Should local government be concerned about recent trend change in its reserves balance?

In 2013, Eric Pickles accused local government of ‘hypocrisy’ for ‘pleading poverty when they have trebled their cash reserves over the last decade’.¹ But last week, DCLG released data on local authority spending and financing in England which reveals a rather different picture. The data release also reveals an interesting trend of increasing self-sufficiency in local authority financing amid increasing pressure on services.

Chart 1: Level of revenue reserves in England

Local authority reserves

According to the data release and as shown in chart 1, local authority reserves balance did indeed increase year on year from 2011 to 2015 as Eric Pickles claimed, but this balance has dropped since 2015 for the second year running.² This trend, if it persists in the subsequent years, should be a cause for concern for local government as it will affect their ability to cope with future demand pressures.

Chart 2: Percentage change in local authority reserves balance

What is potentially alarming is the fact that the percentage change in local authority balance has also been falling year on year, and it started hitting negative digits after 2015. Chart 2 shows the percentage change in reserves balance remaining in positive figures despite slowing down between 2012 and 2015. But in 2016, there was a -2% change, meaning the reserves balance had in fact decreased in real terms for the first time since 2011 – a trend also reflected in chart 1. By March 2017, this figure has dropped further to -6%, bringing the balance down to £23.1 billion.

Indeed, the data release reveals that funding of local government spending through reserves has increased from 0.9 per cent to 2.1 per cent, amounting to £1.1 billion more in 2016-17 than in 2015-16 (see chart 3). This drastic increase should be a warning sign to local and central government; clearly, a continued or long-term reliance on reserves to finance local authorities’ expenditure will not be sustainable.

Chart 3: Financing of revenue expenditure in England

Unlike central government, local authorities cannot borrow money over the medium-term, except for investment in assets. Therefore, local authorities hold reserves in order to help cushion the impact of uneven cash flows, the impact of unexpected event or emergencies, and to meet known or predicted requirements through earmarked reserves.³ However, continued reliance on the reserves for a sustained period would mean less resources to meet these financial demands.

A depleting reserves balance may also be detrimental to the local authorities’ plans to support long-term ambitions, including ‘service transformation’ and ‘future projects’ (helping councils transform for the future without impacting service delivery today).⁴ If this trend continues, the financial pressure can add to the barriers for councils to reinvent the ways they work as an organisation and how they can relate better to the local communities that they represent.

Locally retained income

The data release further reveals that in addition to funding more spending through reserves, local authorities are also becoming more self-sufficient by relying more on locally retained income following the business rates reform in 2013.⁵ As shown in chart 3, local authorities are financing more of their spending from local revenues, and less from central government grants. Funding through centrally distributed income has dropped steadily from 67 per cent in 2013 to 57.5 per cent in 2017, while funding through local revenues during the same period has increased from 35.4 per cent to 40.4 per cent.

Local authorities in England are already facing increasing demand pressure on local services, with expenditure increasing significantly for public health (9.9 per cent) and social care (3.1 per cent) (which include Children’s social care and Adult social care). In fact, when additional funding was required for Adult social care, this was raised locally through the council tax precept instead of relying on central government funding.⁶

In the face of reduced central government grants and increasing pressure on services, local and central government urgently need to develop a more strategic approach to managing councils’ finances to ensure a healthy reserves balance is maintained to support contingent liabilities and future ambitions for the long-term benefit of local councils. Crucially, central government should also address the issues surrounding business rates flexibility and fiscal devolution to local government without any further delay.

Endnotes

1 DCLG, 2013. Councils should not be hoarding billions says Local Government Secretary. 30 August. Available at: https://www.gov.uk/government/news/councils-should-not-be-hoarding-billions-says-local-government-secretary
2 Paine, D., 2017. Half of all councils reduced reserves in 2016-17, LGC. 24 August.
3 CIPFA. 2015. English Local Authority Reserves.
4 A 2014 survey by CIPFA reported that 81 per cent of local authorities planned to use their reserved for ‘service transformation’ and ‘future projects’.
5 LGA. 2015. Business rate retention: The story continues. Available at: https://www.local.gov.uk/sites/default/files/documents/business-rate-retention-s-96f.pdf
6 DCLG. 2017. Local Authority Revenue Expenditure and Financing: 2016-17 Provisional Outturn, England; It is worth noting, however, that the increase in public health services spending is in part due to this year being the first full year that local authorities had to support additional responsibility for children aged 0-5, as part of the public health transfer to local authorities that was first rolled out in 2013.

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