Florence Bastos, Public Finance Technical Advisor
Since its launch in 2020, the Financial Resilience Index has become a vital tool for local authorities, offering a clear picture of their financial health and stability. Now in its fifth iteration, the Index provides critical insights into the challenges faced by councils and highlights the urgent need for reform to ensure long-term sustainability.
Understanding “At-Risk” councils
At risk councils required government interventions, such as capitalisation directions or Section 114 notices, signs of financial strain. These measures are often last resorts, triggered by underlying vulnerabilities tracked in the Index.
A review reveals that 30 out of 32 councils had two or more high-risk indicators over a four-year period. In addition, many of the councils still appeared high risk on similar measures despite receiving government support.
Key indicators of financial strain examined
Several measures of financial pressure are included within the Index to give a high-level picture of a local authority's financial resilience. These select measures were examined for 32 at risk councils over 4 years:
- Reserves: serve as a crucial financial buffer against unexpected challenges. Declining reserve levels limit councils’ flexibility, leaving them vulnerable to future shocks.
- Social care costs: with rising expenditures on adult and children’s social care consuming significant portions of council budgets. This limits resources for other services and reducing adaptability.
- Debt and interest costs: while borrowing can support strategic initiatives, high debt levels and associated interest payments can create long-term liabilities and limit financial flexibility.
The review also identifies several notable trends among at risk councils, including:
- Early warning signs: the index indicated signs of financial strain was evident as early as 2020/21, a sign that these challenges are deep-rooted and not solely the result of recent economic conditions.
- Short-term measures and their limitations: while government interventions, such as capitalisation directions, provide immediate relief they often come at a cost. These measures can lead to reduced asset bases or increased debt servicing requirements exacerbating long-term challenges.
- Persistent risks: Many councils continue to exhibit high-risk indicators even after receiving support, signalling the need for structural reforms to address underlying issues.
Making the most of the Index
While the Financial Resilience Index is an invaluable resource, it is not a standalone solution. Its historical perspective provides critical insights into past challenges but cannot predict future crises. The Index is most effective when used alongside other tools and strategies to create a comprehensive understanding of financial resilience and support informed decision-making.
The general findings from the Index emphasise the pressing need for systemic reform to address the root causes of financial instability. Temporary relief measures can only go so far - meaningful change requires a long-term approach. Key priorities for building financial resilience include:
- Reforming funding mechanisms to ensure stability and predictability.
- Addressing systemic cost pressures in areas like social care.
- Strengthening reserves to provide councils with a robust financial safety net.
The message from the latest Index is clear: addressing the financial challenges facing local authorities requires systemic solutions and collective effort. Financial resilience is about more than balancing budgets—it’s about ensuring that councils can continue to deliver vital public services for their communities, both now and in the future.
Read the full Financial Resilience Index 2024 briefing.
About the CIPFA/Infoshare+ Financial Resilience Index
The CIPFA/Infoshare+ financial resilience index is an analytical tool that provides a high-level comparative picture of English authorities’ financial position based on a range of measures associated with financial risk. There is no single overall indicator of financial risk, so the index instead highlights areas where scrutiny can provide added assurance.