Local authority financial resilience

This briefing paper summarises concerns around local authority financial resilience, which rose in profile in the late 2010s. It begins by setting out the accountability framework within which local authorities operate, including the accountability system operated by the Ministry of Housing, Communities and Local Government (MHCLG), and statutory codes of practice: the Prudential Code, treasury management guidance, guidance on local authority investments, and guidance on minimum revenue provision.

The paper then provides brief details of the legal accountability structures faced by local authorities, and of the process that they must follow when developing their annual budgets. This includes the role of the head of finance (the ‘section 151 officer’) and the procedure surrounding the issue of ‘section 114 reports’ within local authorities.

The paper provides details of concerns expressed by the local government sector in recent years regarding the future funding of local authorities. These include analyses of falls in central government funding for local authorities; analyses of the ‘funding gap’ provided by the LGA’s ‘Future Funding Outlook’ reports; and debates concerning whether English local authorities collectively have access to sufficient funding to continue to discharge their functions. The paper also covers some analysis of how local authorities have tackled the challenges caused by reductions in funding. Brief mention is made of local authority commercial property investments, an issue that has received some attention in the national media and from bodies such as the National Audit Office due to the large sums of money involved.

The paper provides some details of the high-profile difficulties experienced by Northamptonshire County Council in 2018, and subsequent events in the London Borough of Croydon in late 2020.

The paper includes a separate section on the financial challenges generated for local authorities by the coronavirus pandemic during 2020-21. This includes details of the various funding support packages provided by the Government to local authorities in that financial year; brief details of support grants for businesses, distributed via local authorities; and changes to the timing of some existing grant provision, in order to minimise cashflow difficulties.

The paper provides details of the Local Government Association’s peer challenge system, and the monitoring framework for local authorities operated by the Ministry of Housing, Communities and Local Government (MHCLG). Lastly, it summarises debate around the 2018 proposals from CIPFA (the Chartered Institute of Public Finance and Accountability) for a ‘financial resilience index’. This proposed to use a number of finance-related indicators to create a high-level measure of the financial resilience of all local authorities in England.

Local government is devolved to Scotland, Wales and Northern Ireland. Local authorities in those areas have not been subject to the level of funding reductions that their counterparts in England have faced since 2010. Accordingly, debates about local authorities’ financial resilience have focused principally on England, and this briefing paper therefore principally covers England.