Second Report - Local authority financial sustainability and the section 114 regime

The failure to properly fund children’s and adult social care, especially adult social care, is the single biggest threat facing local government financial resilience. Given that the cost of providing social care consumes between 60% and 70% of the budgets … Read more The failure to properly fund children’s and adult social care, especially adult social care, is the single biggest threat facing local government financial resilience. Given that the cost of providing social care consumes between 60% and 70% of the budgets of top-tier councils, a solution to this funding crisis alone could largely restore local government finances. The Government’s current policy of effectively forcing local councils to impose successive above-inflation council tax rises is imposing additional burdens on council tax payers. It is disappointing that the recent Queen’s Speech made so little mention of plans to reform social care funding. We are also concerned about the cuts to more discretionary services arising from councils’ need to prioritise social care provision. We recommend that the Government urgently reform the funding of social care in England. (Paragraph 13) Funding Show less

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We recommend that the Government implement the Fair Funding Review and business rates reset as soon as possible, as the quickest way of partly restoring the link between funding and need. The Government should also allow councils to retain 75% … Read more We recommend that the Government implement the Fair Funding Review and business rates reset as soon as possible, as the quickest way of partly restoring the link between funding and need. The Government should also allow councils to retain 75% of business rates from 2022, but so that this represents a net increase in funding, we urge it not to impose commensurate cuts to grant funding. The additional funding should then be put towards equalisation in a separate grant designed for this purpose. We also urge the Government to clarify what level of funding equalisation it considers to be appropriate for local government. (Paragraph 26) 40 Local authority financial sustainability and the section 114 regime Show less

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The Government should reform council tax by undertaking a revaluation of properties and introducing additional council tax bands, in line with the recommendations of our predecessor Committee. In the longer term, the Government should consider options for wider reform of … Read more The Government should reform council tax by undertaking a revaluation of properties and introducing additional council tax bands, in line with the recommendations of our predecessor Committee. In the longer term, the Government should consider options for wider reform of council tax and business rates, including possibly replacing them with a proportional property tax. Show less

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We recommend that the Government widen the funding base of local government to make it less vulnerable to shocks such as the covid-19 pandemic, including by giving councils more flexibility over local taxes and other revenue-raising powers. This would also … Read more We recommend that the Government widen the funding base of local government to make it less vulnerable to shocks such as the covid-19 pandemic, including by giving councils more flexibility over local taxes and other revenue-raising powers. This would also align with giving local authorities more powers over spending, which we will consider in our future report on devolution in England. Giving local government more powers to raise and spend money is a position supported by our predecessor Committee. We also recommend that the Government reform business rates, in particular by finding a mechanism by which to level the playing field between bricks- and-mortar and online retailers. This is an issue we will return to in our upcoming report on supporting high streets after covid-19. Show less

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The next financial settlement for local government must be a multi-year settlement. The Government should also consolidate the number of small and ring-fenced grants, which can limit local authorities’ ability to provide services flexibly, and should reduce the number of … Read more The next financial settlement for local government must be a multi-year settlement. The Government should also consolidate the number of small and ring-fenced grants, which can limit local authorities’ ability to provide services flexibly, and should reduce the number of bidding processes, which can be burdensome and time consuming. (Paragraph 44) Covid-19 Show less

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We urge the Government to consider ways of mitigating the uneven financial support across local authorities and provide greater certainty to councils over what future costs incurred as a result of the pandemic it intends to cover. (Paragraph 55) Local … Read more We urge the Government to consider ways of mitigating the uneven financial support across local authorities and provide greater certainty to councils over what future costs incurred as a result of the pandemic it intends to cover. (Paragraph 55) Local authority commercial investment Show less

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We recommend that the Government legislate to make compliance with the prudential code by local authorities a statutory duty. The Government should also make good on its commitment to improving the data it collects on local authority commercial investment. (Paragraph … Read more We recommend that the Government legislate to make compliance with the prudential code by local authorities a statutory duty. The Government should also make good on its commitment to improving the data it collects on local authority commercial investment. (Paragraph 72) Audit and control Show less

