Written evidence submitted by CIPFA [SRF 002]

 

CIPFA, the Chartered Institute of Public Finance and Accountancy, is the professional body for people in public finance. CIPFA shows the way in public finance globally, standing up for sound public financial management and good governance around the world as the leading commentator on managing and accounting for public money.

 

1.              Executive summary

1.1              The coronavirus pandemic has dominated the public sector landscape for 2020 and will continue to influence government policy for many years. The spending review must reflect the impact the pandemic has had on local government, importantly acknowledging the longer-term implications on both society and the economy.

This preliminary response sets out CIPFA’s response to this committee under the following headings:

1.2              CIPFA’s research[1] shows local government funding has been falling, something corroborated by other organisations such as the National Audit Office (NAO). We have previously made the case that this rate of decline was not sustainable in the face of rising demand and costs. The pandemic has intensified these issues.

1.3  Demand for public funds will outstrip supply in the short term. However,  CIPFA would reiterate that the balance between short-term funding decisions and longer-term commitments must be acknowledged. The consequences of the pandemic will require support from local government for many years.

1.4              CIPFA continues to support the principle that longer-term planning and greater financial certainty improves financial sustainability[2] and resilience in the public sector. CIPFA would argue that social care funding is one example where the pace of central government decision making has adversely impacted the lives of the most vulnerable.[3]

1.5                More could be done to improve the transparency around the spending of public money. Public services should be accountable, and citizens informed about how their taxes are spent. Currently the sector has several opportunities to improve assurance and transparency and these should be part of the longer-term approach to more sustainable public services.

1.6                We continue to have concerns over the financial resilience of the local government sector, so we welcome the increased focus on financial resilience from the department and organisations such as the NAO[4] and the recent MHCLG review by Sir Tony Redmond, and would like to continue to contribute to how this will be achieved[5].

1.7              Local government relies heavily on funding from council tax and business rates. COVID-19 has exposed the weaknesses of these limited funding sources. While support has been provided from central government during the crisis this is not enough in the longer term and more must be done to assure future funding.

 

2.              Local government’s current financial situation

2.1              Local government has faced unprecedented financial challenges in recent years that are likely to persist well into the next decade. Government funding for local authorities has fallen by an estimated 49.1% in real terms from 2010/11 to 2017/18. This equates to a 28.6% real-terms reduction in ‘spending power’. This meant that when the increased demand for local government services emerged as a result of the pandemic, the quantum of spending power was already under strain.

2.2    Our overall assessment is that a tipping point is in sight. Figures provided by CIPFA identified a funding gap of £1.2bn in July 2020 as a result of COVID-19-related pressures and this is in addition to existing budgetary pressures. Several well–run councils will be in the position of being able to deliver little more than the core statutory provisions in order to meet their legal duty to deliver a balanced budget. It is feasible that some may be unable to meet even that.

2.3              Central government has provided significant funding during the pandemic. The most recent of this was Tranche 4 £1bn including an allocation of £100m for the support of leisure centres. This additional funding has been welcome but the original promise to support the full extent of the burden has not materialised.

2.4               CIPFA discussions with CFOs have confirmed that additional funding has provided a financial respite in 2020/2021. Support such as the income compensation scheme (paragraph 3) and business rate deferral have allowed organisations to deal with the immediate consequences of the pandemic. The concern is for the year 2021/22.

2.5                Work undertaken by CIPFA through its Resilience Index[6] provides clear evidence that the available pre COVID-19 funding was insufficient to cover the sector’s needs. Post-COVID-19 this funding gap is significantly worse. Indicators used in the index include ‘reserves depletion time’, ‘level of reserves’, ‘change of reserves,’ ‘council budget flexibility’ and ‘council tax to net revenue expenditure’. Our findings showed 1015% of councils where there were signs of potential risk to their financial stability. This percentage will have increased as authorities have used their reserves in order to fund COVID-19 activities.

2.6                 Reserves are an important part of the financial resilience of an organisation and part of the CFO’s responsibility[7]. However, current policy decisions such as the spreading of council tax deficits may result in implications for several councils reserves.

2.7                The requirement for financial reserves is acknowledged in statute. Sections 31A, 3242A and 43 of the Local Government Finance Act 1992 require billing and precepting authorities in England and Wales to have regard to the level of reserves needed for meeting estimated future expenditure when calculating the budget requirement.

The establishment and maintenance of reserves is essentially for three main purposes:

 

 

 

2.8               Local authorities must strike a balance between maintaining adequate levels of reserves and investing in risk reduction measures. This balance should form part of the risk management process and be considered as part of the annual budget process

2.9               When setting the budget for 2021/22, councils will have to plan for rising demand and falling income and as a result will be required to have adequate reserves. While it may be counterinitiative, in some area’s reserves may be required to increase in the face of increased risk

2.10               CIPFA recommends this spending review acknowledges the importance of reserves when considering the settlement.

