Written evidence submitted by London Councils [FSS 014]

 

Summary

London Councils welcomes the inquiry. Our submission highlights the following key points:

 

 

 

Introduction

 

  1. London Councils represents London’s 32 borough councils and the City of London. It is a cross party organisation that works on behalf of all its member authorities regardless of political persuasion.
  2. We welcome the opportunity to provide evidence to the Housing Communities and Local Government Committee’s inquiry into local authority financial sustainability and the Section 114 Regime. Our member authorities have been put under immense financial pressure by a decade of austerity, rising demand for services and, in the last 10 months, the Covid-19 pandemic.
  3. This submission is split into four sections that reflect the call for evidence as follows:
    1. Section 1 covers issues likely to impact the financial sustainability of local authorities
    2. Section 2 looks at the scale of the sustainability challenge facing local authorities
    3. Section 3 briefly covers the role of MHCLG, and
    4. Section 4 looks at measures that the government could take to support Local authority financial sustainability.

 

Section 1: Issues likely to impact the financial sustainability of local authorities

Structural funding issues

Disproportionate austerity

  1. Even before the coronavirus outbreak, London boroughs were under significant financial pressure following a decade of funding reductions. The overall resources available to London local government fell by over a quarter in real terms since 2010-11. The equivalent cut to overall Resource DEL (including spending on Health, Education, and Police) was 12%. Meanwhile, overall public spending (Total Manged Expenditure) actually increased by 5% in real terms over the same period (see Figure 1 below), suggesting local services bore a disproportionate share of austerity.
  2. Over the same period, demand for services increased significantly as London’s population grew by 12%: almost twice the rate of growth across the rest of England (7%) meaning that London boroughs now serve nearly a million more people than in 2010[1]. At the same time, new policies and legislation also transferred additional responsibilities - and associated costs - from central to local government without sufficient funding, which have added further financial pressures of around £1 billion to London boroughs.

 

 

Figure 1 – Cumulative like-for-like change in public spending - 2010-11 to 2020-21

Source: OBR – historical official forecasts database; MHCLG (LGF Settlements 2011-12 to 2020-21)

 

  1. Boroughs have coped by restructuring; investing in demand reduction; renegotiating contracts; sharing services and back office functions; embracing digitisation; and becoming more commercial. As a result, they are now more efficient and leaner organisations – with 53,000 fewer staff than in 2010 (a reduction of 29%)[2]. With so much already done, and many of these activities providing only one-off savings, councils are fast running out of options.

 

  1. Even before Covid-19, London boroughs were planning £400 million of savings this year, as part of £2 billion needed over the 4-year Medium Term Financial Plan (MTFP) period to balance their books. The level of overall funding restraint has weakened the financial resilience of the sector overall and meant that some individual authorities were already in a difficult financial position before the pandemic hit.

 

The short-term approach to local government funding

  1. A further underlying issue that is likely to have adversely affected the ability of some authorities to plan their finances in the most strategic, efficient and effective way over the last 5 years, has been the Government’s short-term approach to funding, and its delays to reform of the finance system.

 

  1. The scale of the funding crisis in adult social care in recent years has required several major policy interventions. Since the start of the last multi-year Spending Review period in 2016-17, the Government has repeatedly changed its approach to adult social care funding via a series of short term funding solutions, creating new grants, extending previous ones (like the Improved Better Care Fund), and extending the social care precept annually. Had an appropriate level of funding been provided for the sector at SR15, the emergency measures may not have been required, and councils could have spent the funding in a much more strategic and effective way. Funding that is announced late in the financial year is very difficult to spend in a way that does not simply perpetuate the status quo.

 

  1. More broadly, the last two years have seen a growing level of uncertainty regarding local government finance, with two single year spending reviews, repeated delays to the conclusion of the Fair Funding Review, and the lack of a clear policy on further business rates retention. The latter starting in 2015 with a clear ambition for 100% retention by 2020, followed by a heterogenous approach to piloting further retention across the country, and the current position is that even the scaled-back 75% retention scheme and proposed simplified alternative model are uncertain to happen.

