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SubscribeExceptional financial support for struggling councils “feels like something to get the existing government over the line to the next election” rather than being a sustainable solution.
Dan Bates, financial resilience director at consultancy LG Improve, expressed this view during a webinar on council tax and balance sheets at local authorities.
While the 19 authorities receiving exceptional financial support (EFS) are able to get significant additional borrowing at prevailing interest rates from the Public Works Loan Board (PWLB), they also face a penalty premium and must pay everything back over 20 years. This situation means there is “going to be a massive revenue hit to authorities that are already facing real revenue struggles”, according to Bates.
EFS will also make debt gearing, as a measure of capital health, “go through the roof”, he said. Financially struggling authorities are arguably not in the best position to take on extra debt, Bates added.
He also noted that at the eight authorities to have received EFS from the government and who have also published 2022/23 accounts so far, reserve levels were “plummeting”.
“Allowing these authorities to effectively use the credit card for everyday spending feels like an unsustainable position,” Bates stated. “At best, it’s a bit careless or maybe even reckless, but it is certainly kicking the can down the road.
“They’re not in a position to be able to sustain the need to borrow or sell off assets without some massive implications for revenue.”
Funding and financial health
The LG Improve webinar explored how reductions in funding and unfair distributions of funding over the last 15 years have played a significant role in pushing local government finances to “breaking point”. Bates assessed recently published council tax and business rates data to demonstrate how changes in funding have impacted authorities.
The fact that “virtually every council maxed out” their council tax increase in 2024/25 alone is “a clear indicator of problems with financial stress in the sector”, Bates said.
Council tax is, by some distance, the largest element of core spending power for local authorities, and this is set to increase next year.
LG Improve’s analysis showed a correlation between core spending power growth and council tax income growth, with a huge level of discrepancy between councils. Authorities tend to be better funded where they have a high band D and/or high council tax base per head; have seen significant increases in band D and/or council tax base per head; or have low and/or decreasing levels of council tax support.
“Gains are unevenly distributed across all councils with many authorities doing well out of both tax and rates base growth while others are seeing very little growth,” he said.
This led Bates to argue that council tax “is a regressive system both for the taxpayer and the local authority” with nothing on the horizon to “correct” the situation, aside from a general election.
“It’s hard to work out how to settle this,” he added, before noting the problems with the government’s current solution of exceptional financial support.
Bates did outline possible methods of making funding fairer, while noting that increased government funding was “unlikely” and a reinstatement of the funding formula to measure needs was at least two years away.
In the meantime, his suggested methods included a reinstatement of resources block adjustment to compensate authorities with low tax base growth; allowing authorities with lower band Ds to “catch up”; compensating authorities which have lost out because of higher and/or increasing levels of council tax support; and resetting business rates and redistributing them in “a fairer manner”.
Bates concluded that “there is clearly a link between deteriorating local government financial health and the funding system”. He added: “At a high level, it is possible to draw some conclusions that show that those that have done badly from funding are struggling more than average. The lack of fair funding has certainly exacerbated [overall financial pressures on local authorities] and will continue to do so until some fair funding reset is implemented.”
Declining reserves
Local authority attendees of the LG Improve webinar were asked about their general fund usable revenue reserves position in 2023/24, with 62% of poll respondents (out of 70 responses) stating it would decrease. Some 15% said the position would remain roughly the same, with just 10% stating it would increase.
Based on the results of the poll, Bates said the sector was “going to be looking at another really tough year” with some authorities only able to sustain the trend of declining reserves “for another year”.
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