Scanning Financial Horizons for Local Government

August 24, 2010

Nick Hope, Senior Researcher NLGN
eGov monitor

Local government faces a profound challenge over the coming years as central government embarks on a radical program of fiscal consolidation. The author explores the impact of the budget cuts on services and how councils should deal with it.

The New Local Government Network (NLGN) has just completed a major project that forecasts the overall decline in local authority income, highlights the vulnerability of different service areas to cuts and considers how the impact of funding reductions on services can be managed and minimised.

Shortly after coming to office the Coalition Government announced £1.165bn of in-year funding reductions to the 2010-11 grant settlement to local government. However this first wave of cuts is relatively small compared to the tsunami of funding cuts that will hit councils over the course of this parliament.

In the June 2010 Budget the Chancellor outlined his plans to accelerate the previous Government’s deficit reduction plan, with 80% of the additional measures to be delivered through spending reductions. Predictions suggest that local government will be confronted with a cumulative real terms cut in non-education funding from central government of a third by 2014-15.

It is important to note, however, that councils are not wholly dependent on central government funding and possess other income streams, such as Council Tax and income from fees and charges. NLGN’s middle case scenario forecast suggests that, once locally generated income is taken into account, local government could see a cumulative real terms cut to their overall revenue income of 16.5 per cent between 2010-11 and 2014-15.

Councils have very different mixes of income sources and those that are more reliant on income streams that are likely to fall, or not recover as quickly as others, could face far greater reductions.

More deprived areas are likely to be hit harder by cuts to grant because this funding is distributed, in part, on a needs-resource basis or targeted towards problems associated with high deprivation. We can already see this playing out, with the ten local authority areas facing the maximum 2% in-year cuts for 2010/11 all in the top quarter of areas in the country in terms multiple deprivation.

For the local government sector as a whole, if demands on expenditure were to remain static over this parliamentary term then meeting them would be tough, but demands on expenditure are likely to grow significantly, making the scale of challenge even greater.

Our survey of local authority Finance Directors suggests that the funding gap most commonly anticipated by councils by 2014-15 will be between 21-25 per cent. However our quantitative modelling suggests that this is likely to be an underestimate. It is clear that local government will have to climb up a downward moving escalator if services are not to hit rock bottom.

Our in-depth interviews with council Chief Executives and Finance Directors suggest that the range of services local government provides will have to be cut. If cuts to some services have to be made, our survey research suggests that particular service areas will be more exposed than others; services like museums and galleries and recreation and sport facilities are particularly vulnerable. The key challenge is how to minimise the cuts that have to be made and the number of service areas that are affected.

There is a burning platform for radical action to make major efficiency savings and to undertake a comprehensive redesign of services. Local government has delivered substantial efficiency savings in recent years, outperforming many other parts of the public sector, and is therefore uniquely placed to drive forwards efficiency savings on a far wider scale.

There are a number of options available to councils but many of the reforms that have the greatest potential to deliver substantial efficiency savings are managerially complex, requiring sophisticated planning and negotiation of new joint working arrangements. They take time, need funding certainty over extended periods and demand devolution of resources and powers to allow a more strategic approach to be adopted.

Central government must act with transparency about the planned scale and nature of funding reductions to local government, and local government must be open and honest about the difficult trade-offs between services that have to be made and the need for citizens and communities to rely less on direct service provision by the council.

The benefits of negotiating a new settlement between central and local government and between local government and citizens are clear. Failure to do so will risk avoidable sharp cut-offs in local services, a public backlash and a legacy that could have profound and damaging implications for communities across the country.


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