Written evidence submitted by the LGA [FSS 002]
1. About the Local Government Association
1.1. The Local Government Association (LGA) is the national voice of local government. We are a politically led, cross-party membership organisation, representing councils from England and Wales.
1.2. Our role is to support, promote and improve local government, and raise national awareness of the work of councils. Our ultimate ambition is to support councils to deliver local solutions to national problems.
2.1. Between 2010 and 2020 councils experienced a £15 billion reduction in core government funding. This reduction in funding has run alongside increasing pressures such as higher demand on children’s and adult social care and an ageing population. This has put the sector in a difficult financial position. Local authorities have made significant efficiencies but many services, such as those relating to culture, libraries and environmental health, have been subject to reductions in order to prioritise services safeguarding the most vulnerable residents.
2.2. The Government has provided significant funding towards COVID-19 spending pressures in 2020/21, but the uncertain trajectory of the pandemic means that this needs to continue to be kept under review.
2.3. The provisional local government finance settlement for 2021/22 gives councils the potential to increase council core spending power by up to 4.5 per cent, but more than 85 per cent of the potential core funding increase next year is dependent on councils increasing council tax by the maximum allowable amount (which for social care authorities is up to 5 per cent), leaving them with difficult choices. Councils need a sustainable long-term funding solution, sufficient to meet the needs of residents across the country.
2.4. In driving local solutions during the pandemic, councils moved at pace, used innovative approaches and worked flexibly to set up completely new services to support the most vulnerable, reshaped and redesigned services such as waste collection to keep them running, and were central to the economic support provided to residents and businesses. Central government and local communities trust them, and they keep delivering. Throughout, councils learnt from and supported each other through sector-led improvement.
2.5. Many council services, particularly adult social care, have delivered savings for the NHS and the police and wider criminal justice system. Budgets for prevention-focussed services have been under pressure in the face of external funding reductions, but the success of these programmes is evident, most recently in the Troubled Families Programme, and many further examples in the LGA-commissioned report ‘Demonstrating the beneficial impact of local government spending’.
2.6. The overarching national problem is that local government is not sufficiently resourced. Fundamentally, councils are being asked to do too much with too little money. This has an impact on factors affecting their sustainability, including attitude to risk, for example councils assessing that they need higher levels of reserves to cover a wider range of contingencies.
2.7. The LGA has called for a reform of the way local government is funded and welcomes the opportunity to provide evidence for this Committee. As we move into recovery, it is an opportunity for reform, to create a local government finance system that is sufficient, buoyant, resilient and fair. Only with a strong financial grounding will councils be able to withstand emergencies, individual and national, and continue delivering for their communities
3. Those issues likely to impact the financial sustainability of local authorities, specifically structural funding issues (including grant funding), commercial investment decisions and the impact of COVID-19
3.1. The best value for the use of public resources can only be achieved if councils are able to plan and are placed on a sustainable long-term financial footing. Fiscal announcements and budgets covering just one year make it difficult for medium- and long-term financial planning, and councils are unable to guarantee that services will be funded to meet projected need.
3.2. There is an ongoing debate around some structural funding issues in local government and the LGA continues to work with councils to address these. To help inform this debate we have commissioned research around a potential E-Commerce Levy, our Business Rates Review Submission and our report on Fragmented Funding.
3.2.1 The Fragmented Funding report highlights the proliferation in the number of small grants. Between 2015 and 2019 local government received over 440 individual grants. Many of these grants were very specific, short-term, and ringfenced, limiting what councils can deliver, and taking additional time and resources to administer, particularly if eligibility was bid based. To offer joined-up, efficient, and effective public services, councils need the flexibility to put the needs of residents firmly at their core, without the added burden of navigating a complex and fragmented funding landscape.
3.2.2 Funding allocations based on competitive bidding are problematic. Investments should be locally owned and locally accountable. A competitive bidding process is particularly burdensome now when councils are rightfully focussed on supporting their communities through the pandemic.
3.2.3 Local government has on many occasions raised the need for a sustainable funding solution to adult social care. While this Government’s additional £1 billion grant announced in 2020/21 and continued in 2021/22 and an extra £300 million announced in the 2020 Spending Review (SR) have been welcome, one-year injections of cash and the social care precept, which raises different amounts of money in different areas unrelated to need, are not the answer. This uncertainty creates issues within the market which risks a knock-on effect for service users. The Prime Minister promised to ‘fix adult social care’ in July 2019 and there is frustration with the lack of progress; there must be no further delays to the process of reform.
