Local government finance set for ‘transformation’

Direction finder: George Osborne has set the direction for local government finance

The Treasury has signalled that it will undertake a shake-up of local government finance as part of the forthcoming Spending Review, as councils face cuts of up to 40% in grant funding.

Chancellor George Osborne this week announced that it will publish the review, which will aim to find £20bn of savings across government, on 25 November.

He has ordered unprotected government departments, including the Department for Communities and Local Government, to draw up plans for two different scenarios – savings of both 25% and 40% to revenue spending.

The Treasury said: “As part of the Spending Review, the government will look at transforming the approach to local government financing and further decentralising power, in order to maximise efficiency, local economic growth and the integration of public services.”

Responding to the chancellor’s announcement, Gary Porter, chairman of the Local Government Association, said: “For many councils, there are few efficiencies left to be made and these alone will not be enough to cope with further funding reductions.

“Vital services, such as caring for the elderly, protecting children, collecting bins and filling potholes, will struggle to continue at current levels.

“If our public services are to survive the next few years, we urgently need a radical shift in how public money is raised and spent, combined with proper devolution of decision-making over transport, housing, skills and social care to local areas.”

He said that a 25% cut to local government revenue financing would mean a decrease of £4bn by 2020 while a 40% cut would see this rise to £7bn.

Chris Buss, director of finance at London Borough of Wandsworth said that a 40% cut to council grants would mean some tough decisions for councils.

“We have been making the assumption it would be a cut of between 25% to 30%. If it is 40% I will need a very sharp pencil.

“Some of the cuts will be mitigated by reductions in reserves, and some possibly by increasing council tax.”

Buss also said that plans announced by the Treasury to force councils to reduce rents for their tenants by 1% a year would also cause big problems for the council.

He said: “Over our 30 year business plan we will lose £800m on our HRA. We borrowed over a shorter period of time because there was a previous cast iron guarantee that rents would rise for the next 10 years. This means we are likely to go into deficit on the HRA between years eight and 13 of the plan.”

He said the plans for a cut in rent would mean that the council would probably have to reduce expenditure on building new homes.

The Treasury also announced that it will use the Spending Review to continue to devolve spending decicions away from central government.

“This will give local leaders more opportunity to drive efficiencies by bringing budgets and powers closer to the point of use,” it said.

“It will also improve outcomes through giving local people greater influence over how services are delivered.”

In addition, the review will “consider options to reform the markets that deliver public services to improve service quality and potentially deliver savings”.

It said that modernising regulations surrounding the delivery of and payment for services could encourage more providers into the market, increasing competition and reducing costs.

Photo (cropped): HM Treasury, Flickr