 

3.   Government response to income reductions and demand increases

3.1               The funding gap has been exacerbated by the decrease in non-grant income received by authorities. Recognition that some of this income will never be replaced or recovered must be reflected in any settlement. Income pressures from lost revenue through sales,fees and charges are substantial, with district councils especially losing funding from leisure and car parking used to fund local services. It would be wrong to assume that income and fee levels will revert quickly back to previous levels (if at all) and this must be built into any forecast. We can see this causing cash-flow and funding issues that will have a significant impact on local authority finances into 2021/22.

3.2                 The government’s plan to cover 75% of income losses from fees and charges still leaves a significant financial gap. It doesn’t recognise the further challenge of lost income from council tax and business rates. Deferring this over three years rather than funding the loss does not provide additional funding but is nonetheless welcome to avoid pressure on council tax calculations now.

3.3              Recent figures collected by MHCLG show the extent of the challenges faced by councils.[8]

3.4               The income compensation schemes will go some way to supporting councils, but certainty is required around these schemes beyond 2021. This support will allow most councils to balance their budgets for 2020/21 but there is greater uncertainty for 2021/22.

3.5                It should be noted that the practicalities of budget setting will be made even more difficult for 2021/22 as a result of the timing of this spending review, which does not align with the budget setting process. Budget setting within a local authority will have to be carried out in a vacuum of spending review information and based on scenarios. This spending review must keep authorities informed and aware of all decisions at the earliest opportunity.

3.6                It is difficult to quantify the impact that the late notification of funding will have on the sector. The use of modelling scenarios in the face of 2021/22 budget uncertainly will leave organisations exposed without some form of income guarantee. CIPFA is currently looking to provide evidence in support of this.

3.7              CIPFA asks the committee to recognise that improved alignment of local government budget setting with the settlement would result in improved decision making and greater efficiency.

3.8              CIPFA supports the initiatives currently under way to improve local government funding including the current business rates review. But these measures alone do not provide the foundations for long-lasting reform. This pandemic has exposed the weakness of the current funding system and its over reliance on business rates and council tax.

3.9              CIPFA is working with other stakeholders to generate a conversation that looks at the challenges faced by the sector and the long-term funding options for local government. Our work with the Institute for Government on Performance Tracker[9] is an example of this thought leadership.

 

4.   Social care

4.1               It is essential to maintain a view of the interdependency between spending on the NHS, public health and adults’ and children’s social care in totality. Without a sustainable settlement for social care, the NHS will be unable to deliver on the ambitions in the NHS long-term plan or adequately cope with any further resurgence in COVID-19 or similar future shocks.

4.2                COVID-19 has clearly highlighted weaknesses in the social care sector’s resilience – and should act as a catalyst for reform. The shift in public perception of health and care services means there may never be a better time to address the relationship between state and individual, and to consider what a reformed funding system for adult social care may look like.

4.3    We have identified some key challenges to the funding of adult social care that we believe have made it difficult to respond appropriately to social care needs, and which would need to be addressed when considering future funding for social care. These include:

              individuals face the possibility of catastrophic care costs

              managing increasing demand for services

              public funding has not kept pace with demographic demands

              the right long-term preventative investments are not being made

              provider market problems

              the market, unaided, cannot provide what is needed.

                   These challenges and some of the more common proposals for social care funding reform are discussed further in our recent publication.[10]

4.4                There is a critical need to improve the long-term financial sustainability of the social care system. This can be achieved either by adjusting levels of funding or adjusting service expectations. This is a political and economic choice but if neither option is taken, a longer-term unsustainable position will result.

4.5                Although a separate policy matter, it is worth noting the importance of planned changes to local government financing arrangements. The movement towards incentivising local revenue raising via property taxes ignores the issue of relative need. Unless this is adjusted for adequately, the overall sustainability of social care could be fatally undermined.

4.6  While we make no recommendations on a given level of spending, nor a specific system for organising the split between state/individual contributions, we propose the following five-point plan for the development of a sustainable system:

  1. A mechanism must be found to provide more stable and adequate long-term planning for social care spending within the context of the whole health and care system.
  2. Wider spending on supporting people should be reconsidered from a zero-based perspective with an expectation that some rebalancing from other spending programmes will likely be appropriate (eg pensions, acute care, welfare).
  3. Preventative investments should be encouraged/enabled to maximise long-term sustainability and value for money. This could be achieved by directed funding, incentives and/or reporting requirements.
  4. The system needs to ensure fairness within/between generations and to protect individuals from catastrophic costs by pooling risks.
  5. Reduce the sharpness of the differential between social care, as a largely paid for service, and health as an essentially free-at-point-of-use service.

4.7              CIPFA would argue it is difficult to separate social care funding from any discussion on the long-term resilience of the local government sector post-COVID-19. In 2017/18 gross current expenditure on adult social care (which accounts for spending by social care departments and also includes client contributions) was £17.9bn,[11] and without a sustainable funding source the percentage of local authority income appropriated to this statutory sector service will continue to rise resulting in the reduction of other service delivery areas

 

5       Resilience beyond COVID-19

5.1              Demand for public funds will outstrip supply in the short term and COVID-19 will dominate this spending review. However, CIPFA would reiterate that for the public sector to remain resilient beyond the life of this pandemic there must be a balance between short-term delivery and the need to manage over the medium to longer term.

