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Rob Whiteman: Councils should resist calls to drive down reserves

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As George Osborne is fond of telling us, the government has ‘a long-term economic plan’.

Local government also plans for the long term which is why councils hold reserves to invest for the future or to enable them to respond to unexpected events or emerging needs.

In today’s age of austerity, this is an entirely sensible approach. Councils are legally required to balance the books each year and this is no different from prudent family financial planning or a well-run business.

Despite this, council reserves have been an easy target for some government ministers who in the past have accused councils of hoarding millions of pounds in reserves instead of spending the money on frontline services.

But as our analysis on English local authority reserves published today makes clear, this is not the case.

The data Cipfa collected shows that the vast majority of reserves – more than 80% – have already been set aside to fund vital public services. This means that £3.7bn – less than 20% of reserves – has yet to be allocated.

Looking more closely at the numbers, they show that of the £19.8bn reserves held by councils in April 2014, some £2.3bn has been set aside for schools and public health projects while £13.8bn has been earmarked for other areas of future public spending.

Our data also shows that 94% of local authorities are planning to use the reserves they have built up, 36% are planning to use their reserves to cover likely future costs over the medium term, while 39% are planning to provide cover for medium-term liabilities. 

In addition, 40% of councils said they had increased their reserves because of ongoing uncertainty around central government policy and funding changes such as the localisation of business rates and council tax support. 

This is hardly the image of profligate local authorities sitting on piles of cash that some in Whitehall would like us to believe.

The worry, though, for many chief financial officers is that George Osborne may use the emergency Budget on 8 July to again attack the size of council reserves.

While it may make a good headline for the chancellor, it would sound a depressing note for how the relationship between local authorities and the new government is likely to pan out in the coming months and years.  

On reserves, Cipfa’s advice is clear: in the face of increasing financial pressures and uncertainties of government policy, reserves are a vital part of good financial planning for responsible councils so they can invest in service transformation and future capital projects to support economic growth.

Local authorities are bearing the brunt of significant funding cuts. Any calls for them to drive down their reserves even further and put frontline services at risk should be resisted.

Rob Whiteman, chief executive, Chartered Institute for Public Finance & Accountancy

 

 

 

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