Aileen Murphie: The state of local government funding pressures

Since 2010 local authorities have been dealing with reduced funding and rising demand for key services. Aileen Murphie discusses the current state of councils’ financial sustainability in England.

Local authority services touch all of us and influence what we see as soon as we step out of the door. Demand is rising and other pressures have made them more costly to deliver. Yet, in England, these services are currently delivered with half the level of central government funding, than in 2010. So, how have councils managed with less money and more demand? We set out to answer this question in our recent report, Financial sustainability of local authorities (March 2018).

What’s the size of the financial challenge?

Government funding to local authorities has fallen by 49.1% from 2010–11 to 2017–18. If council tax is included, as in the government’s measure of spending power, then the real terms fall from 2010–11 to 2017–18 is 28.6%. Cost pressures have increased: increased employer national insurance contributions, the new apprenticeship levy and the National Living Wage.

While funding has fallen, demand for services has increased. The total population grew by 5% between 2010–11 and 2016–17. But growth in key groups that use local authority services is even more marked:

• Households accepted as homeless grew by 33.9%.
• The number of looked after children grew by 10.9%.

Authorities pointed out to us that the pace of growth in demand for children’s social care has accelerated and the reasons behind this are not clear. There is rising demand for services for children with special educational needs or disabilities too.

Savings strategies

Up to 2013–14, authorities overall reduced their service spending by more than their funding reductions. This allowed authorities to increase their contributions to reserves.

Then in the three years after 2013–14, reductions in service spending made up less than half of the savings needed to match funding reductions. There is a clear shift in the strategies used at sector level, pivoting around 2013–14.

Since then, authorities have offset funding reductions by reducing other spending, reducing contributions to reserves or drawing them down, and increasing alternative income like commercial trading profits or external interest payments.

Changes to services

Authorities we visited were clear that they had protected front-line services through efficiencies and service redesign, as well as cutting management and support costs by 25.7%. This particularly applied to adults and children’s social care services, where spending had reduced by 3% in real terms between 2010–11 and 2016–17. In contrast, spending on other services had fallen by 32.6%.

There are wide variations in spending reductions between service areas. Services with particularly large reductions include:

• A 65.5% reduction in spending on youth services.
• A 52.8% reduction in planning and development services.
• A 51.1% fall in spending on community safety.

Financial pressure

The data suggest that the greatest financial risks appear to lie currently with authorities with social care responsibilities (single tier and county councils).

As a whole these councils have experienced increasing service overspends since 2014–15, driven by social care and amounting to over a billion pounds in 2016–17.

By 2016–17, more than 80% of social care authorities had overspends in children’s social care, whether their budgeted spend for that service was rising or not.

These overspends have come alongside more authorities needing to draw on their reserves: 66.2% of single tier and county councils in 2016–17. Plus, their use of reserves is more often unplanned (that is: taking place in-year, and not set out in their budget), suggesting a struggle to implement savings plans or manage costs in-year.

Delivering savings in social care is more challenging than in other areas, and social care spending now makes up 54.4% of overall service spend across the sector.

And savings from debt repayment provisions or reductions in capital spend cannot be repeated indefinitely.

At a finer-grained level some authorities have built up their reserves less than others and are drawing them down faster. Some 10.6% of single-tier and county councils have less than three years’ worth of total reserves left if they continued to use their reserves at the rate they did in 2016–17.

Ultimately, a financial model based on dwindling reserves and difficulties in delivering savings, or use of non-recurrent savings is not financially sustainable over the medium term.

MHCLG

The Ministry for Housing, Communities and Local Government is responsible within government for the financial framework for local government, taking the lead on assessing funding requirements and supporting the financial sustainability of the sector. Clearly there are a range of important issues to grapple with in the run-up to the next Spending Review in 2019, especially if they are to avoid local government being pushed towards a narrow remit centred on social care.

Aileen Murphie is a director at the National Audit Office.

For the NAO report, Financial Sustainability of Local Authorities, click here.