Local government is now half way through a period of significant funding reductions. Central government grant funding to local authorities is being cut by over a quarter in real terms (£7.6 billion) between 2011 and 2015. At the same time the Department for Communities and Local Government (the Department), is introducing fundamental changes to the local government finance system with reforms to business rates and council tax benefits. To date, councils have, as a whole, managed to cope, but with reductions likely to continue for several years, the pressures on the sector are set to increase.
The Department does not properly understand the overall impact on local services that will result from the funding reductions. In some instances it cannot provide assurances that money voted by Parliament for a particular purpose has in fact been used to fulfil that purpose. For key local service areas the Department did not do enough work with other government departments to model how funding changes may adversely affect other areas of the public sector, for example cuts in local authority adult social care could lead to bed blocking in hospitals. Some departments that provide funding to local authorities modelled the likely effects of funding changes before carrying them out, but the modelling was inadequate and must be improved in time for the next Spending Review. None of the Spending Review submissions scrutinised by the National Audit Office analysed how the funding changes would affect different types of local authority.
So far, the highest reductions in terms of spending power have tended to be for councils that depend most on government grant, where needs for local services tend to be greatest. New reforms to the funding systemallowing councils to retain a portion of Business Rates income they raise locallywill reward councils who enjoy growth in Business Rates income, but will also remove resources from those which experience a relative decline. It will become increasingly important for the Department to improve its ability to foresee what effects the full package of funding reductions and reforms will have on local authority areas, particularly for those authorities which face higher deprivation levels.
Local authorities' funding continues to be cut yet the number of statutory duties they have has stayed the same, and in some areas, such as adult social care, the demand for services is increasing. If these trends continue there is a risk that the worst-affected councils will be unable to meet their statutory obligations, and that serious questions will arise about the viability of some councils. The Local Government Association has already deemed one district council as being unviable, but the Department does not have a clear strategy for responding to and dealing with such failures. The Department urgently needs to engage with other government departments and the local government sector on what the financial pressures mean for the future shape of local authority services. It must also overhaul its accountability arrangements and in particular clarify its plans to respond if councils become unviable.
While the Department collects a significant amount of data from local government, it has not focused enough on what information is needed to understand councils' spending and performance. The Department did not make clear how it will monitor councils' ability to cope with funding changes, or the extent to which they are able to do this by increasing efficiency rather than reducing services. Neither has it demonstrated that the information published is sufficient to provide assurance on the value for money with which councils spend their resources. It was not acceptable for us to learn that nobody is responsible for providing Parliament with information on either severance payments or the use of personal service companies by local authorities.
On the basis of a Report by the Comptroller and Auditor General, we took evidence on the financial sustainability of local authorities from the Local Government Association (LGA) and Professor Tony Travers of the London School of Economics, and from the Department for Communities and Local Government.