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MPs demand reforms to ensure sustainability of local government finances

The time is right to consider a more radical review of local government finances, the Housing, Communities and Local Government Committee has said.

The committee’s report, Local authority financial sustainability and the section 114 regime, said an urgent solution was needed to the funding of social care in England.

“The failure of successive Governments to properly fund social care, which consumes up to 70% of top-tier councils’ budgets, is currently the most serious spending pressure on local government. A solution to the funding crisis alone could largely restore local government financial resilience,” the MPs said, adding that they were are also concerned about the cuts to more discretionary services arising from councils’ need to prioritise social care provision.

The MPs meanwhile expressed concern that the Section 114 regime might be hindering good financial management and recommended that the Government introduce an intermediary “yellow card” measure that a Chief Financial Officer could apply “to force a council to confront much sooner the seriousness of its financial position”.

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The committee also recommended that Chief Financial 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.

The report also said:

  • The committee welcomed the principle of encouraging councils to be more self-sufficient, alongside devolving more powers to them. The Government should devolve more revenue-raising powers to councils.
  • Options should be explored for reforming council tax and reforming business rates, as the Government has promised, possibly by replacing them with a proportional property tax.
  • Council could never be wholly self-sufficient, as this would disadvantage councils in more deprived area, and some funding equalisation would therefore always be necessary. Both reforms to the Business Rates Retention Scheme, through a reset, and the Fair Funding Review should be completed as soon as possible.
  • The Government should allow councils to retain 75% of business rates from 2022, but, so that this represents a net increase in funding, it should not impose commensurate cut to grant funding.
  • The Government’s short-term approach to funding local government had aggravated councils’ financial instability. Local government had not had a multi-year settlement since 2015. The next settlement must be a multi-year settlement.
  • The provision by the Government of such significant emergency funding during the pandemic was to be commended. “The effects of the pandemic will be felt for many years, however, and we recommend that the Government provide greater certainty about what future costs it intends to cover.”
  • In recent years, some councils had sought to generate alternative sources of revenue by borrowing to invest in commercial property. “Despite concerns that councils could become too dependent on such uncertain revenue streams, it is our view that commercial investment poses no obvious threat to local government financial resilience overall and that, where it has contributed to financial instability, the councils concerned must bear ultimate responsibility. In understanding local authorities’ use of commercial investment, we must acknowledge that previous Governments encouraged councils to be more commercial.”
  • Without a central body responsible for oversight of the sector, the committee saw no way of ensuring a robust and transparent regime of local audit. They also recommended the Government remove the ability of local authorities to choose their own auditors.

Three councils have issued section 114 notices in the last three years - Northamptonshire in 2018, Croydon in late 2020, and Slough earlier this month.

Clive Betts, Chair of the Housing, Communities and Local Government Committee, said: “Council budgets have been stretched for several years and the social care funding crisis is at the heart of financial pressures for many councils. A solution to social care funding would go a long way to restoring local government finances. Covid-19 has also hit councils hard and, while the Government responded to the pandemic with substantial financial support, they now need to come forward with a long-term sustainable way of funding councils and the services they provide.

“The system of local government finance should enable councils to increase revenue by growing their tax base while protecting those councils who are less able to do this, through no fault of their own. To this end, the Government should implement the Fair Funding Review and business rates reset as soon as possible, and allow councils to retain 75% of business rates from 2022. So that this represents a net increase in funding, we urge the Government not to impose commensurate cuts to grant funding, and the additional funding should then be put towards equalisation between councils. 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.”

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