Reserve cap plans face criticism

Local government figures have criticised plans reported to be under discussion in government to place a cap on the level of council reserves.

The Daily Telegraph this week reported that the plan is under consideration by Treasury officials as part of discussions relating to the government’s forthcoming spending review.

Government figures released earlier this year show that council reserves stood at £21.4bn at the end of the last financial year – up from £14.3bn in 2010-11.

But Richard Harbord, former chief executive of Boston Borough Council, said that idea of a centrally-imposed cap would increase financial risk for councils.

He told Room151: “It is true that reserves have risen but a recent survey by the Chartered Institute of Public Finance and Accountancy shows that only 15% are actually free balances and the rest are all reserved against some uncertainty. There are only £3.7bn general reserves in total in authorities .

“The amount of these reserves should be a local decision taken by the elected members when setting a robust and balanced budget.

“It is not something that central government can take a view on as the reserves must reflect the local position.”

Harbord said that it would be “clearly wrong” if councils didn’t provide for difficulties caused by increased risk and uncertainty in the system caused by grant cuts from central government.

He added that uncertainties had been increased because of the backlog of outstanding business rate appeals.

He said: “The current position on the successful appeals of EDF on power stations has underlined how volatile the new system can be.

“Clearly in setting a balanced budget the estimate of business rates collectible is key and most authorities will have set up some kind of reserve for appeal outcomes.”

LGA chairman Gary Porter said: “We need the decisions in the spending review to be guided by the fundamental principle that local people will know best how to spend money on services in their area.”

A Treasury spokesperson played down the possibility of a reserve cap happening soon, but told the Telegraph that councils’ “large reserves” must be looked at.

The paper reported that The Treasury has not ruled out the possibility using legislation forcing local authorities to use their reserves in future.

Chancellor George Osborne has instructed non-protected departments, including the Department for Communities and Local Government, to prepare for budget cuts of up to 40% as part of the spending review.