It’s hard to overstate just how challenging the current environment is for local authorities. Many are experiencing major financial difficulties, with years of reductions in central government funding, exacerbated by an increasing demand for critical services such as social care, housing and special educational needs. At the same time, inflationary pressures and the rising cost of borrowing have left councils struggling to plug budget shortfalls.

With roughly 80% of local authority budgets spent on providing these critical, statutory services, the limited flexibility this affords councils means that it has become increasingly difficult to deliver public services to local residents.

The funding model for local government in England has become extremely complicated, with a core funding formula based on outdated demographic data, hundreds of funding streams to apply for and manage, a complex process of reallocating business rates between councils, and significant constraints on the ability of local authorities to increase council tax or other local taxes and charges in line with spending pressures. In addition, the uncertainty caused by short-term funding settlements has made proper financial planning really challenging.

Many councils were encouraged to take advantage of ultra-low borrowing costs during the second half of the 2010s to invest in commercial property and business ventures to generate alternative sources of income. However, the high-profile cases of Thurrock, Woking, Croydon and Slough demonstrate how inadequate accountability, poor governance and underinvestment in finance teams can end with councils in effective bankruptcy. 

The local audit crisis makes spotting and dealing with any governance failures even more challenging; just 1% of local bodies published audited accounts on time for 2022-23. While we welcome the introduction of statutory backstop dates for delayed accounts, and the government’s commitment to overhauling the local financial reporting and audit system, it will take a long while to get back on track. What’s more, fundamental underlying issues identified by the Redmond Review have yet to be tackled.

There is a widespread acceptance that local authority accounts are very difficult to understand, unless you have deep technical and professional knowledge. The word impenetrable has been used numerous times, with the cross-party Levelling Up, Housing and Communities Committee’s 2023 report highlighting the difficulties councillors have in understanding the complicated nature of the accounts, let alone the wider public. Eric Pickles’ army of armchair auditors has not materialised and even if it had, it would have struggled to work out how public money is being used.

In theory, the annual financial report should be one of the cornerstones of local democracy; providing the information needed for councillors and the public to hold their local authorities to account. But with little third-party scrutiny or assurance beyond the external audit, the complicated nature of local authority accounts means they are not adequately fulfilling their role in supporting local democracy and accountability, ensuring value for money and driving effective, efficient local services.

Local authorities are grappling with a complicated array of interconnected challenges. It’s not simply a case of more money solving all the problems. If only it were! Instead, there are deep structural problems within local government that must be resolved.

Bold reform is desperately needed 

Financial reform

It goes without saying that local government is currently underfunded, and some extra cash now would really help. But without more fundamental reform we will only end up back in the same position again.

One immediate change that would help would be to end the practice of requiring local authorities to bid for money from multiple pots administered by Whitehall. This involves a degree of micromanagement by the national government that wastes significant sums of time, money and effort for very little benefit. There is a whole industry of consultants helping councils with their bids with money going to those that are best at writing them, instead of going to the places that need it most. Meanwhile, civil servants are tied up in administration instead of focusing on strategic challenges facing local government.

Reform is also desperately needed to the outdated core local government funding formula and to the hundreds of funding streams that are used to allocate money to local authorities. Not only do they need to be updated to reflect the demographics of each council area today, but the funding system needs to be designed in a way that keeps up with demographic and other changes so that they don’t get so out of date again.

A more radical reform that should be considered would be to split the funding of the social welfare responsibilities of local government – principally adult and children’s social care, housing and homelessness, and special educational needs – from the day-to-day delivery of local public services and capital investment. Increasing demand for the former continues to squeeze budgets for the latter. Separating funding streams – including council tax precepts – would allow for the challenges to be visible and for alternative approaches to be tried, such as regional budgets for social welfare spending to spread the risks of a spike in homelessness in one council area across much larger areas. It would also allow a much more honest conversation with local residents about why council tax bills are going up at the same time as the quality of services is deteriorating.

Probably the most important reform that is needed is to provide more stability and predictability to the funding that councils receive. Not knowing – or even having to guesstimate – the level of central government grant funding until just before the start of each financial year makes it extremely difficult for local authorities to plan ahead effectively, especially on capital projects which can extend over several years. The government’s plan for rolling three-year spending reviews updated every other year should help, but by how much has yet to be seen.