 

  1. Finally, the annual settlement process, and its lateness in the financial year, stifles a strategic approach to funding local services, and hinders councils in developing long-term plans. Medium-term funding certainty would provide the platform to deliver transformation plans and longer-lasting efficiencies through prevention and invest-to save initiatives that are required to ensure longer-term financial resilience – particularly following a period prolonged funding restraint.

 

DSG deficits

  1. A further structural issue that has progressed rapidly in recent years is the growing level of accumulated deficits on the Dedicated Schools Grant (DSG) – driven primarily by the huge increase in demand for support for children with Special Educational Needs and Disabilities (SEND), following changes set out in the Children and Families Act 2014. Demand has risen by over 50% since 2015, and what began as only a few authorities building up large deficits is now a widespread issue across the sector. London boroughs anticipate accumulated deficits on the DSG of over £300 million by the end of the current financial year and over £400 million by the end of next year without further significant support from government. The scale of deficits for some London boroughs mean they have little or no prospect of recovering them over the next three years. The recent statutory override provided by DfE, which effectively hardens the ringfence on the DSG by asking authorities to change negative DSG balances to separate account solely for this purpose, rather than charging to the general fund revenue account (applicable for the next three years) is welcome in the short term, it does nothing to help the longer term position or to provide councils with the assurance they need that auditors won’t ultimately make adverse judgements regarding the ability of councils to balance their general funds because of the issues with the DSG.
  2. All of these structural factors have put local government in a far weaker position with regards to financial resilience than it was a decade or so ago.

Commercial investment decisions

  1. The scale of the funding reductions since 2010 has coincided with councils diversifying and developing alternative sources of revenue within the confines of the current legislation. However, there has been a growing degree of criticism of commercial investment decisions from commentators and the Government in recent years.

 

  1. Local authorities have a long track record of investing in property - including commercial property - for the benefit of the local area. This is a core part of regeneration and place-shaping activity (a core local government duty) with many projects containing a blend of objectives. The powers to do so are well established[3], and the use of legal powers is subject to checks and balances. This includes the prudential framework, an array of guidance provided by CIPFA, as well as internal oversight and scrutiny, and the external audit regime.

 

  1. The National Audit Office’s review on the subject in 2020 found that 49 authorities (13.9%) accounted for 80% of cumulative spend on commercial property[4]. This led the subsequent Public Accounts Committee inquiry to conclude that “Spending was concentrated in a minority of authorities” and that “the pursuit of yield to offset funding reductions was a predominant factor underlying these investments.”[5], suggesting the underlying broader funding pressures had largely driven this behaviour. It also concluded that the scale of activity is not having a distortionary effect on overall property market activity (less than 5% of activity nationally) which it found to be especially true in London where local authority purchases represent only 1% of overall activity.

 

  1. More widely, the Government remains broadly supportive of cross-subsidy and other innovative financing schemes when delivering capital projects, especially for housing and regeneration schemes[6], and recognises that they have a role in delivering best value for residents. The ability to harness commercial income for public gain can often make the difference between a project being financially viable and not, as well as helping to release funds for investments elsewhere.

 

  1. Overall, we believe commercial property investment by local government is balanced and subject to significant internal and external scrutiny. Any steps to curb perceived excessive risk taking in the sector must be developed in close consultation with the sector so as to avoid dampening much needed investment in local areas, which will be even more important as the country seeks to build back better from the pandemic.  Where examples of financial failure have occurred, these are for a multitude of reasons with an often-complex interrelationship of factors. Commercial investment decisions, while sometimes part of that mixture, are never the sole reason.

 

 

The impact of Covid-19

  1. London boroughs have played an indispensable role in helping local people and local businesses through the pandemic. They mobilised rapidly, helping to coordinate the emergency response across public services in the capital as well as implementing emergency assistance plans at pace in their own areas. However, the financial impact has been considerable: both in terms of additional spending needed to deliver services, and in lost income.

 

  1. London boroughs’ latest estimate the total financial impact (from the December MHCLG financial impact survey) is £2.2 billion in 2020-21. This comprises over £1.1 billion in additional spending (around £400 million of which is in Adult Social Care and almost £150 million because of non-delivered savings) and almost £1.1 billion in lost income. Within this, income from Sales, Fees and Charges (SFC) has been hardest hit with losses of £452 million forecast, while council tax and retained business rates are forecast to be down £430 million.

