National Audit Office report on the financial sustainability of local authorities 2018

The financial health of local authorities across England is getting worse, says a report from the National Audit Office (NAO).

The report, published today, highlights that despite greater freedoms to increase council tax bills and one-off short-term funds from government, local authorities are struggling to juggle higher demands and cost pressures against significant central government funding cuts of nearly 50% since 2010-11¹.

Many local authorities are relying on using their savings to fund local services and are overspending on services², which is not financially sustainable. The report goes on to show that if local authorities with social care responsibilities keep using their reserves at current rates, one in ten could have exhausted them within three years.³ Last month, Northamptonshire County Council imposed strict in-year spending controls as it is at risk of spending more than the resources it has available in 2017-18, which would be unlawful.⁴

Continued increases in demand for social care and tightening resources are pushing local government towards a narrow remit centred on social care. From 2010-11 to 2016-17, the estimated number of people aged 65 and over in need of care increased by 14.3%, and the number of children being looked-after grew by 10.9%. Social care now accounts for 54.4% of local authorities’ total service spend, up from 45.3% in 2010-11.

Despite growing demand, spending on social care still fell by 3.0% from 2010-11 to 2016-17. However, this compares with a 32.6% reduction in spending on all other service areas including: reductions of 52.8% on planning and development; 45.6% on housing services; 37.1% on highways and transport; and 34.9% on cultural and related services.

There is further evidence that these spending reductions are impacting frontline services. Since 2010-11, 33.7% fewer households have their waste collected at least weekly, the number of bus miles subsidised by local authorities outside London has fallen by 48.4%, and the number of libraries has reduced by 10.3%.

The Ministry of Housing, Communities and Local Government (the Department) has made improvements in understanding the sector’s financial position since the NAO’s last report in 2014 but, because responsibility for services is spread across departments, there is no single view of how funding cuts are impacting the whole of local authority services. At a time when social care spending is being prioritised by local authorities, failing to understand how funding and demand pressures affect the full range of local authority activities risks unintentionally reducing services to a core offering centred on social care.

The government has given local government several short-term cash injections in recent years, but most of this funding has only been available for adult social care. Uncertainty remains over the long-term financial plan for the sector. The government has confirmed its intention to implement the results of the Fair Funding Review in 2020-21 and to allow local authorities to retain 75% of business rates, but the implications of these changes for local authorities’ finances are not yet clear. 

Amyas Morse, head of the National Audit Office, said today:

“Current funding for local authorities is characterised by one off and short-term fixes, many of which come with centrally driven conditions. This restricts the capacity of local authorities and yet the weight of responsibility to respond to increased demand and maintain services remains very much on their shoulders. The Government risks sleep walking into a centralised local authority financial system where the scope for local discretion is being slowly eroded." 

Key facts

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Notes for editors

1.           Central government funding to local authorities has fallen by 49.1% from 2010-11 to 2017-18. This equates to a 28.6% real-terms reduction in spending power. In the 2015 Spending Review and the 2017 Budget, the government provided extra funding to relieve growing spending pressures in adult social care. Consequently, the rate of spending power reductions has levelled off since 2016-17 for social care authorities (single tier and county councils) and is predicted to remain relatively flat until 2019-20.

2.           Total overspending on services by social care authorities in 2016-17 amounted to £1.023 billion. District councils, who do not have social care responsibilities, did not overspend in aggregate. Combined overspends of both social care and district councils were £901 million.

3.           10.6% of single tier and county councils would have the equivalent of less than three years' worth of reserves left if they continued to use their reserves at the rate they did in 2016-17. A further 9.9% would exhaust their reserves within four to five years – reference figure 24 in the report

4.           In February 2018 Northamptonshire County Council’s chief finance officer had to issue a section 114 notice imposing immediate spending controls on the organisation. It means no new expenditure is permitted, with the exception of safeguarding vulnerable people and statutory services. The notice has been served in light of the severe financial challenge facing the authority and the significant risk that it will not be in a position to deliver a balanced budget by the end of the year. The precise causes of the council’s difficulties are not yet clear. The Department had already appointed an inspector in January 2018 to look into financial management and governance at the authority.

5.           Local authorities deliver a range of services. The government sets statutory duties for them to provide services, ranging from adult social care to waste collection. Local authorities also provide discretionary services according to local priorities. The Ministry of Housing, Communities and Local Government (the Department) has overall responsibility in central government for local authorities' funding. This includes: distributing the majority of funding voted by Parliament to support local authorities to deliver services; taking the cross-government lead in supporting HM Treasury on decisions about local government funding at major fiscal events; and maintaining a system of local accountability to ensure local government acts with regularity, propriety and value for money in the management of its resources, including preventing and responding to financial and service failure.