblowing. Where does that go into as a suppository in that support mechanism if the LGA is not the appropriate piece for that because it is a peer-to-peer support-type programme? Does Oflog want to step into that space? I believe it does and I believe it can, but it has to be done in the right way. What we do not want is for it to move into an Ofsted-type provision where we find out they are coming on the Monday and on the Friday we very much busy the organisation, make it look really attractive and hide everything we don’t want them to find. That therefore becomes a perverse incentive.
We have to make sure we continue to work in partnership with Oflog because I believe it has the right intentions, as set out by the Secretary of State, the interim chair and chief executive, but it has to understand that councils across the country need that trusted partnership and relationship with Oflog for it to be a success. It needs to listen to us as to some of the evidence we think it should be looking at through the metrics, as Stephen alluded to.
Q60 Bob Blackman: Barry, a final word.
Councillor Lewis: I agree with the sentiment that Oflog’s intentions are right. It just needs a little work on the approach and not making it, as has been said, a huge data-logging exercise.
Local authorities generally are not shy about coming forward with their problems, as you know, and I am sure you have all received one letter of some form or another that has been copied to you as it has gone to the Secretary of State or whatever around these issues. We feel that the Ministers and officials understand the seriousness of what we are facing as local authorities right across the country. The County Councils Network keeps restating those big numbers on the budget gap and the deficit that we are facing as local authorities across the piece. Ministers and officials are making the case on behalf of local government to the Treasury and we hope that the cost pressures that you have heard about today are recognised in the autumn statement in a fortnight’s time. It is about really making sure that we have the ear of the Treasury, moving forward. That will be quite critical.
The LUHC Ministers and officials have engaged with us, certainly where there are significant concerns about the immediate size of the financial pressures that we are facing. By and large, yes, there is a feeling that we are beginning to be understood and be heard on these particular issues, but we want to try and prevent this getting worse. It is one in 10 councils now, but it will be four in 10 councils next year and six in 10 in just a couple of years’ time that will be facing those pressures. This is a fast-moving train and we need to arrest that momentum and make sure we get control back.
Chair: I thank the two of you for coming today and Barry for coming on the line, to give very helpful evidence on the range of problems that are clearly facing councils across the country. The message we are getting is that it is not just individual councils, but councils collectively that are facing really serious financial challenges. That is really helpful. You and the first panel gave us lots of information and evidence that we can reflect on and include in the report that we will produce at the end of these sessions. Thank you very much indeed.