 

  1. MHCLG has responded by providing substantial financial support with London boroughs receiving in the region of £1.6 billion to date though a mixture of un-ringfenced emergency funding, specific grants, and the 75% compensation schemes for lost SFC and tax income. Without the support provided by the Government, undoubtedly many authorities across the country would have found themselves in Section 114 territory. However, it is a measure of the scale of the crisis that even this unprecedented intervention is not enough to cover the total impact with around a £600 million shortfall expected in London in 2020-21 without further funding. This estimated was before the third national lockdown and huge increases in infection rates since then due to the new strain of the virus. The reality could be far worse, with modelling suggesting it could exceed £700 million without further support. 

 

  1. The funding provided has broadly kept pace with increased expenditure so far, but on income losses, the compensation schemes look like they may only cover half of the £880 million of SF&C, council tax and business rates losses London boroughs forecast. In addition, there has been no recognition of the lost income and additional spending within the Housing Revenue Account and lost commercial and other income, all of which totals an estimated £200 million in London in 2020-21.

 

  1. It is clear the pandemic will continue to have a huge impact on local government finances beyond the end of March, and in all likelihood throughout 2021-22. Many of the long-term impacts of the pandemic are still unknown – for example, the longer-term impact mental health (for adults and children), as well as the impact on rates of child protection, children in need and looked after children which could be adversely affected by repeated lockdowns. The costs cannot yet be quantified but they will be significant over the next few years, and this growth in demand for services must be built in future funding discussions ahead of the next spending review.

 

  1. The impact of the pandemic means that boroughs may need to make savings of £2 billion over then next 3 years – rather than the 4 years previously expected. A far tougher position than they faced at the start of the last multi-year spending review period in 2016-17, but with even fewer efficiency and transformation savings options now available to them, and within a much weakened economic context because of the pandemic. 

 

 

Section 2: The scale of the problem

 

  1. The deterioration of the sectors financial position is well documented. The NAO’s most recent report on the financial sustainability of local authorities (in 2018) concluded that, compared to the situation described in its 2014 report, “the financial position of the sector has worsened markedly, particularly for authorities with social care responsibilities.”[7] The Public Accounts Committee (PAC) subsequently stated that “Seven years of funding reductions have left an increasing number of local authorities in a worrying financial position.”[8]

 

  1. In 2019 the PAC found the financial position of local government was continuing to deteriorate, adding that it was “deeply frustrated to have to repeat the same concerns about the sustainability of the sector and the ability of local authorities to provide the vital services that taxpayers need.”[9]

 

  1. While the scale of the problem at national level is clear and well evidenced, gaining a more a more granular understanding of potential financial failure is more difficult at an individual authority level. We are aware that MHCLG takes stock of the financial position of local authorities via its own internal index and that CIPFA has published its financial resilience index in the last year.

 

  1. London Councils works closely with London borough treasurers and chief executives to regularly monitor financial resilience. Our analysis since 2016-17 has shown a gradually deteriorating position, with the latest survey suggesting the average borough planned to use around a third of their earmarked reserves over the course of the current 4-year MTFP period. Clearly, this is not sustainable in the long term and the situation is likely to be worse now as a result of the pandemic.

 

 

Section 3: The role of MHCLG

 

  1. The high level of centralisation within the UK’s constitutional arrangements is widely recognised and places a considerable weight of responsibility on MHCLG as the supervising department.

 

  1. MHCLG must deliver national priorities while playing a stewardship role in supporting local government to carry out its statutory duties. An important part of this role is securing funding at fiscal events, ensuring that other Whitehall departments fully fund the duties they place on local authorities, and providing a system for fairly distributing resources.

 

  1. While oversight of the prudential framework is important, as set out above, we believe the current framework has worked well since 2003 and provides authorities with the autonomy they require to deliver their place shaping roles. We would urge against any changes in response to perceived risks of commercial investment by the department.

 

  1. Regarding reforms to lending terms offered by the Public Works Loans Board, London Councils remains concerned by the indirect tightening of central control over local authorities’ capital programmes through these reforms and does not consider PWLB lending terms to be the right mechanism for adjusting the operation of authorities’ statutory powers.

