What the local government finance settlement means for council budget

Local government finance enters the new year on a knife edge.

Local government finance enters the new year on a knife edge

Councils are well-used to this government’s habit of announcing a delayed Local Government Finance Settlement in the final hours parliament sits before rising for Christmas.

Now that their funding is confirmed for 2015/16 (subject to parliamentary approval), finance officers in councils across the country have just over a month to finalise budgets before councillors vote on them in February ahead of the new financial year.

This unsatisfactory approach imposed from Westminster creates uncertainty for council budgeting, prevents the long term planning that is necessary for local service collaboration and undermines councils’ ability to consult residents properly.

On the detail of the local government finance settlement, the top line is of course that local authority budgets have been cut for the fifth consecutive year. The impact of this is masked by the methodology used by the government.

They have created their own definition of ‘spending power’ which they use when announcing budget cuts to councils – this enables them to claim councils are facing reductions of 1.8 per cent next year.

The figure is based on a complex calculation to work out how much money councils will have next year, including income from council tax. This paints a misleading picture as the calculation includes money given to councils for a specific purpose such as public health and joint work with the NHS on adult social care.

This funding is linked to new responsibilities and cannot be spent on other services.The LGA calculates a more accurate figure which accounts for the impact the settlement will have on councils’ non-ringfenced budgets: core funding to local authorities will be reduced by 8.8 per cent for 2015-16.

This means that from April next year a further £2.6 billion will need to be taken out of council budgets. It takes the total amount by which councils have had their funding cut since 2010 to 40 per cent: councils will have had to find savings of £20 billion in this period.

The impact of these cuts has been greater in areas which through factors such as a lower council tax yield from lower property values and greater demand for services, grant funding forms a higher overall proportion of their income.

A council tax freeze grant equivalent to a one per cent council tax increase will again be offered to councils. Since this is more or less the same as the current rate of inflation, in real terms this will have a minimal impact on available finances required even to maintain provision at current levels.

Also, this is something of a regressive allocation since it pays more to areas that have a stronger council tax base from higher property values.

The threatened one per cent council tax referendum threshold did not materialise, apparently following internal opposition to Pickles’ proposal. The threshold is instead still set at two per cent, meaning that any council proposing an increase in council tax of two per cent or more must hold a referendum.

Any centrally imposed limit is contrary to the principles of localism, when all other taxes are judged to fall within the mandate of the elected government.

Nationally set taxes such as VAT and business rates have a much greater impact on people’s income than council tax, and the public was not directly consulted over increases in both under this government (or indeed the cut to the top rate of income tax which affects available public investment).

The government didn’t miss an opportunity to include an attack on council reserves which have increased by £2.2 billion and now stand at £21.4 billion. This figure is again misleading as it includes reserves allocated to longer term projects to improve services and save money.

But the principle of maintaining reserves should not be lost. With a bleak funding outlook in future years, demand pressures on local services such as adult social care growing and many ‘known unknowns’ for council finances such as the impact of welfare reforms, it is only fiscally prudent for councils to put money aside for the future.

Councils have a legal requirement to balance their books year on year (unlike the national government which is allowed to run a huge deficit), so reserves are a vital buffer.

Finally, in spite of committed campaigning by councils and charities against proposed plans to cut local welfare assistance for the most vulnerable, the settlement announced no additional funding.

Instead the government has identified £130 million from within the core grant, which effectively represents a further cut that will put additional pressure on council services already facing significant challenges in getting support needed to the most vulnerable.

So the combined impact of cuts to their funding from central government and continued restrictions on the ability to raise revenue independently means that local government is increasingly running out of options.

Local government finance enters the new year on a knife edge – efficiencies and back office savings from year-on-year salami slicing budgets will not yield the degree of savings required in the future.

The next parliament will have to consider radical reform of the way public services are resourced around people and places rather than continued alignment to departmental silos – if vital public services funded by ever diminishing resources are to deliver impact for the people who rely on them.

Jessica Studdert is a political adviser to the LGA Labour Group. Follow her on Twitter

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