A year in the life of local authority finances

Local authority finances were already under severe pressure as we headed into 2020, following a decade of austerity that has eaten away at many councils’ reserves, making them vulnerable to adverse events such as a major pandemic.

The Redmond Review into the effectiveness of external audit and transparency of financial reporting in local authorities was starting to wrap up, with ICAEW holding a stakeholder forum in January 2020 for all interested parties to discuss how the crisis in local authority audit might be addressed. 

We wrote a short article to explain who the key people are in this area and why it matters so much to understand the perspective of ALL parties, whether preparers, auditors or regulators, or even the most important party – the tax-paying citizen. As we reach December 2020 the formal government response to the Redmond Review recommendations has yet to see the light of day – an unsatisfactory cliff-hanger to take us into 2021.

Weak local authority finances were also at the top of the agenda at the start of the year, with concerns about whether councils might follow Northamptonshire’s 2018 example of issuing a section 114 ‘bankruptcy’ notice. A report by the National Audit Office in February highlighted the 1,340% increase in local authority investment into commercial property acquisitions in the three years to March 2019 compared with the three years before that. This may have seemed a sensible way to take advantage of low interest rates to fill the gap left by cuts in central government funding and increasing pressures on costs, but the pandemic has demonstrated that commercial property values can go down as well as up.

In May, we reported on the additional funding MHCLG was giving to local communities in response to the pandemic in line with the government’s call to do ‘whatever it takes’, but even then councils were saying that this was insufficient. Extra funding announced in July may have helped a little but this clarified that not all losses made by councils were to be made up, forcing councils to cut spending and/or utilise what is left of their usable reserves.

This was not sufficient for Croydon Council, which was already struggling before the pandemic and was forced to issue a section 114 notice in November 2020.

Rumours of local authority consolidation were already circulating before the arrival of COVID-19, but they reached fever pitch over the summer as it looked like an announcement was imminent. In the event, the government delayed its plans (not for the first time) and local government in England remains unreformed, at least for now. Although there are many opposing voices concerned about local accountability, a reduction in the number of councils seems likely to return to the agenda given the opportunities to reduce back-office costs and obtain greater efficiencies of scale in the delivery of local public services.

This is not to say that there are not things that can be done. ICAEW members active within local authorities such as Chris White from St Albans City & District Council and Sanjiv Kohli from Newark and Sherwood Council have described innovative ways to try and plug the gaps, while many local authorities have been doing what they can to improve their efficiency within limited budgets.

So where does all that take us to at the end of the year? 

• Councils await news of a potential further funding package to help them survive for the rest of the financial year, while at the same time facing significant uncertainties as they attempt to put together their budgets for 2021-22.

• There continues to be speculation that even with additional funding, more local authorities could end up following Croydon and Northamptonshire into section 114.‘bankruptcy’. Not only would this be a crisis for the councils concerned, but it is disruptive to local citizens too. 

• Although many councils will have been glad to defer the anticipated consolidation of local authorities in England, given everything else they have on their plate right now, they will be acutely aware that reform remains on the agenda and is likely to return at some point next year. Any cost savings that might be achieved have also moved further out into the future. 

• Similarly, the fair funding review into how councils are funded has also been deferred again, as have the long-awaited plan to reform the funding of adult social care. 

• At the same time, there is no government response to the Redmond Review report as yet, with the risks that firms could withdraw from the local audit market remaining unaddressed for now.

There are quite a few flashing red lights on the Ministry of Housing, Communities and Local Government’s dashboard as we approach the end of 2020, with many of the others showing amber. Even with a vaccine on the horizon, turning around local government in 2021 will not be easy!