Financial sustainability of local authorities Presentation to Budget & Finance Scrutiny Select Committee 13 March 2013

Contents Introduction Findings Recommendations Criticism of report methodology Response to report findings

Introduction Report “Financial sustainability of local authorities” National Audit Office (NAO) Methodology Survey of all local authorities Analysis of published data Semi-structured interviews: o 27 central government staff o 8 LG finance directors o 5 bodies representing LG treasurers

Findings 1 So far local authorities have absorbed reductions in central government funding but there is some evidence that services have been reduced. Local authorities still need to find about half of the savings to be made before March 2015 and may find it harder to absorb funding reductions and maintain services. Most of the local authorities who responded to the NAO survey expected to make the largest savings through efficiency improvements. However, nearly all saw service reductions as contributing to their savings requirements. The majority of local authorities have so far not drawn on financial reserves to make up for reduced income.

Findings 2 While changes to the local government funding regime (around business rates and council tax support) may create financial opportunities for local authorities, they also create financial risks and uncertainty. And while individual government departments assessed the impact of the changes being made, their approach was not comprehensive. With a range of changes to local government funding being implemented over the spending review period, the NAO believe that it is increasingly important to understand the cumulative effect of the changes as these may affect local authorities differently. How the accountability framework for local government responds to multiple financial failures during more challenging times for local authorities is at present untested.

Recommendations CLG should: work with other departments to understand the information needed to support decisions affecting local authority finances and services; ensure that decisions on financing local authorities are made with an assessment of their service obligations, including statutory obligations; satisfy itself that the assurances provided by the accountability framework are robust enough for the more challenging financial and service delivery conditions facing local authorities.

Criticism of report methodology Too narrow in scope. It ignored: education funding and DSG public health interactions between other funding systems (eg welfare benefits) and local government HRA reform New homes bonus No detailed fieldwork at individual councils through “lack of statutory powers”

Response to report findings 1 Margaret Hodge, PAC chair: “potentially disastrous consequences” [on the finding that 12% of councils were at risk of being unable to balance their books in future] “extraordinary” [on the government’s “lack of transparency” on the total reduction of local authority income] CLG must make clear what it will do if councils fail financially CLG must provide a clear statement on what funding changes mean for local services Local Government Chronicle “real jaw-dropper” [on the finding that poor modelling at DfE meant CLG went into 2010 CSR thinking that cost pressures in children’s services were no greater than inflation]

Response to report findings 2 CIPFA Government needs to “up its game” in evaluating the local impact of national decisions o Move responsibility for LG finance from CLG to HMTreasury o Provide some legal rigour and discipline to the LG settlement process so that it is more timely and accurate o Assumptions should be responsibility of OBR, and be given greater transparency and scrutiny o NAO should review LG funding biannually and report to an ad-hoc parliamentary committee o Independent review of CSR framework to provide a more stable, rigorous and transparent decision-making process

Useful links LGiU member briefing o National Audit Office - Financial sustainability of local authorities.pdf National Audit Office - Financial sustainability of local authorities.pdf Source reports o National Audit Office report - “Financial sustainability of local authorities”“Financial sustainability of local authorities” o Audit Commission report - “Tough Times 2012” (November 2012)“Tough Times 2012” o CLG - Accountability System StatementAccountability System Statement