Article

The importance of long-term financial sustainability

Guy Clifton Guy Clifton

Local government leaders have withstood ten years of austerity-driven funding reductions at the same time as managing the increasing and more complex demands on services such as adult social care and homelessness.

The Autumn Spending Round provided an unexpected increase to local government funding, but councils still have no certainty on their funding position after 2020/21. The financial sustainability of local government over the medium term remains a significant challenge. Our latest forecast* indicates that over 50% of unitary, county, metropolitan and London borough councils will be at risk over the next five years.

Medium-term financial sustainability forecast for English Councils

forecast-for-english-councils.png

Source: Financial foresight

How to read the chart:

  • 'Base' uses the 2018/19 revenue outturn data as the baseline for a five-year forward spend projection.
  • Scenario 1 relates to the 2018/19 revenue outturn as baseline, with the September Spending Round additional funding included for 2020/21
  • Scenario 2 relates to the 2018/19 revenue outturn as baseline, with the September Spending Round additional funding for 2020/21 recurring for following years

When applied to 2020/2021 the most recent Spending Round announcement and additional funding for the sector will make a limited impact. This is because the Spending Round sought to manage short-term cost pressures and not the underlying funding shortfall as demand increases. When the additional funding from the Spending Round is applied to 2020/21 onwards there is an improvement for all categories of council.

Long-term financial sustainability challenges

We brought together senior finance officers from councils in the north west at a roundtable we hosted with CIPFA to discuss these challenges..

Here's what they had to say:

  • Some officers and members do not effectively buy into medium-term financial modelling – it can be seen as a technical solution and a finance-led approach in selling a 'doomsday scenario', resulting in a lack of ownership from senior leadership teams
  • Local government has been a victim of its success in managing some of the deepest cuts during the period of austerity and there are concerns that continued lobbying of the government for additional funding may fall on deaf ears
  • Some felt that the better than anticipated outcome of the most recent Spending Round has changed politicians’ mindsets so that they are moving away from making - the still necessary - tough decisions required to ensure financial sustainability, making medium-term financial planning discussions much harder
  • A hard Brexit remains a concern in terms of retaining EU workforces in some services and in supply chains, including the increased risk of provider failure

However, the key challenge was seen as the intractability of on-going rising demand for some services, particularly adults and children’s, alongside the increasing complexity of need and the price of specialist care.

Adult social care is recognised as having benefitted from recent government funding increases, but the underlying demand pressures remain. However, it is children’s services which is creating the biggest in-year financial pressures, in areas such as out of borough placements and increasing SEN demand.

Drivers of this increase in demand and costs identified included family court judges becoming more risk averse, an increase in family breakdowns and the scaling back of prevention services. Early years services, home to school transport, and children’s placements are becoming particularly acute, alongside the impact of SEND demand on DSG budgets.

Social care can represent 50-80% of total revenue spend[1] (for councils with this responsibility) and universal services suffered major cuts during austerity.This has created challenges for local politicians because it is universal services which are most visible to local electors, who are often asked to pay increased council tax bills.

A service-based way forward for councils

Councils need to develop service-based financial resilience strategies, that are owned by the relevant service director and team, who recognise the role that finance has to play in supporting and monitoring their delivery.

Finance and other support services such as HR and policy and performance should be seen as enablers and not solution finders. The solutions should sit within services, but support services need to be effective in how they prioritise the use of their resource, and agile in prioritising their support.

Taking a risk based approach will prioritise financial team resources heavily towards high risk areas (such as social care). But it does not eliminate the need for robust financial controls for those areas considered less high risk.

The key opportunity identified during the roundtable was understanding future trajectories and forecasts on costs and demand. It was recognised that the socio-economic and demand pressures impacting on children’s services had not been effectively predicted. Effective service line forecasting (both throughput volumes as well as demand numbers) is critical for effective financial planning and can mitigate the “us vs them” discussions between finance and services.

Contributing factors that councils could influence

Whilst austerity is considered to have not left local government and it is never easy to predict where spending pressures will fall over the medium term, it was recognised that councils do have some opportunities to control or influence the contributing factors to current pressures. Examples given included:

  • reducing the dependency on agency staff and social workers moving between neighbouring councils (the sector could do more on a sub-regional basis to mitigate this)
  • doing more to improve the numbers of in-borough foster carers to manage the costs of out of borough placements
  • more effective market management, particularly collaboration between councils
  • increasing staff levels of pay (which could improve retention and could reduce spend on agency staff)
  • better co-ordination of planning authority roles – private providers are developing new properties to meet social care demand, but these are typically located where it is most economical to do so. This can lead to increased costs for councils in terms of out of borough placements.

Summary

Given the significant level of uncertainty facing local government – from the level of its funding after 2020/21, how the new government’s policies will affect the sector, and how Brexit will impact on councils and the places they serve - it is more critical than ever to consider the different scenarios and interdependencies that may impact a council, its communities and local businesses.

Having long-term financial forecasts, underpinned by various scenarios and sensitivity analysis based on continued horizon scanning, will become ever more important. Councils, facing unprecedented resource constraints, and having been hollowed out by approaching ten years of austerity, need to make this a priority for their financial planning, and risk and opportunity management.

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Footnote

*The financial forecast is based on the latest 2018/19 revenue outturn data. A council is 'at risk' of financial failure when its reserves fall below 5% of overall net revenue expenditure.

References

  1. Local Authority Revenue Expenditure and Financing: 2018-19 Provisional Outturn, England Ministry of Housing Communities & Local Government