An estimated 57% of authorities in the North West will become ‘at risk’¹ of financial failure in the next five years making the it the region with the second highest proportion of authorities at risk in England².
Senior finance professionals from council’s in the North West agree that growth in expenditure is outstripping growth in income, but how are councils dealing with this? And what effect does this have on the role of the director of finance?
We hosted a discussion on financial sustainability with a number of councils in the North West, and this is what we learned.
Successfully managing demand
Children’s social care is currently the greatest pressure point for the majority of authorities, due to the increasing scale and complexity of demand. Meanwhile the impact of adult social care services on council budgets is being masked by one-off sources of funding. In both cases, many around the table said that it will be important to manage demand with preventative services as they believed core statutory services alone are considerably more costly. Councils have also explored partnerships with the voluntary sector which, when done effectively, can reduce reliance on council services.
Some authorities in the North West have made significant progress in integration of health and social care, which aims to positively impact demand management and health of local populations. However, there are key challenges for local authorities as vision and practicalities are very different. Local authorities are legally bound to balance their budget, but the NHS is not. This financial imbalance in terms of cost savings poses challenges for collaboration.
Considering other remedies for managing financial sustainability, one council said it has commercialised in order to generate income, and was taking on risk in order to achieve this. For commercialisation to be successful there needs to be an appetite for taking on risk across the council and it needs to be clearly defined. Does commercialisation mean behaving in a more business-like manner? Does it mean charging for services? Or does it mean investing to get a return that can then be reinvested in council services?
Generating income through taxation
The government announced its intention to increase the level of business rates retained by local authorities in 2017 and invited councils to be part of a pilot scheme during 2019/20. For those councils present that are part of the pilot, rates were increased from 50% to 75% and they have benefited significantly from this.
However, others suggested that relying on business rates is a worrying prospect, due to having a weak base and struggling to attract new businesses to the area. This form of income is highly geographically varied and can be volatile.
Council tax can be controlled to a greater extent by councils than business rates. Councils could look to increase council tax revenues by increasing the base through house building, increase charges or try to increase the proportion of households that pay. However, all of the options also have restrictions, the most significant of which is political appetite. One council has had a council tax freeze in place for the last six years, other than the adult social care precept, for this very reason. Consequently, there has been significant loss of revenue for the council.
The changing landscape of financial stability
Uncertainty over future funding, particularly in relation to business rates retention and the outcome of the fair funding review, poses a threat to the ability of finance directors to carry out their duties effectively. Those present particularly felt there was a risk to their credibility if they under or overestimated the gap between income and expenditure in their medium-term financial strategy assumptions in the absence of information from central government.
A further challenge involved colleagues taking the foot off the pedal in terms of savings, due to an assumption that council funding would not decrease to a significant extent. This is again as a result of the lack of information from central government post 2019/20.
With regard to setting balanced budgets and working within them over the year, finance directors are often at odds with their senior colleagues over providing statutory services, who want to act in the interests of local residents. Strong relationships with the chief executive and lead finance member are an important way of ensuring that finance is considered in conversations where the finance director is absent to avoid overspend. It was agreed that finance should be an important consideration in the decision-making process, in order to ensure the effective use of resources.
Councils in the North West are largely attempting to manage and reduce demand on their services at this stage, rather than generate income, through preventative measures or partnerships with the voluntary sector. For finance directors, maintaining good relationships and fostering a culture of understanding the financial implications within the council are necessary steps to ensure they are able to perform their role effectively. Perhaps the implementation of these measures could reduce the number of councils that become ‘at risk’.
Contact Phillip Woolley for further information on issues raised in this article or to find out more about Financial Foresight.
1 “At risk” has been defined as reserve levels at or below 5% of total net expenditure
2 Grant Thornton and CIPFA’s Financial Foresight model.