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'Stressed' councils set to struggle financially

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A quarter of councils may struggle to balance their books in this spending review period - and more than a tenth risk running into trouble this year, the Audit Commission has warned in a wide-ranging financial health check of the sector.

The commission’s second Tough Times report shows that a growing number of councils are causing concern to district auditors. The proportion at risk of failing to keep to their budgets has risen from 10% last year to 12% in 2012-13.

Commission chairman Jeremy Newman said auditors had expressed concerns about a number of councils already showing “signs of stress” and facing further “significant challenges”.

Councils of most concern were most likely to have struggled during 2011-12, the report said. These had carried out ‘unplanned actions’ or faced relatively high funding cuts and - “perhaps more important” - had low reserves, the report added. Unplanned actions include the use of reserves and exceptional requests for capitalisation.

The commission’s report confirmed that the most deprived areas were hardest hit by funding cuts even though they continued to receive the highest per capita spending.

Cumulative cuts over the first two years of the spending review produced a 19.5% cut for metropolitan districts compared with 16.6% in London and 11.8% for counties. Metropolitan districts were the most likely to fall into the “high stress group”, the report added.

Despite these concerns, Mr Newman praised local government’s handling of severe budget cuts as a significant achievement.

The report also identified a number of trends in council spending in 2011-12 and budget plans for 2012-13, including

  • Central government funding fell by £1.6bn in 2012-13 while a second year of council tax freeze saw real-terms income fall by a further £400m over the same period.
  • Adult social care will be less protected as the only service set to be cut more in 2012-13 (3.4%) than in 2011-12 (2.2%).
  • Children’s social care spending is due to increase by 0.6% in 2012-13 after a 3.4% cut in 2011-12.
  • Planning and development will suffer less as planned savings fall from 27.2% in 2011-12 to 6.9% in 2012-13.
  • Housing faces further cuts of 9% in 2012-13, following a 12% budget cut the previous year.
  • Councils increased their reserves by £1.3m in 2011-12 despite plans to reduce them.

Treasurers described the report as an accurate reflection of councils’ experience, but warned that it could not take into account the financial risks associated with numerous funding reforms, which were due to come into force in April 2013.

Bob Palmer, audit lead at the Society of District Council Treasurers, said incentive schemes such as the New Homes Bonus and the retention of business rates would disadvantage authorities with below-average growth. “We are going to see increasing funding and financial difficulties for those councils unable to boost their domestic or non-domestic properties. That’s a serious issue that comes on top of overall reductions,” he said.

Frances Foster, chief policy officer at the Special Interest Group of Municipal Authorities, echoed Mr Palmer’s concerns. Referring to the report’s confirmation that the most deprived areas were hardest hit, she said localised business rates and council tax discount schemes would exacerbate this effect.

“It is difficult enough to deal with cuts when resources are known but build in volatility of business rates and council tax income then I would expect the ‘stress levels’ to increase accordingly,” she said.

LGA chairman Sir Merrick Cockell (Con) said councils were doing “an outstanding job in extremely difficult circumstances”. “The strain of the 28% cut in funding is undoubtedly starting to show across all service areas,” he said, pointing to cuts in the previously protected area of social care.

Sir Merrick said councils were in an “increasingly precarious position” due to funding cuts, risks to revenues and rising demand. He said the sector should be spared from a similar scale of cuts in the next spending review. “It is now time for others to do the heavy lifting,” he added.

A spokesman for the Department for Communities & Local Government said the business rate retention system could add £10bn to the wider economy. “Councils account for a quarter of all public spending - this year English councils will spend £114bn - so it is vital they continue to play their part tackling the inherited budget deficit,” he said.

Warning

Steve Freer, chief executive of the he Chartered Institute of Public Finance and Accountancy said the report was “positive” but pointed out it did not assess the impact of cuts on services. He also said public reactions to the cuts are “influenced in part by perceptions of fairness” and warned the governemnt to “reflect very carefully on the message from this analysis that deprived communities are bearing a disproportionate share of the pain”.

Joanna Killian, chair of Solace, also warned the that “public concern at service closures will only be heightened if this autumn sees the government’s contribution reduced even further” and called for “a full debate with the public about what local services they want and how they should be paid for is also required”.

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