The Role of Reserves in Local Government Financial Resilience

by Rob Whiteman, Chief Executive CIPFA

Last month, CIPFA published the results of its annual council tax survey. The rise in council tax across the country repeats the trend we’ve seen over recent years and it also reflects the financial strains that many local authorities are facing 
 
Local government finances have been much in the news over the past few months. Northamptonshire County Council’s extreme predicament has naturally grabbed headlines, alongside speculation over which council might be next.
 
The truth is, Northamptonshire is ultimately unlikely to be a unique or isolated case. The whole sector faces pressure owing to cuts, funding pressures and service demands. But other councils in as difficult a position as Northamptonshire have over a period of time managed their finances to a safer outcome.  In a year or so, without some concerted action we should expect more Section 114 notices because on a normal distribution curve not all councils are as well led as the best. Councils have lost 50% of grant and are spending 25% less than in 2010 and so the government should consider first quantum, that it’s putting more money into the system, but secondly how more councils can be supported or challenged to move up the the well-led curve. For our part, CIPFA is considering steps to further improve financial management capabilities.
 
On quantum, this year’s council tax increases will act as a sticking plaster, but as the LGA pointed out last week, local government faces a £5bn funding gap by 2020. This tells us that the sector either needs more resource from government or the ability to raise more resources from a wider range of taxes and charges. I would hope that these issues are addressed by widening MHCLG’s Fair Funding review.
 
And councils must keep up the pressure on growing their tax bases through growth and maximising the opportunities of partnership working to achieve value for money at system level. But the sector must most of all keep its feet on the ground. Perhaps the aphorism that turnover is vanity and margin is sanity applies less to public bodies, but there is no question that the overriding rule that cash is king applies just as much. That Northamptonshire is running out of money by overly depleting reserves over recent years has led to its plight. 

Local government reserves play a crucial role in good public financial management. They exist so that a council can invest in service transformation for the future or else allow them to respond to unexpected events or emerging needs. Critics have been quick to criticise these pots of money held by councils, arguing that services should not be failing while councils hold reserves. But taking away capital and technical sums such as insurance, usable revenue reserves usually only amount to about a month’s turnover on operations. And always remember as one-off resources, they can only be spent once, while service demands will continue year on year.
 
Finally, as CIPFA guidance sets out, the legal requirement that a revenue budget deficit is not permissible when it cannot be covered by revenue reserves, applies to any future financial year and not the just the current year. The question is not whether there will be more s114 notices in the years ahead, but whether there will be more s114s now in relation to the years ahead if reserves are overly depleted. And we should applaud that the system works. Northamptonshire CC has set a more balanced budget for 2018/19, on advice from officers and external auditors, than would have occurred without the recent notice.