A decade ago, Lehman Brothers went bankrupt. One of the biggest corporate failures in history, it was a catastrophic moment for banking and the worldwide economy.
In response to the worst global downturn since the Great Depression of 1929, the UK’s then prime minister Gordon Brown introduced the first austerity measure in late 2008. Two years later, when the coalition government came into power, the austerity programme was initiated to reduce and eventually abolish the deficit.
Over the past decade, we have witnessed austerity drastically change public services, particularly for local authorities in England, whose central government funding has effectively been halved. Shrinking resources led councils to scale back and reprioritise their activities.
Whilst the Chartered Institute of Public Finance & Accountancy and the Institute for Government’s performance tracker shows public satisfaction has broadly held up – suggesting real efficiencies and productivity gains – Northamptonshire CC’s fate makes clear that the sector is in the most fragile state it has ever been in.
This is set against wider scepticism about financial services such as doubt about the validity of Libor rates and the possibility of misselling. We have also seen the rise and fall of payday loans, a new national culture directing vulnerable people to turn first to the private sector for financial aid where previously the public sector would have been the first port of call.
Clearly, maintaining the status quo is not an option. Services will likely deteriorate or be cut back to the statutory minimum unless urgent and inevitably quite radical action is taken.
This, along with the beginning of a prediction of a new financial crisis, is only likely to expose vulnerable people more. New thinking is still needed.
The top priority should be a sustainable funding solution. For years, successive governments have avoided meaningful steps to resolve the sector’s financial issues. Whether business rate retention and the fair funding review will do enough to reform local government finance is debatable.
Short of taxing people more or increasing communities’ overall share of government spending, bolder and braver moves must be taken to ensure authorities can sustain services.
This may include council tax revaluation, more means testing or giving regions the power to introduce local tax measures, such as tax on sales, tourism and other sources of income. In Scotland, parliamentary committees are currently debating the introduction of a transient visitor tax.
As well as reviewing sources of funding, another priority must still be devolution. The scale and representative nature of the combined authority model is a promising route to an optimal economic distribution and effective coordination of the state’s resources to meet local needs, enabling place-based decision making across agencies.
Central to the concept of local government autonomy is ensuring that organisations maintain a good grasp on their finances. The disconnect between funding and rising service demand means that this will continue to be tough.
outs are definitively – and rightly – off the cards, meaning that councils must strengthen their spending plans’ capacity to weather present and future risk. Whilst most local authorities do have the requisite capabilities, Northamptonshire’s demise exposed complacency and an optimism bias unlikely to be unique to the East Midlands council.
Cipfa’s work on measuring financial resilience is looking to challenge this bias by giving those running local authorities a clear understanding of their level of financial stress and what their main pressures are. But this professional contribution in itself will not provide all the answers.
What it has done already is allow us to have a healthy and transparent debate about how we can help the sector. There is also a role for reconsidering the role of regulation, audit and inspection in both the private and public sectors.
Our consultation, which closed late last month and attracted unprecedented levels of feedback, exposed a broad range of views on how well a proposed methodology would capture local authority risk. We are now working through the responses to develop our original proposal, and will issue an update on our plans, along with a summary of the consultation submissions, in early October.
The current financially-untenable position of a few councils – not to mention the more exotic commercial investments being made by others – means the political mood music has shifted. Many observers now quite rightly questioning whether council leaders and officers are being sufficiently prudent. In this they are shrewd.
Rob Whiteman, chief executive, Chartered Institute of Public Finance & Accountancy