The Housing, Communities and Local Government Select Committee issued a report on local authority financial stability and the section 114 regime on 19 July 2021 that calls for major changes in how local government in England is funded. The report considered evidence heard by the Committee in November 2020 and February 2021 from a range of witnesses, together with written submissions made earlier this year.

The Committee expresses grave concerns about the state of local government finances following increased demand for services, changes to the level of funding equalisation between councils and the ongoing impact of the pandemic. Some councils have approached the Ministry of Housing, Communities and Local Government (MHCLG) for financial help, with a number forced to issue s114 ‘bankruptcy’ notices restricting future spending to essential services.

The failure to properly fund social care is highlighted as the “biggest threat facing local government financial resilience”. For most county and unitary councils the cost of social care amounts to 60-70% of their budgets, putting non-statutory council services and discretionary areas of spending under severe pressure. The Committee believes the planned reform of social care funding is needed urgently.

The report highlights how local government in England is increasingly reliant on locally generated revenue following a significant reduction in central government grants over the last ten years. The Committee supports the devolution of revenue raising powers and greater control over how councils spend their money, while at the same time providing support to the local authorities less able to raise revenue locally. 

The report says the Business Rates Retention Scheme has not been successful in incentivising growth or redistributing funding according to need, while the delay in implementing the Fair Funding Review has also impacted the link between funding and need. 

The Committee also repeats its predecessor committee’s recommendation that council tax should be reformed with a revaluation of properties and an introduction of additional council tax bands. Long-term reform of council tax and business rates is needed to give councils a reliable view of future funding – together with a multi-year funding settlement from central government. Unfortunately, the Secretary of State, Robert Jenrick, has only been able to express a “hope” that the next funding settlement cover a period of longer than one year.

The Committee also asks for increased revenue-raising powers to be given to local government, believing that greater fiscal autonomy could contribute to better financial resilience. 

The pandemic has placed a huge additional burden on local government finances, increasing spend and reducing income by significant amounts. While emergency funding has been provided to local authorities this does not cover future years and the government is asked to provide greater certainty over future funding to cover additional costs that will persist following the pandemic. 

Commercial investments by local authorities, encouraged by previous governments but now causing concern, are also a focus of the report, which recommends adherence to the Prudential Code become a legislative requirement. 

No review of local authority finances would be complete without comment on the fragile state of the local audit regime. The witnesses to the hearing generally mourned the loss of the Audit Commission whilst noting that they would not want it restored in its entirety. The government was asked to confirm that the new systems leader, to be placed in ARGA, join up individual auditor findings with a view to identifying systemic issues across local government.

The section 114 ‘bankruptcy’ regime that requires local authorities to suspend all non-statutory expenditures if a council runs into financial difficulties was a key focus of the Committee’s report, especially as by the time the s114 notice is issued it is probably too late to repair deteriorating finances. The Committee echoes calls from the Redmond Review and others to implement an intermediary ‘yellow card’ approach to force councils to confront the seriousness of financial problems facing them at a much earlier stage.

Comment

Alison Ring, director for public sector at ICAEW, commented: “The pandemic has exacerbated the already precarious state of local government finances and the local authority audit market. It is disappointing that many of the Select Committee’s recommendations remain unaddressed and repeat those of its predecessor committee.

“The model of local government funding in England has been broken for some time, with unresolved problems in nearly all major revenue streams including council tax, business rates, central government funding, and returns from commercial investments. We hope this report will help galvanise the government into action.”