Either way, the funding system needs to recognise the importance of investing for the long-term. The recent RAAC (Reinforced Autoclaved Aerated Concrete) debacle demonstrates how cutting back on maintenance and new construction can end up costing more in the long run. Similarly, sustainable improvements in the quality and efficiency of public services are only likely to be deliverable with sufficient up-front investment.

Structural reform

The evolution of local government has resulted in a patchwork quilt of different types of regional and local authorities across England. Some areas have a unitary authority or a metropolitan borough responsible for all local public services, while in others those responsibilities are split between county and district councils.  About half the population live in areas with a regional mayor with a more strategic role over transport and economic development, while the rest of the country have no equivalent champion to argue the case for a better deal for their region.

It is perhaps unsurprising that Whitehall struggles to manage this complex web with over 440 different regional and local authorities of different sizes, shapes and responsibilities to deal with. Contrast that with a country like Germany, where the federal government works with 16 regional administrations and lets them deal with local authorities in their regions.

While streamlining the different types of local authorities has been debated for a long time and might make the system function more effectively, probably a higher priority is the need to accelerate the roll out of a regional tier of government across England or even adopt the ‘big bang’ approach seen in France, which created a completely new tier of regional government across the country in 1986. This is particularly important if local government is to be able to contribute to genuine economic development where, for example, Greater Manchester’s mayor Andy Burnham is all too eager to grasp whatever powers he can and run with them, but there is no one to take the lead in the same way for most of the South West.

A clearer, simpler local government structure would facilitate better understanding of the responsibilities of local government and also proper funding and resourcing.

Governance reform

Many of the problems we have seen in local authorities have come down to poor governance and weaknesses in accountability, and our view that these becomes more important – not less – when money is tight. Hence it is concerning that many of the same themes occur again and again, such as councillors not fully understanding the risks of the decisions they are being asked to approve, and a lack of transparency in the information provided to audit and scrutiny committees.

Our vision for local audit sets a series of proposals to improve governance and financial management in addition to the improvements in financial reporting and audit that provide the critical foundations they need. One key proposal that we believe is essential is the need for audit committees to contain at least one independent member with financial expertise to be able to assist their elected colleagues in asking the right questions and in navigating the worlds of finance and audit.

Strengthening governance arrangements and investing in finance teams to improve their ability to support their functioning is critical, not only to ensuring councils get the best value for money from the money they spend every day, but also that they make the right strategic decisions – looking after the billions and millions as well as the individual pounds.

Strengthening financial expertise across local authorities

The pace of change in the sector can feel frustratingly slow at times and we believe that the government needs to take bolder action to implement the changes proposed in the Redmond Review that is now over four years’ old and fix the financial foundations of local government.

A key part of this is the need to strengthen finance teams, which are struggling to recruit the staff they need and to invest in their skills, as well as supporting councillors, officers and non-finance staff with their understanding of local authority finances.

I am therefore very pleased that we can publish a series of case studies that demonstrate the extent to which local authorities and public sector bodies can benefit from strong finance skills. By sharing best practice, our aim is for readers to better understand how their teams can strengthen financial expertise and ensure effective financial decision-making.

Each case study focuses on a particular challenge. They explore issues including: how successful finance teams can work effectively with business partners to deliver the best outcomes; and the skills required to ensure data-led decision making.

We have a case study focusing on how finance teams can ensure their non-financial colleagues understand financial information and how best to develop financial literacy across the organisation. We also cover the common challenges councils face in preparing financial statements and how best to prepare for an external audit.

Across these different case studies, it is clear that the finance profession has so much to offer. The skillset required is hugely diverse; encompassing technical knowledge, commercial expertise, technology know-how along with vital softer skills such as communication and story-telling.

To support our members, we will continue to call for greater investment and skills training for local authority finance teams. Our annual ICAEW Public Sector Conference shares expert insight on the requirements of finance professionals and key public finance management topics.

We also need to foster and promote a highly valued and thriving finance profession within local government that attracts talented individuals to work in the sector and means younger people view it as an exciting career proposition.

When I talk to our local authority finance members, I am always struck by the amazing work they are doing; really making a difference by providing services that are changing people’s lives in their local community. What could be better than that?

I would like to specifically thank the finance professionals that contributed to these case studies for their time and insights and also for their dedication to advancing local authority financial expertise and ensuring better outcomes for their local residents.