Local Government Reorganisation – the inherited financial challenge

The business cases produced to inform government’s decision on the preferred configurations in the Devolution Priority Programme areas detailed the scale of opportunity that local government reorganisation creates to deliver more efficient and effective local government. These business cases also detailed the significant costs associated with delivering local government reorganisation. A picture of the future for local government in these areas has been sketched out in the business cases and now needs to be filled in in detail.  Critical to that is a robust understanding of the structural financial challenges facing predecessor authorities that will be inherited by the newly created authorities, before the costs and complexities of delivering transition are considered and any efficiency savings are realised.

We have taken a detailed look at the Medium Term Financial Plans of local authorities in Suffolk, Norfolk, Greater Essex and Hampshire & the Solent, four of the Devolution Priority Programme areas where decisions on the future configurations have been made. This review highlights the scale of the financial challenges facing local government, even before the costs and complexities of local government reorganisation have been considered. Across all these areas there is a cumulative budget gap for the period pre-vesting day and ongoing beyond vesting day, alongside a significant savings delivery programme required to deliver the forecast position. Therefore, there are three immediate issues for the newly created authorities to consider:  

In each of the four areas that we have looked at there is MTFS budget gap for each of the next three financial years, one year that will be pre-vesting day and two years that will be post-vesting day. For all areas it is the budget gap of the upper tier authorities that is making the largest contribution to this gap, and for county authorities, it will be this financial pressure that will be disaggregated across each of the newly created authorities. For Norfolk, the county council budget gap is 83.8% of the combined budget gap across the period 27/28 to 29/30, for Suffolk it is 59.9%, in Essex the upper tier (county and unitary) budget gap is 67.0%, and in Hampshire & the Solent, Hampshire County Council's budget gap is 81.4% of the combined MTFS budget gap up to 2027/28.  

Delivering the 26/27 budget and future years MTFS positions is dependent upon the successful delivery of the planned savings programme. The cumulative MTFS savings target across each of the four areas we have reviewed is significant, £49.0m across Norfolk, £61.3m across Suffolk, £87.7m across Greater Essex and £55.6m across Hampshire & the Solent. Any slippage or non-delivery of this will impact on the baseline financial position of the newly created authorities as mitigating action through reserves may be required. In addition to this, the MTFS’ of the predecessor authorities have built in savings targets for the newly created authorities that sit outside of the savings from reorganisation. Delivery of these savings may be impacted and delayed by the complexities of local government reorganisation with different authorities adopting different approaches, increasing the financial baseline challenge for these newly created authorities. This alongside the wider pattern regarding savings from previous rounds of local government reorganisation is likely to create financial pressure for newly created authorities. Our review of the new unitary councils created since 2019 found that savings and transformation benefits typically take longer to materialise than business cases assume, often not being realised for twelve to eighteen months after vesting day, or possibly longer, rather than immediately. 

A high-level review of the potential disaggregation of the financial baseline position highlights that the impact will not be even across the newly created authorities. Given the scale of the upper-tier councils, decisions around disaggregation and the allocation of funding and expenditure to the newly created authorities is critical. Therefore, decisions made during the transition period will have significant financial implications for the new authorities and will require management to quickly identify how these inherited pressures can be addressed. 

Debt and the level of external borrowing is an inherited financial pressure that is a key consideration during the transition period. Government has already intervened directly on debt in two of the areas we have reviewed. In Essex the government announced a £200m debt relief package for the debt of Thurrock Council and in Surrey, government committed in principle to repay £500m of Woking’s debt ahead of the new West Surrey unitary vesting in April 2027. These interventions show that there has been government support for inherited debt but newly created authorities inheriting significant legacy debt should not assume automatic or full relief. Continuing debt servicing costs should be built into financial planning alongside the budget gap and savings risks set out above.  

Alongside the forward looking challenges around budget gaps and savings delivery, the newly created authorities will need to deliver local government reorganisation in a position of weakened financial resilience. MTFS’ for the predecessor authorities include the use of reserves to deliver priorities and, in some cases, underpin the financial position of the council. Therefore, the reserves available to underpin financial sustainability and support the delivery of local government reorganisation are likely to be smaller than the current balance across geographies.  

The business cases of local government reorganisation detail the opportunities available to deliver savings through reorganisation and integration of authorities. Learning from previous rounds of local government reorganisation demonstrates that the delivery timescale for savings will not emerge immediately. Therefore, the newly created authorities will need to manage the legacy financial pressures from predecessor councils, including the delivery of already identified savings, alongside planning for delivery of benefits from reorganisation. This will be complex and challenging and emphasises the need for early financial planning and scenario planning during the shadow period. This will ensure that there is clarity around financial planning and the financial position of the new authority and proactive action can be taken to manage it. 

To manage these challenges during transition the following should be considered as a priority; 

• Commission a consolidated financial baseline. Bring together the MTFS positions, savings pipelines and reserve levels of all predecessor authorities into a single integrated view for each new authority area. This should be a priority task for shadow authority finance teams, providing the foundation for all subsequent financial planning. 

• Stress-test the savings programme. Model scenarios at partial delivery levels to quantify the reserve and budget gap implications and identify mitigating actions before slippage occurs rather than in response to it. 

• Agree the disaggregation methodology in the shadow period. Decisions on how upper-tier income and expenditure are allocated to newly created authorities will have lasting financial consequences. Methodology should be agreed early, transparently and with full modelling of the distributional impact across each new authority. 

• Protect reserves earmarked for transition. Working with predecessor s151 officers, shadow authority leads should seek to identify and ring-fence a quantum of reserves for reorganisation costs, separating these from the use of reserves to underpin ongoing MTFS positions. Predecessor authorities should also agree a shared, pooled budget for transition costs across the area, rather than each authority funding its own share in isolation. 

• Develop an integrated financial plan spanning the shadow period through to two years post-vesting. This plan should sequence the management of inherited pressures, savings delivery, debt costs, transition costs and reorganisation benefits against realistic timescales, and should be subject to regular scenario refresh as the financial position evolves.