5.2                To ensure there is resilience within the system CIPFA considers that good financial management must be at the heart of a public sector organisation and this requires financial planning, good governance and transparency.

5.3                More could be done to improve the transparency around the spending of public money. Public services should be accountable, and citizens informed about how their taxes are spent. Currently the sector has several opportunities to improve assurance and transparency and these should be part of the longer-term approach to more sustainable public services.

5.4               The Redmond Review has proposed to introduce the Office Local Audit and Regulation (OLAR), which brings together regulatory responsibilities around appointing auditors to conduct high quality audit, maintaining the Code and guidance that supports that quality work and performance monitoring and review, including, where necessary, enforcing sanctions in cases of failure. CIPFA considers that by bring together these elements you strengthen the local audit approach, enhance accountability and improve assurance.

5.5                Recommendations such as the requirement for an external auditor to present an annual audit report to the first Full Council meeting after 30 September each year could reinforce the level of assurance provided by providing additional opportunity for scrutiny.

5.6                Requiring all public sector auditors to be adequately trained for the task of auditing local authorities will also improve the assurance and stewardship of public money in the face of increased risks.

5.7                CIPFA therefore considers that it would be beneficial for the sector to take forward a number of recommendations from the Redmond Review in order to support and strengthen local audit and recognise the importance of this role in delivering good public finances.

5.7               The government’s 2019 consultation[12] on prevention as a strategy highlights the importance of ‘place’ as being integral to the implementation of preventative strategies, and the need to ask fundamental questions on how much we value prevention. We welcome these areas of focus, and these are areas that we sought to explore in our collaborative work with Public Health England (PHE[13]).

5.8                There is a need for a system-wide rethink on preventative investment to enable it to be considered as a true investment.

5.9                Making the prevention agenda a priority and focusing on outcomes across the health and care sectors has the potential to reduce demand, avoid future costs, improve financial sustainability and achieve greater benefits from the resources already available. The government has committed to greater focus on prevention, and we urge this prevention ‘lens’ to be widened beyond the current focus on public health to take a wider view of health, wellbeing and the associated determinants.

5.10  While the future of public health may remain uncertain pending consultation on the future of PHE in the coming months, the spending review presents an opportunity to at least reverse the impacts of persistent reductions to the public health grant. In the longer term, there should be a renewed focus on prioritising preventative investment across the wider health and care system and how this could be appropriately evaluated and protected.

5.11               There are clear lessons to be learned from the current pandemic. The positive examples of joined up working and collaboration in parts of the wider health and care system should become business as usual across the country. Prevention should be viewed as a true investment – money invested now to improve outcomes and reap future benefits.

5.12               CIPFA therefore considers that this spending review should signal a clear direction towards place-based budgeting and commit to appropriately fund the revised landscape.

5.13               Appropriate funding may include the introduction of financial and accounting flexibilities. The exact nature of these flexibilities would need to be determined and CIPFA makes it clear they would not be a substitute for adequate funding

5.14               We would support a review of ring-fenced grants and intend to work with local authorities post spending review to looking at specific areas (eg income from car parking charges, fixed penalty notices, environmental charges) to help further the discussion.

5.15               Ending ring-fencing would give local authorities the ability to prioritise locally and make best use of resources for residents and business as has been the case with the removal of ring-fencing for Supporting People and Public Health grants.

5.16               In the past where there have been specific financial challenges to individual organisations, central government has considered certain accounting flexibilities including capitalisation directions. While these do not create additional funds, they provide CFOs with short-term headroom. CIPFA does not advocate these as long-term measures as they are not consistent with strong financial management but acknowledges these as available short-term tools.

5.17               Looking beyond COVID-19, the spending review must recognise the requirement of local authorities to invest in infrastructure and their local economy. As part of this agenda CIPFA is reviewing the Prudential Code, and we also support the review of The Green Book which plays an important role in the government levelling-up policy.

5.18               CIPFA therefore considers that as part of this spending review the government should provide clarity around its levelling up narrative and identify appropriate funding.

 

November 2020

 

 


[1] CIPFA Statistical Data, April 2019

[2] CIPFA Financial Management Code 2019

[3] Road to Reform 2020

[4] NAO Report Financial Sustainability of Local Authorities

[5] CIPFA response to the Redmond Review

[6] CIPFA Resilience Index

[7] Role of the CFO in Local Authorities 2016

[8] MHCLG analysis

[9] Institute for Government Performance Tracker, October 2018

[10] The Road to Reform 2020

[11] https://www.cipfastats.net/socialservices/pssactuals/default.asp?view=commentary&year=2017-18&content_ref=23441

[12] https://www.gov.uk/government/consultations/advancing-our-health-prevention-in-the-2020s

[13] https://www.cipfa.org/policy-and-guidance/reports/evaluating-preventative-investments