 

  1. We are aware that a number of authorities have applied for capitalisation directions in the last few months, and that some funding is being held back via an “exceptional support scheme” to support those authorities in the worst position[10], although its not clear how much and where the funding has come from. The use of these mechanisms, while welcome for those authorities in the most difficult position, can be seen as continuation of the recent short-term crisis management approach to funding local government set out above (paragraphs 8 to 11).

 

 

Section 4: Measures to support Local authority financial sustainability

 

  1. This submission has highlighted several factors that have driven an increased likelihood of local authorities experiencing financial difficulties. London Councils believes the structural funding issues and the impact of Covid-19 are the most significant of these factors. To a large degree, these could be alleviated by the Government taking short-, medium- and long-term action.

 

Fully support councils through Covid-19

  1. In the short term, the Government must make good on its promise to fully support local government through the pandemic. This means fully funding additional spending pressures and compensating for all lost income, without which London boroughs face a potential funding gap of up to £700 million by the end of the year. Most immediately, we ask that the Government:

 

Provide medium-term certainty

  1. In the medium term, the Government must provide certainty, following two single year Spending Reviews, by delivering a multi-year CSR that provides sufficient resources to stabilise the sector until fundamental reform of the local government finance system can be put in place, and which acknowledges the role played by local government during the pandemic, as well as the continuing pressures it will face as the country seeks to recover.

 

  1. We urge the Government to confirm the timetable for the conclusion of the Fair Funding Review and further retention of business rates as soon as possible, to give councils a realistic planning timeframe and some certainty for setting medium-term plans.

 

Deliver long term reform

 

  1. More fundamentally, the events due in the next year (the outcome of the fundamental review of business rates, the long-awaited reforms to adult social care, the Devolution White Paper and possible conclusion of the Fair Funding Review) present an opportunity for the Government to realign local government finance, and ensure it is put on a sustainable longer term path. We urge the Government to view these events holistically rather than in isolation and set out a vision for local government finance reform with a clear road map to get there over the remainder of this parliament.

 

  1. This should include reform of council tax and business rates which account for an increasing proportion of local government funding: but neither is fit purpose. The pandemic has exposed these flaws, with revenues from both falling substantially due to increases in CTS claims and business rates holidays through lockdowns and beyond.

 

  1. More broadly, London Councils remains committed to ambitions of the London Finance Commission, which called for access to a broader range of revenue raising powers and flexibilities, rather than being too dependent on one particular tax. Fiscal reform must be considered on different scales, to both incentivise effective activity, but also deliver broader strategic choices. The former may include but not be limited to, the proceeds of an online sales tax; retention of unspent Apprenticeship Levy funding; devolution of Vehicle Excise Duty to help address the need to invest in roads maintenance; exploring potential options for a local Tourism Levy (but only once the economic impact of pandemic has receded); local retention of Landfill tax; and the ability to set and retain planning fees locally; while the latter may include bolder reforms such as assignment of national taxes like VAT and National Insurance.

 

 

January 2021

 


[1] ONS – Mid-year estimates and Sub-national population projections

[2] LGA - Quarterly Public Sector Employment Survey, https://www.local.gov.uk/ons-quarterly-public-sector-employment-survey

[3] Through the Local Government Act 1972, Local Government Act 2003 and the General Power of Competence within the Localism Act 2011

[4] National Audit Office, Local authority investment in commercial property, 13 FEBRUARY 2020, p25.

[5] House of Commons Public Accounts Committee, “Local authority investment in commercial property” Eleventh Report of Session 2019–21, July 2020, p10

[6] HM Treasury, “Public Works Loan Board: future lending terms, Response to the consultation.” November 2020, paragraph 3.96, p19.

[7] National Audit Office, “Financial sustainability of local authorities 2018” 8 MARCH 2018, paragraph 15, p8.

[8] House of Commons Committee of Public Accounts Financial sustainability of local authorities Fiftieth Report of Session 2017–19” 27 June 2018, p5

[9] House of Commons Committee of Public Accounts “Local government spending” Seventy-Sixth Report of Session 2017–19, 6 February 2019, p3.

[10] https://www.lgcplus.com/finance/breaking-exceptional-support-offer-for-councils-facing-unmanageable-pressures-07-01-2021/