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Why the OBR could prove a vital ally to the sector on its financial frailties

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LGC’s essential daily briefing.

Local government has been warning of impending financial catastrophe for years now.

LGC has heard it suggested that the tenor and intensity of these claims were too much, too soon in the early years of the decade when in reality there was some fat to trim and the sector perhaps did not quite realise what it was capable of in terms of innovation and reform.

Like the proverbial boy who cried wolf this early warning approach may have in the long run made local government’s pleas for funding easier to ignore – certainly if yesterday’s Budget was anything to go by.

However, as others have noted, the real story yesterday was not Philip Hammond’s timid, tinkering Budget, but the Office for Budget Responsibility’s worrying assessment of the nation’s finances.

The section on local government is no less concerning and it should alarm Whitehall. The OBR says pressures on council spending appear to have “intensified” in 2016-17 with councils overspending against their total budgets (excluding education) for the first time since the financial crisis. This is “in contrast to previous years when underspends in other areas outweighed overspends on social care”. More evidence, for those who require it, that the fat has been well and truly trimmed.

The opaque nature of local government accounts, particularly when compared with their NHS counterparts, and councils’ legal requirement to balance their books have also helped to make the dire state of local government finances easier for the government to ignore.

When faced with pleas for more funding ministers have also traditionally pointed to councils’ levels of reserves, which can seem eye-watering to the casual observer. According to the OBR those days are also over.

As LGC has previously reported, councils’ overall level of reserves fell for the second year running in 2016-17, which the OBR describes as the toughest year of the four-year local government finance settlement. The OBR notes that as districts actually added £0.2bn to their reserves, this fall was driven by upper tier councils which reduced total reserves by £1.6bn.

The OBR notes that while it had expected reserve drawdowns to begin much earlier, the “corner does now seem to have been turned”. The OBR has almost doubled its forecasts for councils use of reserves between this year and 2019-2020, from £0.9bn to £1.7bn. It expects £1bn of this to be in the current year.

The OBR also picks up on pressures on children’s services, an issue it says it plans to “consider more fully in due course”. It notes that developments that influence demand include “trends in the prevalence of factors known to reduce parental capacity to meet their children’s needs”. Among these it cites poor mental health, addiction and domestic abuse.

The issue of children’s services has risen rapidly up the agenda in recent months. On this and other areas of funding pressure the impartial cool heads at the OBR – the fiscal watchdog set up by the government in 2010 to provide, in its words, “independent and authoritative analysis of the UK’s public finances” – could prove a valuable ally.

Sarah Calkin, deputy editor 

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