3.3. There is a long history of councils holding commercial property and making commercial investments, indeed “municipal trading arrangements” have been in place for as long as councils themselves. All councils rely on income generated from sales fees and charges. More recently, some councils have made additional commercial investments as a reaction to reduced Government grants with the intention of becoming less reliant on central funding and keeping services going.
3.4. Councils’ commercial activities have been under significant scrutiny[i]. In its funding of councils in the pandemic, the Government has excluded losses from any commercial activities from its income compensation scheme. It is acknowledged that budgeting for services based on the income from commercial activities will inevitably attract a certain level of risk, but the alternative is often to reduce vital services for local residents. The pandemic has shown that reliance on core funding sources such as tax and sales, fees and charges is not without risk with reductions in income amounting to billions of pounds. It is not clear why a loss of income from commercial sources is deemed worse than a loss of income from other sources.
3.5. Councils assess the viability and impact of their investments and are subject to overview and scrutiny on these decisions. Councils are accountable for the exposure to risk. By investing commercially, councils also support the local economy, create employment opportunities and raise funds to keep services running.
3.6. For councils like Manchester City Council and the other Greater Manchester councils, and Luton Borough Council, who usually derive substantial income from their respective airports, COVID-19 will have had a devastating impact and difficult decisions must be made.
3.7. Luton Council’s RSG dropped from £63.96 million in 2013/14 to £10.89 million in 2020/21. To mitigate this impact, it has driven its commercial revenue from a number of sources. From its airport company, Luton London Airport Limited (LLAL), net revenue had risen from £7m in 2012/13 to an expected £33.4 million in 2020/21. The devastating impact of COVID-19 has reduced that 2020/21 income to £17.4 million. The overall projection of the impact of the pandemic on LLAL is expected to be a reduction in income (over several years) of well over £100 million.
3.8. As a short term response to this reduction in revenue, in July Luton approved an emergency budget that included £22 million worth of in-year savings, affecting a wide range of vital services that the council provides to its residents, and will need to find another £4 million to balance the budget for the next financial year and £8m for the year after. Nevertheless, the council states that through taking this early action its finances are stabilised in the short term and it is formulating a plan, with MHCLG support to move them back to sustainability in the medium term.
3.9. If commercial activity were to be an area closed off completely it would significantly affect councils’ ability to fund core services, as well as adversely affecting local economies.
3.10. We are still in the midst of the pandemic, and thus unable to quantify the total economic and social cost of COVID-19 to local authorities. There are still many uncertainties around the long-term effects of the pandemic on service use and ensuring the sector’s financial resilience will be paramount.
4. The scale of the problem, including assessment of CIPFA’s resilience index
4.1. As part of its analysis commissioned by the LGA, the Institute for Fiscal Studies (IFS) estimated that councils face cost pressures of nearly £9 billion by 2023/24 in order to maintain 2019/20 service levels. When considering other pressures set out in its report, such as the fragility of the adult social care provider market and the impact of a future revaluation of pension funds, this could lead to a funding gap of £5.3 billion by 2023/24 even if council tax increases by 2 per cent each year and grants increase in line with inflation.
4.2. These estimates were developed prior to the 2020 Spending Review. The announcements of the SR, such as further adult social care precept flexibility (estimated to be worth up to £900 million if used in full) will have some positive impact on future funding of councils. However, council tax increases are not a sustainable solution for council finances or for adult social care. Continued uncertainty over funding beyond 2021/22 also means that the funding gap is still estimated to be worth billions by the end of the Parliament.
4.3. The IFS’s more recent analysis in response to the Provisional Local Government Finance Settlement warns of the potential for ‘longer-run and indirect effects of the crisis on the prevalence of chronic ill-health and safeguarding issues’, and suggests that a funding gap is ‘highly likely’ unless there are substantial increases in Council Tax revenue or central funding.
4.4. Local government needs a system that raises sufficient resources for local priorities in a way that is fair for residents and gives local politicians all the tools they need to be the leaders of their communities. Councils have had to make difficult decisions and significant cuts to services as a result of austerity measures. It is critical that a long-term, sustainable and sufficient funding solution is reached with the sector.
4.5. Published indices can provide a useful tool for local authorities to compare key financial indicators. The key indicators should be chosen based on consistent spending pressures, across the sector, which are easily and usefully comparable. In respect of this, they do not account for outlier events such as the COVID-19 pandemic and warranted variation in spending which is a local decision. By necessity, such tools are backward-looking and, in our view, should not be used as a predictive indicator.
4.6. Councils can make use of LG Inform, the LGA’s Research and Data tool which helps councils to benchmark themselves and assess performance locally, regionally and nationally, against a wide range of indicators using up-to-date data.
