Nailing down medium term financial strategies

As councils look towards finalising budgets for 2017/2018, Thomas Foster argues that now is the time for local authorities to take stock of what key areas they need to be considering for the financial year ahead.

The chancellor’s autumn statement was notable for its lack of focus on local government finances.

For some, this came as a surprise given the challenges faced by local authorities, while others were relieved that there was no indication that budgets would be tightened further.

The outcry following the announcement has focused on the lack of additional funding for social care services, with many suggesting a shortage of funding will have serious consequences for healthcare services.

Instead, the chancellor chose to focus on how to get the economy growing despite the potentially negative impact of Brexit, with welcome measures aimed at increasing house building.

Without additional funding, and the removal of the revenue support grant by 2020, councils will likely need to focus on mitigating any risks of an economic downturn, rather than looking at how to boost economic growth beyond current levels. This means there is little chance of relief from the intensifying financial pressure on local government.

On the horizon

So, given this backdrop, what do councils need to be considering in the year ahead?

For the second year in a row, the government will offer multi-year financial settlements to those councils which publish their financial efficiency plans.

While the measure is expected to provide a greater degree of financial certainty, it is designed to ensure councils are more confident about managing their financial risk, and potentially release reserves set aside for this purpose.

While many councils have recognised the advantage of these plans, a review of those published to date demonstrates that many of these are very strategic and narrative based.

Councils should consider whether they have used this opportunity to prepare genuinely robust multi-year budgets and detailed savings plans, to support their medium term financial strategies (MTFS).

Increasing numbers of councils are considering the merits of outcomes based budgeting. The concept here is to set clear priorities for services with measurable outcomes, and then focus the councils’ financial resources on these areas.

Progress against outcomes is then measured over the year to ensure that resources are being used effectively. Following this review the necessary action will be taken, for example redeploying resources where necessary to help achieve the outcomes.

If done properly, it will help the council to identify areas that are not working or that are no longer a priority. The challenge is to find reliable data on outcomes that can be directly reconciled to the financial inputs. This takes work, but data sources are emerging in the market and it is likely to become a valuable tool for financial planning in the future.

For a number of years, councils have reiterated that the top slicing of budgets has reached its logical limit, and so future savings will have to come from transforming services.

Yet many councils are still looking at reducing support services or service budgets in the short term, with transformation often featuring in the latter years of the MTFS.

However, since the transformation plans will often be wide-ranging and will require radical changes to traditional models, councils need to consider starting this process sooner rather than later.

Alternatives

Councils are increasingly looking to income generation as an alternative to savings, and many have been successful with their commercial models.

However, in order to manage the significant risks involved, councils must put in place strong governance arrangements.

This is also essential to ensure that commercial income growth targets within the MTFS are realistic and founded on reliable data about the commercial market they are operating in, as well as the competition they face from other local authorities and the private sector.

Many of the MTFS written by councils are already dependent, to some degree, on assumptions around efficiency savings through the sharing of services or management in some form.

However, as increasing numbers of shared service arrangements reach a mature stage of development, most remain small scale and with a limited scope of services, restricting their potential for further efficiency.

In some cases, the complexity of different shared arrangements that have evolved might actually present a barrier to organisational transformation and hence further improvement. In either case, the time is right to evaluate these arrangements and consider whether change is necessary.

Finally, perhaps the most significant area for local government finances in the longer term is also the one that is proving most difficult for councils to come to terms with – the broad field of public sector reorganisation.

It is fair to say that regional devolution and efforts to reorganise in two tier areas has seen slow progress and is becoming increasingly mired in local political disputes.

We must not lose sight of the fact that securing the future financial viability of local government is a key driver, if not the key driver, of the reorganisation agenda.

While this goes on, local government cannot make the changes required to deliver the services that local people need on a financially sustainable basis.

The government needs to make sure that it provides strong support and direction to help overcome these issues over the next few years, regardless of other distractions.

For its part, local government must plan accordingly for the short-term, ensure it can push through necessary transformation plans in the medium-term, and consider how it can help not hinder local government reorganisation to ensure a stable future in the long-term.

Thomas Foster, senior manager, local government advisory, Grant Thornton UK.