LGA - ‘Fast track to financial failure' – Councils warn against using reserves to plug funding gaps

15 Sep 2015 10:26 AM

Council reserves would be fully spent in less than three years if local authorities used them to plug expected reductions in government funding, new analysis shows.

With public spending expected to continue falling until 2020, analysis by the Local Government Association shows that if councils used reserves to cover projected funding cuts, all of the money would be spent by 2018.

Such a move would leave councils with no funds to make vital investments or manage new financial risks. It would also increase the national deficit.

The LGA forecasts that the cumulative gap between projected funding and expenditure for English local government will reach £17.9 billion by 2018/19. Latest figures show that, at 31 March 2015, councils held £17.1 billion in reserves.

A recent LGA survey of council finance directors reveals much of this money is set aside for longer-term investments. These include job-creating regeneration schemes, creating school places, restructuring programmes to save money and redundancy payments.

As part of its Spending Review submission to the Treasury, the LGA, which represents councils in England and Wales, said longer-term funding settlements would allow councils to plan ahead and release some of their risk-based reserves to fund services.

At present, settlements often span less than three years and arrive very late making it difficult for councils to plan ahead.

Cllr Claire Kober, LGA finance spokesman, said:

"Reserves are designed to help councils manage growing financial risks to local services. Most of this money is essentially a growth fund which councils are using to build new roads and regenerate areas or pay for school places and superfast broadband. What's left would only cover less than a month's spending.

"The size of cuts councils are having to make are simply too big to be plugged by reserves. Spending them in this way would be a gamble with the future of people who rely on council services and would put local areas on the fast-track to financial failure.

"It is not viable for councils to use reserves to cover reductions in spending. This would store up huge problems and runs contrary to the Government's goal of reducing public spending to drive down the deficit.

"With further funding reductions expected in the Spending Review along with ever-growing pressure on vital services like caring for our elderly, putting aside money for the difficult years ahead is prudent financial management. It is crucial to local taxpayers getting value for money that councils are able to plan ahead more than 12 months at a time."

Notes

  1. Spending Smarter: A Shared Commitment', the LGA's 2015 Spending Review submission includes a recommendation for the establishment of a joint task force to undertake further research and analysis into council reserves. This should include central and local government with experts such as CIPFA.
  2. DCLG local authority revenue outturn statistics 2014/15: total of "unallocated financial reserves level" + "other earmarked financial reserves" held by English local authorities excluding "other authorities" as at 31 March 2015 = £17.1 billion.
  3. Based on spending cuts in this parliament, the LGA's Interim Future Funding Outlook 2015 forecasts that the gap between projected funding and expenditure for English local government will increase at the following rate: 2015/16: £3.0 billion; 2016/17: £6.0 billion; 2017/18: £8.9 billion; 2018/19 £10.3 billion. Based on this, the cumulative gap filled by reserves by 31 March 2018 is £17.9 billion.
  4. Unallocated financial reserves levels held by English local authorities excluding "other authorities" as at 31 March 2014 = £3.782 billion (DCLG revenue outturn statistics). Annual expenditure by English councils 2015/16 = £50.718 billion (LGA Interim Future Funding Outlook 2015)
    £3.782 billion = 27 days' expenditure.
  5. An LGA survey of local authority directors of finance carried out earlier this year asked what specific projects/risks money held in earmarked reserves was set aside for. It shows that money has been set aside for a combination of long-term projects to save money and short-term fixes where government funding has fallen short. The survey drew 71 responses including: