Cuts, changes and uncertainty for local government in 2013
Despite the cuts being front loaded and authorities making smaller cuts this year than last, the task is not becoming any easier.
In its recent report Tough Times 2 the Audit Commission commended local authorities’ ability to cope with the above average expenditure cuts. However, it also raised the issue that as cuts continue, reductions in budgets will be harder to identify and the impact on front-line services will increase. With efficiency savings already made, councils must now make difficult decisions on which services to keep and which to lose.
On top of funding reductions, uncertainty and risk are also increasing. The new financial year will see a range of complex financial system changes affecting both business rates and council tax benefit. Because of these system changes, it is important to monitor both spending and revenues with extra vigilance and be ready to make in-year adjustments. These changes also potentially increase the funding gap between authorities with those in growth areas benefitting from the new homes bonus, growth in non-domestic rate income and less pressure on council tax support.
This uncertainty is one of the main reasons that council reserves have been increasing. Each local authority must make its own decision on the level of reserves that are required and with the risk of potential shortfalls in the future, councils are building up reserves to ensure they are able to continue to deliver services. Another reason that reserves have been increasing is councils’ good performance in coping with austerity. They have universally reduced budgets in real terms, and in many cases they have also managed their affairs to deliver underspends which bolster reserves.
Regardless of the level of reserves, suggestions that authorities should dip into them to fund services are misguided. The nature of most council services is that they require recurring funding to meet staff and other running costs year after year. Reserves are a one-off, finite source of funding. They can cover a shortfall in recurring funding for a specific period but, after reserves are exhausted, the underlying shortfall will still be there. Ultimately services will need to be reduced to a level which is affordable within the envelope of recurring funding available.
All of this provides the context for another important decision that councils have had to make. Whether to accept the Government’s grant and freeze council tax or to raise it.
According to CIPFA’s council tax survey, published at the end of February, 41% of local authorities who responded are forgoing the grant and are instead raising tax. The number forgoing the grant is a significant increase from 15% the year before. This increase has been framed in a variety of ways in the media, but it is not altogether unsurprising.
In 2011/12 councils were offered a 2.5% grant that would continue as a permanent increase to each council’s tax base, so it was universally taken up. This offer was too good to refuse. Last year councils were offered another 2.5% grant, however this time it was one off, meaning that if councils accept the grant and the next year they wanted to increase spending by a further 2.5% they would need to raise council tax by 5% in order to do so. This year, the grant was once again a one off and it was only equivalent to a 1% increase, which goes some way to explaining the much lower take up.
The lack of clarity over future freeze grant funding led councils to look more closely at the long term impact on their council tax base funding levels. Each council must balance the benefit of the council tax freeze against the impact of additional cuts in services on local council taxpayers and there may be an undesirable redistributional impact with council tax freezes benefiting those in higher band houses the most while service cuts have a disproportionate impact on the most vulnerable.
Uncertainty is the order of the day. 2013 will be a landmark year for local government and the role that finance staff and public sector leaders will have to manage with intelligence and sensitivity.
CIPFA, the Chartered Institute of Public Finance and Accountancy (http://www.cipfa.org/), is the professional body for people in public finance. As the world’s only professional accountancy body to specialise in public services, CIPFA’s portfolio of qualifications are the foundation for a career in public finance.
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