Government in denial over state of council finances says Public Accounts Committee

- Local authority finances continue to deteriorate amid rising demand for vital services

- PAC dismayed by Government’s view of what constitutes sustainability in the sector

- Short-term cash injections are not good value: Government must plan for the future

REPORT SUMMARY

Local authorities face enormous pressure: their financial position is continuing to deteriorate as demand for vital services increases.

Over the last eight years, the Government has cut the funding it gives to English local authorities by nearly half, while, at the same time, demand for critical council services has risen: housing is under strain with over a third more people homeless and adult and children social care are confronted with growing demand. The rate of looked-after children, for example, is at a 25-year high. The cost of adult and children’s social care has forced many local authorities to reduce spending on services in other areas. 

Some councils are now in an extremely worrying position: overspending their budgets for social care, reducing key services, falling back on financial reserves and increasingly relying on generating other sources of income, which comes with greater risks. 

The Ministry of Housing, Communities and Local Government (the Department) is relying on a short-term approach to a long-term problem. Overall spending by local authorities on services fell by 19.2% in real terms between 2010-11 and 2016-17.

The Government has had to inject large amounts of additional funding to ensure that the local authority sector can keep going in the short-term: £1.4 billion in the 2018 budget. Yet disturbingly, there is still no sign that the Department has a clear plan to secure the financial sustainability of local authorities in the long-term.

The Department continues to insist that the sector is sustainable but refuses to provide the evidence that Parliament and the public need to be assured that this is actually the case.

The Department has rejected a number of the Committee’s previous recommendations on these subjects. We are 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.

COMMENT FROM PAC CHAIR MEG HILLIER MP

“The Government is in denial about the perilous state of local finances. It insists the sector is sustainable yet is unwilling or unable to back up this claim.

“Flimsy assertions have no place in financial planning. The fact Government has bailed out councils with short-term fixes should be evidence enough that all is far from well.

“Government needs to get real, listen fully to the concerns of local government and take a hard look at the real impact funding reductions have on local services. And then it needs to plan properly for the long-term.

“It is extremely troubling that the Government views the financial sustainability of councils solely in terms of statutory services, rather than full range of services local people need and can reasonably expect councils to provide.

“Cutting youth services, for example, may simply build pressures on statutory services and we expect Government to explain how it takes account of these shunted costs in reaching its conclusions.

“It must also explain why its conclusions differ from those of the Local Government Association, local authorities and other representative bodies seriously concerned about sustainability in the sector.”

CONCLUSIONS AND RECOMMENDATIONS

Central government financial support for local government continues to be characterised by one-off, short-term initiatives, which do not provide value for money, rather than a meaningful long-term financial plan for the sector. As we concluded in our most recent report on local authority financial sustainability in July 2018, the lack of a long-term funding plan for local authorities is a risk to value for taxpayers’ money. Since our last report, the government has announced more funding measures, including £1.4 billion of additional funding for councils in 2018-19 and 2019-20. The government intends over £700 million of new funding to be spent in 2018-19, despite only being announced five months before the end of the financial year. The Department is unable to provide a convincing answer as to how it can be confident that funding provided so late in the year will be spent efficiently and on the services it was intended for.

Recommendation: The Department should work with local authorities to collect and analyse evidence on the impacts on value for money and the implications for service users of providing funding through one-off funding streams announced late in the budgetary cycle rather than through long-term funding arrangements.

The Department should, within 12 months, write to the Committee detailing the findings from this work and how it will use this evidence base to ensure that both its own funding schemes and those of other departments are structured and announced in a way that delivers maximum value for money.

The Department has an unacceptable lack of ambition for the sector, with no aspiration for improving local finances beyond merely ‘coping’. The Department asserts that, having put additional money into the local authority sector in response to government and local authorities’ concerns, that the sector is now stable for 2019-20.However, it admits that there is still a high level of risk inherent in the sector and that it does not expect the overall financial sustainability of local authorities to ever be rated as less than amber. We are concerned that the Department responsible for fighting the corner of local government within central government does not have any ambition to improve the financial sustainability of the sector in order to reach a green rating. Despite the additional funding, the Department’s assurance about the sustainability of the local authorities relates solely to the current spending review period. The Department cannot give assurance about the long-term sustainability of the sector and accepts that some local authorities are very worried about what comes after. We have previously said that alternative means of supporting local authorities to remain financially sustainable will be needed to prevent them being solely reliant on the outcome of the next Spending Review. The Department’s plans in relation to this point are not ambitious enough to give us confidence that this will be achieved.

