New analysis from leading business and financial adviser Grant Thornton UK LLP, has found that over a third (36%) of all councils in England are at risk of financial failure in the next ten years*.
Worryingly, the analysis also found that many will hit crisis point even earlier than this, with almost one in five councils (17%) set to be at risk of financial failure by 2021.
Using the firm’s new Financial Foresight tool, which analyses councils’ long-term baseline financial forecast, a council is defined as ‘at risk’ if their reserve levels are at, or below, 5% of total expenditure.
London boroughs are found to be most exposed with 78% (25) forecast to be at risk of financial failure over the next decade. Unitary authorities and metropolitan councils are the two next most vulnerable authority types, with 49% and 50% expected to hit financial failure by 2028 respectively.
While twelve county councils (44%) are forecast to be at risk over the next decade, a number of these are also facing an uncertain future in the more immediate term. Three are likely to be at risk in the next three years – a number that rises to seven if the ‘at risk’ level is increased to reserves at, or below, 10% of total expenditure.
Interestingly, only 43 district councils (21%) are set to become at risk over the next decade. A factor which is reflective of the fact that these councils do not have statutory responsibility for demand-led social care services – the number one issue and financial strain for many other councils currently.
The analysis also looked at the impact the proposed reduction of the Revenue Support Grant in 2019/20 would have on councils if alternative funding - such as the suggested increase in business rate retention - was not implemented. The data found that, if overall income levels grew in line with current rates (and there was no change in the level of business rates retention), once the Grant ceases in 2019/20 52% of all authorities would be ‘at risk’ of financial failure within the next ten years**. London boroughs and county councils would be most affected, with 97% and 93% at risk respectively.
Commenting on the findings, Paul Dossett, head of local government, Grant Thornton UK LLP, said:
“The local government sector is facing unprecedented demand and financial pressures, and the risk of financial failure has never been more acute. The very public struggles of Northamptonshire and Somerset County Council’s this year demonstrate the intense distress many councils, and in turn their citizens, are facing.
“Our analysis shows that it won’t be long before others also reach breaking point, with almost a third of all councils found to be at risk of depleting their reserves in the next ten years, if not sooner. Council reserves should only be used to cover the cost of unexpected events and are an unsustainable method of long-term funding. With future funding levels an ongoing uncertainty, ensuring their financial sustainability is now the number one issue facing councils.
“We have seen an inexorable rise in the number of councils dipping into their reserves, as they struggle to balance the twin challenges of continued reductions in Revenue Support Grant and rising demand in areas such as adult social care, children’s services and homelessness. The pressure on these essential services has been widely publicised but now even those universally used services such as parks and pot hole filling are visibly declining in quality. These issues combined mean financial sustainability will continue to be the biggest challenge for local government for the foreseeable future.
“With the upcoming Spending Review and Fair Funding Review also raising further questions for councils, it has never been more important for local government leaders to have intelligent tools that allow them to implement long term meaningful financial planning. Our new Financial Foresight tool provides the functionality to test a range of financial strategies and scenarios and develop a robust medium to long term financial strategy for a council.”
Building on Grant Thornton’s portfolio of financial and data analytics platforms, currently used by over 100 councils, Financial Foresight provides councils with a multifaceted model to develop a robust medium and longer term baseline financial forecast.
In addition to income and costs projections, Financial Foresight can benchmark spend between authorities, and apply socio-economic and service outcomes to understand the nature and effectiveness of spend.
* Historic local authority financial data from 2009/10 to 2017/18 provided by MHCLG, combined with household and population projection figures from MHCLG and the ONS respectively, were used to forecast growth in expenditure on demand-led services and income growth over the next ten years. For grants and non-demand-led services a flat line projection was made from 2017/18 onwards.
** This analysis aims to understand the potential impact of the provisional Local Government Finance Settlement for 2019/20. The provisional Revenue Support Grant figure for 2019/20 was used for this period and then a flat line projection was made from 2020 onwards. The current expectation across the sector is that the reduction in Revenue Support Grant will be replaced by an uplift in business rate retention. However, because of the uncertainties around this, this has not been modelled in detail.