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Audit Commission - Councils are coping with reduced funding, at least for now

Most councils are managing well in the face of unprecedented reductions to their income, but services have been affected and a small number of councils may struggle to balance their books, an Audit Commission report has found.

Tough times draws on a survey of auditors and new analysis of councils' budget data. It finds that although councils face a real terms loss of total income of £4.7 billion (7.5 per cent) this financial year (2011/12), auditors felt nine out of ten councils are well prepared for this and will deliver their budgets.

Audit Commission Chairman, Michael O'Higgins, said:

'We all know that councils, like the rest of the country, are experiencing tough times. They have seen their funding from government fall and their local income reduce. So far, councils have responded well to these challenges, and auditors believe that most will balance their books this year. Many have also protected the most vulnerable people in their area. But with more reductions to come, and wider economic problems intensifying the pressure, councils need to prepare for a potentially rocky road ahead.

'Good financial management and the continued search for efficiency savings will help councils navigate their way through this period, but they will also need to make some tough decisions about how to bridge the funding gap in the coming years.'

Councils have seen their funding from central government fall by £3.5 billion this year, and expect to lose a further £1.2 billion, in real terms, from locally generated income. For example, income from fees and charges is falling due to the economic downturn. In response, the majority of councils are protecting priority areas such as adult social care. Service cuts focus on smaller services such as planning and cultural services.

Local government faces three more years of cuts in government funding with almost 60 per cent of the total reductions yet to come. To meet this future challenge the report finds that some elements of councils' cost-reducing strategies will have to change. In single tier and county councils (STCCs) almost half of this year's savings will come from planning, housing and cultural services, but these only cover 16 per cent of service spending. These services cannot deliver similar savings every year. Many councils will face difficult decisions about how to meet their funding shortfall in the next few years.

Strong leadership and financial management mean that most councils should balance the books this year. However, many have had to cut back on services to secure their financial stability. Most local authorities are taking the right steps to make efficiency savings but have also had to reduce the quality and quantity of services. Charges are going up in many councils. The report highlights many of these planned changes within STCCs, including:

  • 5 out of 6 councils planning to reduce the quantity or frequency of some services within cultural services;
  • 3 out of 4 councils planning to increase charges within environmental services;
  • 4 out of every ten councils planning to tighten eligibility criteria in adult social care; and
  • almost half of councils planning to reduce service standards in highways and transport.

Councils are not planning to make significant withdrawals from their reserves this year - some even plan to increase them. Reserves alone cannot be used to balance budgets in the longer term, but there may be scope to use them more than currently planned - to give councils time to achieve sustainable efficiencies.

Although most councils are coping, the report finds that a minority (1 in 10) of councils were considered by auditors to be 'at risk' of not meeting their budget for 2011/12. The common characteristic of these councils is a combination of financial and managerial issues. Facing large funding reductions is not, on its own, enough to cause auditors to worry about a council's financial resilience. It is councils with both big funding reductions and weak financial management that are at most risk of not achieving their budget. 'At risk' councils were less likely to have thoroughly evaluated their savings proposals and were more likely to use short-term financial fixes.

The report recommends that councils use the Audit Commission's Value for Money profiles to see how their council compares to the national picture set out in this report, identify councils facing similar challenges, and learn from others' approaches.

Notes to editors

  1. The report uses new analysis by the Audit Commission of revenue account (RA) data provided by councils to the Department for Communities and Local Government (DCLG). This sets out the funding information councils used when setting their 2011/12 budgets, and also details their plans for spending and use of reserves. Our analysis of RA data is presented in real terms at 2011/12 prices. Frontline schools funding is excluded from all analysis. We also surveyed all Audit Commission appointed auditors in May 2011 to gather their emerging views on the impact of falls in government support, and councils' responses as they prepared their plans for 2011/12. The survey had a 100% response rate and included all councils.
  2. Our figures are not comparable to those published at the time of the local government settlement by DCLG due to differences in data sources and reporting (particularly the difference between real-terms and cash values).
  3. The Audit Commission is a public corporation set up in 1983 to protect the public purse.
  4. The Commission appoints auditors to councils, NHS bodies (excluding NHS Foundation trusts), police authorities and other local public services in England, and oversees their work.
  5. We also help public bodies manage the financial challenges they face by providing authoritative, unbiased, evidence-based analysis and advice.
  6. In August 2010, the government announced plans to disband the Audit Commission and put in place new arrangements for auditing England's local public bodies.
  7. The Commission is undertaking a procurement exercise to outsource the work of its in-house Audit Practice. Beginning in 2012/13, the Commission will award contracts of three to five years to private audit firms.
  8. The government is currently considering responses to its consultation on the 'future arrangements for local public audit' that are intended to replace the Audit Commission.

For further information please contact:

Louise Neilan,
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