4.7. The purpose of assessing financial resilience is to ensure councils are equipped for difficult periods. Council services have been critical in the fight against COVID-19 and while further funding to manage the additional cost pressures is welcome, reform is necessary to ensure local authorities are in a strong position moving forward.
5. The role of MHCLG, including oversight of the Prudential Framework, capitalisation and reform of the Public Works Loan Board (PWLB)
5.1. COVID-19 highlighted the importance of a strong working relationship between MHCLG, the LGA and councils in the interests of delivering for the sector. The Government has provided £4.6 billion unringfenced funding to cover additional expenditure incurred in the pandemic in 2020/21. Through the sales fees and charges compensation scheme, Coronavirus Job Retention Scheme and pledge to cover 75 per cent of irrecoverable council tax and business rates income, the Government has supported councils to keep local services going.
5.2. It should be recognised that MHCLG officials have done a lot of work to identify the financial impacts of COVID-19 through regular collection of data from councils and have been open to discussions with the sector on what this data means. MHCLG has also been very open to representations from councils that have been particularly badly hit. The Ministry has also been receptive to the LGA’s response in moulding sector-led improvement to changed circumstances.
5.3. Some councils have applied to MHCLG for a direction to be able to capitalise revenue costs in 2020/21, enabling them to borrow or to apply capital receipts to cover revenue costs. In our view, MHCLG should make this flexibility more generally available to all councils in current circumstances to manage the unexpected financial burden of the pandemic.
5.4. The Prudential Framework governs council borrowing and capital funding decisions. It is an important, enabling framework, consisting of various codes and statutory guidance. Following the framework ensures councils make decisions on the affordability and sustainability of borrowing to fund capital expenditure. It is important that decisions on the investment of public money are subject to a thorough and transparent assessment and it is our view that the Prudential Framework supports this.
5.5. The main lender to councils is the Public Works Loans Board (PWLB). Currently about three quarters of all council debt is with the PWLB. New lending terms for the PWLB were announced alongside the Spending Review, following a consultation earlier this year. Under these new terms, councils intending to buy investment assets primarily for yield in the next three years will lose access to PWLB for ordinary borrowing. They will, however, retain access to borrowing for refinancing purposes provided that the refinancing is not for newly acquired investment assets held primarily for yield. This is to aid financial sustainability of councils and is welcome. It is important that the new terms do not enable unelected officials to make decisions that are correctly the province of elected members. The cut in the PWLB lending rates reversing the increase in rates made in October 2019 was also announced in the SR. This is something we have called for and it is welcomed.
6.1. The consequences of a report under Section 114(2) are very different from those under Section 114(3). Under Section 114(2), a Chief Finance Officer (CFO) is required to report when a council is about to make a decision that will result in illegal expenditure. In this section we have answered entirely in relation to reports under Section 114(3) which deals with the situation where it appears to a council’s Chief Finance Officer that the council has insufficient funding to cover its spending plans.
6.2. The single best way of avoiding Section 114(3) reports is to ensure that funding keeps pace with pressures on council budgets. Our analysis of the Provisional Local Government Finance Settlement 2021/22 shows that 130 councils will have a lower core spending power in 2021/22 than they had in 2015/16. Over this same period, all councils have experienced increasing service use, particularly in higher demand for adults and children’s social care.
6.3. The Section 114(3) report is a legislative procedure designed to allow the CFO of a council to signal where they will be unable to balance the books. It pauses all non-essential spending for a short period to allow councils time for re-evaluation. For understandable reasons, a Section 114(3) report is seen as a last resort. The actions that are taken as a result of issuing a Section 114(3) report, to reduce council expenditure to essential services only, if used in advance, could have prevented the need for a formal Section 114(3) report.
6.4. Recently, where a Section 114(3) report has been issued, the councils concerned have been subject to successive reports because in each case by the time it was first issued by the CFO, the council’s options for short-term action had become very limited. It is important that councils are empowered and enabled to deal with the issues and have the support and resources to implement solutions.
6.5. The avoidance of the need to issue a Section 114(3) report does not necessarily mean that the measures a council has to take are any less onerous or impactful to residents – simply that the need for such measures has been acknowledged and addressed in a timely way. The impact on residents and their ability to access services can still be severe.
6.6. It is important to observe that only two councils have been subject to a Section 114(3) report from 2010 to 2020. Over this same period, local authorities will have lost over 50 pence out of every £1 of core Government funding. This shows that excellent local budget management has enabled councils to face these challenges without, in vast majority of cases, the need to resort to Section 114(3) reports.
[i] See NAO Report on 'Local authority investment in commercial property' and Select Committee on Local authority investment in commercial property