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By Rob Whiteman, Chief Executive, CIPFA
First appeared in Public Finance on 31 October 2013
The chancellor’s call for a return to surplus by the end of the next parliament is likely to mean even more cuts by 2020 – leaving a grim outlook for local government.
We have reasons to be optimistic on the economy. Although we’re experiencing a flatter recovery than in the 1930s, 1970s or 1990s, the UK excels at things demanded globally: science, financial services, luxury goods, universities, design, creative industries and high-quality engineering. However, for public service leaders, it’s time to divorce economic recovery from our fiscal outlook – the prospects are grim.
Future rising interest rates will push up the cost of government debt, and increasing levels of personal debt will limit scope for tax increases.
Added to this are three structural issues: the ageing population; our nationalised healthcare system, which means that improvements in health science fall to the state to fund; and, despite welfare reform, a relatively unskilled workforce that is ill suited to the jobs to be created. All three increase public expenditure to a degree that the government’s room for manoeuvre within the already tight fiscal envelope will be limited.
However, at some point, the public may seek a different debate – for example, what level of service is expected rather than what is affordable? This will create a tension with the chancellor’s stated aim to create a surplus by 2020 – perhaps nowhere more so than in local government.
By the end of the present Spending Review in 2015/16, local government will have seen spending reduce by 35% compared with 8% in education and a 4% increase in health. But local government has survived, and one could argue that this ‘success’ is therefore taken for granted.
Presently, local government is caught in a bind. According to media-savvy Communities and Local Government Secretary Eric Pickles, it is letting the public down by charging too much for parking, not collecting bins every week or limiting homecare visits to 15 minutes, whereas all of these can be solved by paying the chief executive less, sharing back-office functions and operating with fewer reserves.
These issues are undoubtedly important, but arithmetically, they do not equate to the demands of safeguarding children, caring for the elderly or sufficiently investing in adult skills. However, as public opinion still holds the government to account for hospital winter pressures but not for social services, the prospects of any financial respite for local government remain pretty slim.
So what now for council finances if the next government wants a surplus by 2020? The answer falls into two distinct categories, which are not unrelated: the structure of council finances and the structure of public spending in localities.
Council finances: All parties appear interested in the role of councils in promoting growth. Where traditionally an area improving its prospects was seen by the Treasury as a displacement within the economy, better skills, transport, housing supply or broadband are now seen as good for UK plc in aggregate, too.
On capital finance, the prudential framework means that, if it so chooses, government can allow councils to expand borrowing in an affordable way. But on revenue finance, the framework appears to be unfit for purpose.
Many councils raise relatively little resource from locally derived taxation, and so are dependent on government funding – which, under successive governments of all parties, looks tantamount to gerrymandering. And soon, council tax will need a referendum to increase above low-level inflation.
It is doubtful whether the current framework for revenue finance and the new referendum process will last even a decade if placed under further strain by material cuts from 2016/17. So the question remains whether something more sustainable can be built through cross-party support that would last through several parliaments and fiscal scenarios.
Local public spending: No government has cracked ‘total place’. The situation is made more complex by the localism reforms that have introduced police and crime commissioners, clinical commissioning groups, trusts and academies, and helped free local government from much of the previous inspection focus on community outcomes.
The impetus for local joining together is therefore unlikely to come from a single view in central government. Local agencies must learn to invest together more regularly.
While social care and health integration, and early intervention or prevention, are better for clients, those local agencies must collectively assess whether a focus on this is better for the taxpayer, too. For example, will integration ease the demand pressures on both NHS and local government budgets?
Ultimately, all public services – police, schools, health and councils – will face mounting pressure at a time when the scope for councils to fill the gaps and bring agencies together to stem demand pressures may be impeded by a weak council finance structure that appears unlikely to be capable of withstanding further cuts from 2016/17.