The uncertainty principle

Posted on June 15, 2023

The most recent finance settlement for local government was better than many had feared. But after 13 years of cuts, stubbornly high inflation and rapidly increasing demand and pressures on our services, councils are one bad settlement away from being in a position of real difficulty.

At the Special Interest Group of Municipal Authorities (SIGOMA) we recently issued a financial pressures survey to our membership. We are still compiling all the data, but one key theme is emerging: the amount of uncertainty that local government is currently facing is something our membership makes clear to us repeatedly.

Councils have received five single-year settlements, and while the department did provide some information about what we could expect for 2024-25 as part of the most recent one, this did not contain any indicative allocations and so the uncertainty about future funding levels remains.

Some significant items still have a lot of uncertainty around them, including the pay deal for this year and how the Extended Producer Responsibility (EPR) scheme will impact budgets in the coming years. Councils are still not clear about what will happen when the fair funding review is resurrected, or when the long-delayed reset of accumulated business rates growth happens.

Uncertainty for our members extends to capital projects too. Inflation on the cost of delivering capital projects and wider uncertainty means many of our members are reducing the number of projects, delivering lower value projects, or deferring or delaying projects.

This is bad for economic growth in each area and the wider ‘levelling up’ agenda. More funding is required to deal with the inflationary pressure on capital projects.

One of the tools councils have to deal with uncertainty is by maintaining a sustainable level of reserves. These are an important part of dealing with risk and are held for many different reasons. The understanding of these reserves within central Government has historically been poor, and over the last 15 years there has often been an expectation that reserves should be used to cover spending cuts from central Government.

However, as many of our members pointed out in our survey, use of reserves to plug a gap is only a one-year solution for problems that would repeat annually – they will face the same problem (but with lower reserves) in the following years unless funding increases.

The new Office for Local Government (Oflog) will focus on this topic – local government reserves are to be one of the four priority areas for the new body. Hopefully this is an opportunity for the department to better understand how reserves work, and they will be examined with an appreciation of the importance of maintaining sufficient reserve levels, especially during a period of such uncertainty regarding funding.

Over the last decade councils have been criticised for their level of supposedly high reserves while being provided with very little long-term certainty about funding. A key outcome from our survey is that the Government should provide sustainable funding that means that councils do not have to use their reserves to balance the books and the Government should set out what that the funding level is well in advance – ideally over at least a three-year period.

Multi-year settlements would be a key element of bringing certainty back to local government finances, while we also need reassurance about the longer-term reforms about to impact us.

Read the article in the MJ here.