Is it time for the Treasury to take charge of local government funding from DCLG?

Next week the Public Accounts Committee will be taking evidence on the recently published NAO report on local authority funding and financial sustainability (“Financial sustainability of local authorities”). Those hoping for Eric Pickles to be held personally accountable will be disappointed as the convention is that this honour goes to Sir Bob Kerslake, Accounting Officer and Permanent Secretary at the Department of Communities and Local Government.

Overall the report is a bit of a disappointment in failing to provide a definitive and in-depth picture. It is focused upon the DCLG and formula grant with the NAO choosing not to go anyway near other funding streams such as education and public health.  While the interactions between different funding systems and local government such as the benefits system and its impact on housing and the NHS and its interrelationship with social services, are ignored.

So while the report sketches out a picture of increasing financial risk and uncertainty for local authorities what is presented is partial and adds very little to the Audit Commission’s November 2012 report “Tough Times” which found that twelve per cent of local authorities are at risk of being unable to balance their books.

Nonetheless the PAC will still have some fun as the local government finance directorate at DCLG is a gift that just keeps giving. Settlements announcements are getting later and later, often incomplete of key details, frequently with hidden surprises. This time around it was covert cuts to the early intervention funds as they were rolled into the new ‘start-up funding assessments’ (under the business rates retention system). More recently funding offers under the new ‘sparsity fund’ were withdrawn or significantly cut (while others have gained) when errors were found in the original announcement; and this is for a pot of money which is being used as a sticking plaster to aid a discredited formula assessment.

Now the NAO basically tells us, what many had suspected, that Whitehall knows little about what cuts are being made where, and to what effect. While Dan Drillsma-Milgrom, the (acting) editor of the Local Government Chronicle, sees “the real jaw-dropper in the report” is the finding that, due to a lack of proper modelling by the Department for Education, DCLG went into the 2010 spending review believing that cost pressures in children’s services would be no greater than inflation. Dan says that “this is a pretty stunning finding and helps to explain the anger coming from council chiefs at the ratcheting up of expectations on children’s services by the DfE and Ofsted at a time of swingeing council cuts”.

The NAO also found that departments did not consider the demand for, or cost of, services and therefore how far individual local authorities could make the estimated savings. They also didn’t consider regional variations or local authorities’ statutory obligations.

Spending reviews (under this and the previous Government) are very messy affairs. They are ill prepared for, and do not provide for solid decision making as in reality they are like playing a game of poker in the back of a car being driven by a teenage joy driver. The 2010 spending review was a pretty intense affair, not only given what was at stake (given the size of the cuts to be made) but also because of the foreshortened timescales involved. This piece of the machinery of government is in need of repair.

This will not be the first time the PAC has looked at this territory; their November 2011 report on formula funding concluded that it “is virtually impossible to follow the line between calculated needs and funding allocations”, while their April 2012 report on the accountability for public money found the accountability statements, Whitehall’s key means for to account for its funding of local bodies and which were, subsequently found to be untested by the NAO, as “unwieldy” and lacking “coherence and clarity”.

We can expect the PAC to return to those issues while also calling upon the government to provide greater transparency over the true extent of the cuts awaiting local communities given for example given the lower council tax receipts and higher inflation than the Government initially thought at the time of the last spending. They will also press Sir Bob Kerslake about his arrangements for dealing with the risk of multiple financial failures in the sector and the risks being transferred to individual local authorities as a result of localising council tax support and the business retention scheme which will be central to the funding of local authorities from April. All issues raised by the NAO.

So how do we move forward? Steve Freer, CIPFA’s Chief Executive is close to the answer when he says that the challenge to Government is “to up its game in evaluating the local impact of national decisions”, emphasing that “without more effective analysis and modelling there is a danger that funding reductions are made on a ‘hit and hope’ basis and that potentially dire implications for local communities and service users are not understood until the damage is done”.

In practical terms the answer lies in and around:

  • Moving responsibility, including the accounting officer role, for local government finance from the Department for Communities and Local Government to HM Treasury; thereby placing central government funding of local authorities at the heart of the wider spending review framework and the annual autumn statements rather being than decided upon as an afterthought.
  • Providing some legal rigour and discipline to the annual local government settlement process so that it is delivered to a reasonable timetable and is accurate. Getting rid of the arms-length relationship between the Treasury and DCLG will help. But the Government should go further so for instance the draft settlement is announced in parallel with the autumn statement in November each year.
  • All assumptions made on local authority funding, and including the rigour of the formula and new funding assessment, should be brought under the auspices of the Office of Budget Responsibility backed up greater parliamentary and public scrutiny.
  • The overall local government funding framework (including formula grant, business rates retention scheme, specific grants) and demands on local government services should be the subjected to biannual reviews conducted by the National Audit Office and scrutinised by an ad-hoc parliamentary committee (with members drawn from select committees on public accounts, health, education, communities and local government and others).
  • And finally there needs to be some reflection on the current spending review framework to provide a more stable, rigorous and transparent decision making process. In the first instance, a body such as the Institute for Government should be invited to undertake an independent review of past practices, practices overseas, and to make recommendations.

This post is written by Mark Upton, Consultant at Public Policy Strategies ( and LGIU Associate, and is based on his Local Government Information Unit member briefing on the NAO report “Financial sustainability of local authorities”.


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