Councils strengthen reserves despite funding cuts says Audit Commission

Research from the Audit Commission has found that, despite funding cuts, “a great majority” of councils have been increasing their reserves.

Councils facing the most cuts in central government funding increased reserves by the equivalent of on average 1.7% of their revenue spending in 2011/12. Those facing medium government cuts increased reserves by 2.6% on average and councils facing low cuts increased reserves by an average of 3.7%.

In its report released today Tough Times 2012: Councils’ financial health in challenging times, the Commission gives three main possible explanations for the increases:

• Effectiveness in delivering savings plans has led to reduced need to draw on reserves and even in some cases underspends being added to reserves

• Some councils received extra in-year funding which may initially have been added to reserves

• Councils are putting more money aside to cope with increasing uncertainty. (The Office for Budget Responsibility said recently that it expected the high rate of savings by councils was: ‘because local authorities are front-loading spending review savings and are putting more money aside because of uncertainty around the effects of forthcoming changes to business rates and council tax benefit and about their funding in the next spending review’.)

Nonetheless, councils that experienced greater pressure in 2011/12 were more likely to draw on reserves. Thirty percent of single tier and county councils in the highest cuts group drew on their reserves, compared to 22% of those in the medium group and 15% in the lowest.

In general, more than one in ten councils are not well placed for 2012/13 or for the remainder of their medium term plans according to auditors.

A further 25% of councils were found to represent a future risk as they will deliver on their 2012/13 budget but are not in a good financial position for the remainder of their medium term financial plan.

Councils expect £1.6 billion less from central government in real terms in 2012/13, a reduction of 6% on 2011/12. Budgets showed a 10.9% fall in government income for 2011/12 compared to 2010/11.

The report also found that councils with the largest falls in government funding in 2012/13 often had the biggest reductions the year before, creating large cumulative differences between councils.

Metropolitan district councils were worst affected, with average two-year cuts equal to 12.4% of their 2010/11 revenue spending, compared to only 5% in county councils. Councils in the most deprived areas were most affected in both years but still received more funding per resident than in less deprived areas.

CIPFA chief executive, Steve Freer, said that Government should: “reflect very carefully on the message from this analysis that deprived communities are bearing a disproportionate share of the pain.” Significant funding reductions alongside a strengthening of reserves was still a positive, he added.

The Audit Commission reported that adult and childrens’ social care saw the lowest average cuts in spending, but that budgets for 2012/13 show adult social care to be no longer protected from major funding cuts.

Sir Merrick Cockell, chair of the Local Government Association, said: “Cuts on a similar scale beyond 2015 will put councils in an invidious position, reducing their ability to deliver core services and undermining the vital role they play in supporting local businesses and fostering economic growth.”