Recommendation: The Department should write to the Committee by May 2019 setting out the steps it will take over the medium-term to move the sector to a stronger financial position. This should reflect its consideration of a full range of options to support the sector financially rather than simply a reliance on the forthcoming Spending Review and a move to greater local retention of business rates.

It is worrying that the Department does not know what its minimum expectations are of the full range of services that local authorities are expected to provide. As part of Spending Reviews, the Department helps the government as a whole to decide how much it should cost to deliver the statutory services local authorities are expected to provide. The Department also provides a central point where other government departments can raise concerns about any statutory services they are responsible for. Such concerns have led to decisions to provide additional funding for social care in part to ensure that local authority spending is not diverted from other important services. However, the Department does not have a comprehensive or detailed list of the costs of providing statutory services to a minimum service expectation. Instead, the Department uses existing spend on services to project future spending needs based on anticipated changes in service demand. Overall, the Department does not have a structured, clear set of expectations about statutory services to inform its funding models and has not said what non-social care services the government considered to have sufficient importance to justify additional social care funding to protect them.

Recommendation: The Department should, by May 2019, publish the minimum service levels it has used to calculate service costs for the statutory services included in its modelling.

We are deeply dismayed that the Department views the financial sustainability of local authorities solely in terms of a small set of statutory services rather than the full range of services local people need. The Department determines whether the local government sector as a whole is sustainable if the amount of resources available to it can deliver the statutory services that it is required to deliver. These statutory services primarily relate to adult and children’s social care. Demand for these services means that local authorities are spending a greater proportion of their funding on social care services, which limits how much they can spend on other areas. There are a range of other services, such as libraries and youth services, which local people can reasonably expect their council to provide, but which the Department does not consider rigorously when determining whether local authorities are financially sustainable. We are concerned that the Department’s narrow view of service provision risks giving a misleading picture of the sustainability of services as a whole. 

Recommendation: The Department should write to the Committee by May 2019 setting out how services where the level of provision can be determined locally feature in its assessment of financial sustainability, how they should be funded, and how it takes account of the fact that the loss of such services may have longer term cost implications for required statutory services.

It is not acceptable that the Department repeatedly states that the local authority sector as a whole is sustainable but refuses to provide evidence about how it has reached these conclusions. The Department has repeatedly asserted that the sector is on a sustainable footing for the remainder of this spending review, and that no council is close to the edge. The Department admits that there is a great deal of risk underpinning the financial sustainability of the sector but claims to have stabilised the risks for 2019-20 significantly. The Department is unable to provide a satisfactory explanation for the basis of this conclusion or the evidence underpinning it. It refused to provide a numerical answer or risks rating to describe what margin of sustainability it believes the sector to possess, and continues to use the complexity of the methodology, Ministerial advice and Ministerial decisions as excuses for its failure to answer our questions.

Recommendation: The Department should write to the committee by May 2019 setting out a step-by-step model of how it assures itself that the sector is sustainable:

•      In relation to the Department’s ‘top-down’ analysis for the remainder of this Spending Review period, this should include a detailed account of how adequate funding need has been defined and calculated including assumptions over service levels (including both statutory and discretionary) and demand projections.

•      In relation to the Department’s ‘bottom-up’ analysis looking at the sustainability of individual authorities, it should set out what quantitative and qualitative evidence is used in its analysis, the framework in which this information is used, and the process by which this information is combined to produce a conclusion.

•      Where conclusions are reached based on judgements in either the top-down or bottom-up methods, the Department should detail how they are made, what the criteria are and to what extent these judgements are subject to independent scrutiny to ensure quality and consistency.

We also call on the Department to revisit its refusal to publish a shared definition of financial sustainability.

We are concerned that the Department uses similar data and methods to other stakeholders to assess the financial sustainability of the local authority sector yet reaches different conclusions. In its written evidence, the Local Government Association estimated that local authorities faced a funding gap of £3.2 billion by 2019-20. The methodology used by the LGA is very similar to that used by the Department and relies on similar datasets. The Department attributes the differences in the conclusions drawn from their respective calculations to a difference in the assumptions used, and different views on expected service levels and differences in the time period covered. We do not consider the Department has given a clear enough justification of why its conclusions and those of the LGA, local authorities and other representative bodies are different.

Recommendation: The Department should write to the Committee by May 2019 setting out how its estimates for local authorities’ funding needs compare to the LGA’s forecast of a £3.2 billion funding gap in the sector by 2019-20 and explain any differences.