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Local authorities adapt to budget cuts but 2016 predicted... a tipping point for financial resilience

Local authorities have so far met the challenges of public sector budget reductions but with the 2015/16 Spending Round confirmed in June, 2016 is expected to be a tipping point for some authorities, when the pressure becomes acute and financial failure is a real risk, according to analysis by Grant Thornton UK LLP.  

The firm’s third annual report on the financial health of local government in England, published today, finds that 79% of councils anticipate some form of tipping point in 2015/16 or 2016/17.

The report rates local authorities in four areas - key indicators of financial performance, strategic financial planning, financial governance and financial control. It also identifies a series of potential ‘tipping point scenarios’ such as local authorities no longer being able to meet statutory responsibilities to deliver a range of services. 

The report shows that county and district councils have performed well, whilst unitary authorities have the lowest number of green ratings* of all council types, with 40% fearing a tipping point in the short term compared to 20% for other local authority types. Metropolitan districts scored strongly on their financial performance but are also the only type of local authority to score red ratings* for strategic financial planning, financial control and financial governance.

On a regional level, the north of England was the best performing area over the four key performance indicators. However it was also the only area with red ratings, reflecting the impact of metropolitan districts, many of which are located in the North. The South West performed the worst, with the Midlands presenting a mixed message, scoring the lowest green rating out of all the regions for strategic financial planning.

Looking at the financial performance of individual authorities, Grant Thornton’s report reveals that a significant minority of local authorities aren’t reporting changes to saving plans (caused by slippage or non-delivery) in a transparent way. The worst performing region was the South East, with 52% of councils not accurately reporting changes to savings plans. This year's report also highlights a growing need for authorities to ensure they have appropriate strategic financial planning skills to help navigate the challenges and uncertainties over the medium term.

Commenting on the report's findings Paul Dossett, Head of Local Government, Grant Thornton UK LLP said: "In last year’s report, we highlighted that government funding reductions could see some local authorities facing a financial tipping point. Since then, we’ve been in extensive dialogue across the sector which has confirmed that these tipping point scenarios are possible or even probable. This has also allowed us to fix on a timescale of 2016 onwards when local authorities may face one or more of these tipping points.”

“As funding reductions start to bite harder and deeper after 2015, councils will be faced with a great challenge. In order to remain sustainable, authorities will need to have a relentless focus on generating additional sources of revenue income. This can range from investments in the commercial property portfolio to regeneration and inward investment and the skills agenda  to boost local economic activity. Equally, councils will have to continue to improve efficiency through shared services, strategic partnerships and wider re-organisation. Even after all of this, the public will need to understand that service quantity will need to be reduced and may never return to their pre- 2010 levels."

*Risk-rating criteria

Green: Arrangements meet or exceed adequate standards

Adequate arrangements identified and key characteristics of good practice appear to be in place.

Amber: Potential risks and/or weaknesses

Adequate arrangements and characteristics are in place in some respects, but not all. Evidence that the authority is taking forward areas where arrangements need to be strengthened.

Red: High risk

The authority’s arrangements are generally inadequate or may have a high risk of not succeeding.