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Written evidence submitted by Councillor Shaun Davies

I am writing as Chair of the Local Government Association’s (LGA) Resources Board to share our analysis ahead of your Committee’s inquiry into the local government finance system: overview and challenges. The sustainability of council finances continues to dominate my and many of my colleagues agenda and I thought it would be useful to highlight our views on local authority commercial investments; local government audit and the overall viability of local authority finances in light of the Spending Review and Autumn Budget 2021.

Commercial investments

In May last year, the LGA gave written evidence to your Committee’s inquiry on commercial investments and my predecessor, Cllr Richard Watts, gave oral evidence to the same inquiry. In both pieces of evidence, it was noted that only a minority of councils have invested in property solely to make an income, in order to replace lost funding and support the council’s budget. Many more councils hold property for service reasons – for example, for place shaping or for economic regeneration, such as plans to regenerate high streets by changing and influencing the mix of use of properties. On these, councils also charge a commercial rental income, which may or may not cover their costs of holding the property. In many cases, the distinction is not clear, and an individual property can be held for several different reasons. Cllr Watts emphasised that councils have often faced a choice of either absorbing funding reductions and cutting services – such as care for older and disabled people, protecting children, reducing homelessness, fixing roads and collecting bins – or seeking alternative sources of income, such as making investments, to try and protect them. A more commercial approach has also been encouraged by Government in the past decade.

The LGA also gave written and Cllr Watts gave oral evidence to the Housing, Communities and Local Government Committee inquiry on local authority financial sustainability and Section 114 notices earlier this year, which covered the issue of commercial investments where. In his evidence, Cllr Watts noted the same issues highlighted above. In addition, he gave the examples of the councils of Greater Manchester, and Luton Borough Council, who usually derive substantial income from their respective airports, but COVID-19 had a devastating impact on this income. These examples demonstrate that if councils were to be prevented from undertaking commercial activity, it would significantly affect their ability to fund core services, and have an adverse impact on local economies. It was therefore welcome that in their report, the Housing, Communities and Local Government Committee acknowledged that “commercial investment poses no obvious threat to local government financial resilience overall” and “In understanding local authorities’ use of commercial investment, we must acknowledge that previous Governments encouraged councils to be more commercial.”

Local government audit

In May this year the Local Government Association submitted written evidence to the Committee’s inquiry on local government audit. In our evidence, we agreed with the National Audit Office (NAO) that the late delivery of 2019/20 audit opinions is concerning and the system had worsened. We laid out how audit has been impacted by COVID-19 due to increased demand on local authorities in responding to the pandemic, as well as auditors and audited bodies having to adapt their working practices. We also noted that audit demands have increased and the attractiveness of local audit to the supplier market has declined. Furthermore, there is evidence that among the relatively few registered firms that remain in the market, there are too few qualified senior auditors (termed Key Audit Partners) to ensure the resilience of the system. While we do not disagree that a shortage of resources and capacity in councils, particularly of suitably qualified staff, have had an impact on the timeliness of audit, feedback from our members suggests that long-term causes of delays are more related to the pressures on auditors. It was therefore welcome to see our evidence referenced in your Committee's report and to see the Committee amplify our concerns relating to the ongoing problems around the late delivery of audit opinions and the fragility of the local audit market, as well as its long-term viability. We also welcome the Committee’s calls to clarify how the Audit, Reporting and Governance Authority (ARGA) will act as a system leader for local audit; for a higher profile to be given to the specific problems faced by local government audit and proposals for a way forward. The LGA responded to the Department for Levelling Up, Housing and Communities (DLUHC) consultation on the local audit framework and will continue to work with DLUHC on future local audit arrangements. However, it is of particular concern that less than 10 per cent of 2020/21 audit opinions were delivered by the 30 September deadline, demonstrating there is clearly a lot still to be done. Effective external audit and clear and transparent financial reporting are vital, and councils take them extremely seriously.

Sustainability of local government finances

I also wanted to touch on the sustainability of local government finances and what needs to be done to ensure councils are able to continue to provide vital local services to their residents. Prior to the pandemic, councils were already under immense financial pressure. They faced a £15 billion reduction in core government funding between 2010 and 2020. While part of this challenge was met through efficiencies and transforming services, many councils have had to ration services such as cultural services, economic development, libraries, parks, leisure services and others to ensure they could continue to protect vulnerable residents. These financial pressures were only exacerbated by the pandemic and while we welcomed £9.6 billion of Government grant funding in 2020/21, we called on the Government to keep support under review.

Below I have included a table on the financial impact of COVID-19 on councils and associated Government support. In summary, it appears that the funding has covered costs and lost income in aggregate in 2020/21, but our estimates suggest it will fall short in 2021/22 and the shortfall in tax take will exceed the resources allocated to compensate:

1 Lost tax income will impact budgets in the next financial year (for example 2021/22 lost tax income impact budgets in 2022/23)

2 Government grant funding includes adult social care pressures funded by Clinical Commissioning Groups

3 The compensation scheme for lost sales, fees, and charges for 2021/22 compensates for losses in the first quarter of 2021/22 (April 2021 to June 2021) only and is an estimate.

Looking slightly further ahead, it was welcome the Autumn Budget and Spending Review 2021 provided councils with new government grant funding of £1.6 billion per annum (total £4.8 billion over the period) over the next three years to support vital local services. This will help meet some - but not all - of the extra cost and demand pressures local government faces just to provide services at today’s levels. We note that the £4.8 billion funding over three years includes the £200 million commitment to increase Supporting Families funding, funding for cyber security and funding to improve local delivery and transparency. However, we are unclear whether the Government intends to use any of this pot of funding to equalise for the differential impact of the council tax and the adult social precept, as they have done in previous years.

Noting these caveats, initial LGA analysis suggests that the increases to core spending power projected by the Government, including all councils increasing council tax to the maximum, will meet in aggregate the estimated forward pressures in 2022/23 to keep services at the at their 2019/20 level of quality and access will fall short by more than £1 billion in the last year of the Spending Review period. There is, however, no provision to address the existing pressures facing councils on services such as housing and planning, and the current challenges in adult social care such as unmet need, workforce shortages and the need for investment in prevention.

The Spending Review also made no mention of whether local government will receive a three-year financial settlement or whether and when local government finance reforms, such as the Fair Funding Review, will be implemented. Councils look forward to receiving early certainty with a three-year local government finance settlement. In recent years, settlements have been published in draft form very late in December, after the target of 5 December that the DLUHC has historically set itself. We are urging the Government to meet this target.

November 2021