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We recommend the Government remove the ability of local authorities to choose their own auditors. The risk is that auditors will be reluctant to flag up potential problems for fear of losing their contract. The Government should consider who will … Read more We recommend the Government remove the ability of local authorities to choose their own auditors. The risk is that auditors will be reluctant to flag up potential problems for fear of losing their contract. The Government should consider who will be best placed to appoint local authority auditors, given that it should not be local authorities themselves, and ARGA doing so could lead to a conflict of interest. We also ask the Government to confirm that the new system leader will be able to join up individual auditor findings with a view to identifying systemic issues across local government. Without a central body responsible for oversight of the sector, we see no way of ensuring a robust and transparent regime of local audit. Show less

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We recommend that the Government consider changing the section 114 regime to provide Chief Finance Officers with intermediary measures that can be applied at a much earlier stage to highlight concerns before a council’s finances deteriorate so far as to … Read more We recommend that the Government consider changing the section 114 regime to provide Chief Finance Officers with intermediary measures that can be applied at a much earlier stage to highlight concerns before a council’s finances deteriorate so far as to require a section 114 notice. We also recommend that Chief Finance Officers report to both the Executive and appropriate scrutiny committees on a quarterly basis on the state of local authority finances and, in particular, draw attention to potential serious financial problems. (Paragraph 90) Local authority financial sustainability and the section 114 regime 43 Show less

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We agree with the principle of incentivising councils to grow business rates in their area, as a means of making them less reliant on central funding, but we are concerned about the impact on councils that, through no fault of their own, are less able to do this. As our …

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The question of the BRRS is closely related to the debate about the longstanding role of equalisation in how local government in England is funded. Whilst the purpose of equalisation is to ensure fairness between councils, there is little agreement on the appropriate level: 100% equalisation would provide local authorities …

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We are pleased that the allocation of the £300 million grant for social care mitigates the distributional impact of the council tax rises, but we do not think the fairness of the funding model should be reliant on one-off, short-term grants. It is right that certain councils be compensated for …

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The funding base of local government in England is very narrow. As the pandemic has highlighted, revenue derived from council tax and business rates is also insecure. As concluded by our predecessor Committee, greater fiscal autonomy could contribute to local government financial resilience.

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We understand the Government’s reasons for resorting to a one-year spending review last year, but we note it followed a one-year spending review in 2019 and that the last multi-year spending review came in 2015. Local government cannot manage its spending and borrowing without the medium-term certainty that multi-year funding …

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The proliferation in recent years of small, often one-off and ring-fenced grants, sometimes involving a competitive bidding process, and the uncertainty around such funding, can hinder robust financial planning and management by local authorities, as has been acknowledged by the Public Accounts Committee. Ring- fenced grants also limit councils’ flexibility …

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The Government deserves credit for having responded to an unprecedented crisis with significant emergency funding that, from a national perspective, broadly covers all the additional financial pressures consequent on the pandemic and lockdowns in 2021–22. The effects of the pandemic will be felt for many years, however, and we are …

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Commercial investment appears to pose no clear threat to local government financial resilience overall, and where it has contributed to financial instability, the councils concerned must bear ultimate responsibility. We also welcome the Government’s reforms to the PWLB’s lending terms, which are a useful clarification of the purposes for which …

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Furthermore, whilst we welcome the Minister’s commitment to gathering the best quality data to better understand councils’ exposure to commercial investment, we think this should have been done by now. We are also concerned about the lack of a statutory requirement on local councils to comply with the prudential code.

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As highlighted in Sir Tony Redmond’s independent review of local authority audit, the local audit market is deeply flawed. We are particularly concerned about the shortage of specialist local auditors, about the principle of allowing local councils 42 Local authority financial sustainability and the section 114 regime to choose their …

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The absence of section 114 notices before 2018 is adduced as evidence that the regime has been broadly successful. The consequences for a council of issuing a notice are serious, however, and we are concerned that, rather than concentrating minds, the regime might be hindering good financial management, as it …

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