The dangers of prudence

At a recent gathering of local government finance chiefs the speaker asked for a show of hands from those who had underspent their budget last year.

Given the unprecedented 28% cut in local government funding announced mid-way through that financial year, and predictions of municipal poverty heard ever since, an outsider might have been surprised to see almost every hand go up. They might be even more surprised to find out some councils are set to underspend again this year.

The answer to this apparent contradiction is, of course, prudence. Faced with such a massive cut in funding over the next four years, and aware that the last years’ savings will be the toughest to find, councils are wisely giving themselves some wiggle room. If, or when, the expected savings fail to materialise in year four, treasurers will be able to dip into reserves money from previous years’ underspends and avoid entering crisis mode and closing down services.

Prudence is doubly needed right now because finance officers are struggling to write the medium term plans which normally allow them to predict their financial position over the next few years. Even short term planning beyond this financial year is proving to be a massive headache, all because a multitude of funding and policy changes are set to come into play in April 2013 and their impact is yet to be fully understood.

First and foremost is the long-awaited reform of local government funding set to scrap the disliked four block formula and instead allow councils to partially retain growth in Business Rates income. The mechanics of this system, and how this will affect individual councils funding streams, are still being worked out. There are some modelling tools around for treasurers, based on the information that has been made available so far, but as one London finance officer explains: “We have done some modelling around assumptions but the only thing we have been saying is the numbers might be wrong.”

A consultation paper providing additional information should be out shortly, including important information about how each council’s baseline will be calculated. However, this will only allow slightly improved modelling rather than any precise forecast of income beyond April 2013.

Alongside this reform of the fundamentals of local government finance, a number of other changes must be added to the mix. They include the transfer of public health spending where the switch in funding allocation from historic spend to need has set treasurers’ heads spinning and where reductions are expected from 2013/14.

They also include another transfer of responsibility from central to local government, this time council tax benefit. Local government’s difficulties in managing a 10% in the funding cut next year have been well rehearsed, but councils are also preparing for further cuts in later years of an as yet unknown magnitude.

All of these changes make it very difficult for councils to predict their future finances in the same way they did in years gone by when all things were equal.

The actual figures which treasurers need to plan will not be available until the settlement later this year, but unfortunately this looks set to come even later than expected, as reported by LGC this week.

Faced with so much uncertainty and risk, it is no wonder treasurers are playing it safe and putting money aside in case of erroneous forecasts and rainy days.

Unfortunately, there is a danger that this prudence will make local government look better off than it actually is. As one county treasurer puts it: “There is a risk that, with all this uncertainty, councils will make sure they have sufficient reserves and balances, and that is not something communities secretary Eric Pickles will want to see.”

At the gathering of finance chiefs where they all admitted to underspends, one mischievous treasurer did an impression of what Mr Pickles’ reaction might be if he had been in the room to see their arms raised.

“I’ve given you the biggest cut in local government history and you didn’t spend all your money, you built up your reserves against that background. I’ve localised business rates and given you that control, I’ve localised council tax benefit, I’ve given you freedoms on council tax, I’ve given you freedoms on referendums around council tax and you’re telling me you haven’t got enough money?”

The danger of too much prudence is that Mr Pickles will look at the reserves built up in turbulent times, ignore the tales of poverty and will once again be entering the star chamber to offer up another historic cut in local government funding for the next spending review.