Written evidence submitted by London Councils [FSS 014] Summary London Councils welcomes the inquiry. Our submission highlights the following key points: London boroughs were under significant financial pressure even before the coronavirus outbreak due to a decade of funding reductions, increased demand, and underfunded new duties. A number of other structural funding issues have increased the financial pressures on London boroughs and hampered their ability to plan their finances sustainably, including: a short-term approach to funding by Government; delays to reform of the finance system; and the potential impact of DSG deficits on general fund budgets. Covid-19 has intensified the financial pressure: Even after c.£1.6 billion in pandemic funding from central government, London boroughs forecast a potential shortfall of £700 million in 2020-21. While commercial property investment has increased in recent years, spending has been concentrated in a minority of authorities and is not having a distortionary effect on overall property market activity, and investments are subject to significant internal and external scrutiny. There are a number of measures the Government can undertake to support the financial sustainability of the sector over the short-, medium- and long-term, including: o most immediately, by making good on the promise to fully support local government through the pandemic; o in the medium term, providing certainty by delivering a multi-year Spending Review that provides sufficient resources to stabilise the sector, acknowledges the underlying structural funding pressures, and new demand pressures being put on local government as a result of the pandemic; and o in the longer term, use the key events in the next year (the fundamental review of business rates, CSR, Devolution White Paper, reforms to Adult Social Care, and the Fair Funding Review) to reform local government finance by including access to a broader range of revenue raising powers and flexibilities, so the sector is not overly reliant on one particular tax. Introduction 1. London Councils represents London’s 32 borough councils and the City of London. It is a cross party organisation that works on behalf of all its member authorities regardless of political persuasion. 2. We welcome the opportunity to provide evidence to the Housing Communities and Local Government Committee’s inquiry into local authority financial sustainability and the Section 114 Regime. Our member authorities have been put under immense financial pressure by a decade of austerity, rising demand for services and, in the last 10 months, the Covid-19 pandemic. 3. This submission is split into four sections that reflect the call for evidence as follows: a. Section 1 covers issues likely to impact the financial sustainability of local authorities b. Section 2 looks at the scale of the sustainability challenge facing local authorities c. Section 3 briefly covers the role of MHCLG, and d. Section 4 looks at measures that the government could take to support Local authority financial sustainability. Section 1: Issues likely to impact the financial sustainability of local authorities Structural funding issues Disproportionate austerity 4. Even before the coronavirus outbreak, London boroughs were under significant financial pressure following a decade of funding reductions. The overall resources available to London local government fell by over a quarter in real terms since 2010- 11. The equivalent cut to overall Resource DEL (including spending on Health, Education, and Police) was 12%. Meanwhile, overall public spending (Total Manged Expenditure) actually increased by 5% in real terms over the same period (see Figure 1 below), suggesting local services bore a disproportionate share of austerity. 5. Over the same period, demand for services increased significantly as London’s population grew by 12%: almost twice the rate of growth across the rest of England (7%) meaning that London boroughs now serve nearly a million more people than in 20101. At the same time, new policies and legislation also transferred additional responsibilities - and associated costs - from central to local government without sufficient funding, which have added further financial pressures of around £1 billion to London boroughs. Figure 1 – Cumulative like-for-like change in public spending - 2010-11 to 2020-21 1 ONS – Mid-year estimates and Sub-national population projections Source: OBR – historical official forecasts database; MHCLG (LGF Settlements 2011-12 to 2020-21) 6. Boroughs have coped by restructuring; investing in demand reduction; renegotiating contracts; sharing services and back office functions; embracing digitisation; and becoming more commercial. As a result, they are now more efficient and leaner organisations – with 53,000 fewer staff than in 2010 (a reduction of 29%)2. With so much already done, and many of these activities providing only one-off savings, councils are fast running out of options. 7. Even before Covid-19, London boroughs were planning £400 million of savings this year, as part of £2 billion needed over the 4-year Medium Term Financial Plan (MTFP) period to balance their books. The level of overall funding restraint has weakened the financial resilience of the sector overall and meant that some individual authorities were already in a difficult financial position before the pandemic hit. The short-term approach to local government funding 8. A further underlying issue that is likely to have adversely affected the ability of some authorities to plan their finances in the most strategic, efficient and effective way over the last 5 years, has been the Government’s short-term approach to funding, and its delays to reform of the finance system. 9. The scale of the funding crisis in adult social care in recent years has required several major policy interventions. Since the start of the last multi-year Spending Review period in 2016-17, the Government has repeatedly changed its approach to adult social care funding via a series of short term funding solutions, creating new grants, extending previous ones (like the Improved Better Care Fund), and extending the social care precept annually. Had an appropriate level of funding been provided for the sector at SR15, the emergency measures may not have been required, and 2 LGA - Quarterly Public Sector Employment Survey, https://www.local.gov.uk/ons-quarterly-public-sector- employment-survey councils could have spent the funding in a much more strategic and effective way. Funding that is announced late in the financial year is very difficult to spend in a way that does not simply perpetuate the status quo. 10. More broadly, the last two years have seen a growing level of uncertainty regarding local government finance, with two single year spending reviews, repeated delays to the conclusion of the Fair Funding Review, and the lack of a clear policy on further business rates retention. The latter starting in 2015 with a clear ambition for 100% retention by 2020, followed by a heterogenous approach to piloting further retention across the country, and the current position is that even the scaled-back 75% retention scheme and proposed simplified “alternative model” are uncertain to happen. 11. Finally, the annual settlement process, and its lateness in the financial year, stifles a strategic approach to funding local services, and hinders councils in developing long- term plans. Medium-term funding certainty would provide the platform to deliver transformation plans and longer-lasting efficiencies through prevention and invest-to save initiatives that are required to ensure longer-term financial resilience – particularly following a period prolonged funding restraint. DSG deficits 12. A further structural issue that has progressed rapidly in recent years is the growing level of accumulated deficits on the Dedicated Schools Grant (DSG) – driven primarily by the huge increase in demand for support for children with Special Educational Needs and Disabilities (SEND), following changes set out in the Children and Families Act 2014. Demand has risen by over 50% since 2015, and what began as only a few authorities building up large deficits is now a widespread issue across the sector. London boroughs anticipate accumulated deficits on the DSG of over £300 million by the end of the current financial year and over £400 million by the end of next year without further significant support from government. The scale of deficits for some London boroughs mean they have little or no prospect of recovering them over the next three years. The recent statutory override provided by DfE, which effectively hardens the ringfence on the DSG by asking authorities to change negative DSG balances to separate account solely for this purpose, rather than charging to the general fund revenue account (applicable for the next three years) is welcome in the short term, it does nothing to help the longer term position or to provide councils with the assurance they need that auditors won’t ultimately make adverse judgements regarding the ability of councils to balance their general funds because of the issues with the DSG. 13. All of these structural factors have put local government in a far weaker position with regards to financial resilience than it was a decade or so ago. Commercial investment decisions 14. The scale of the funding reductions since 2010 has coincided with councils diversifying and developing alternative sources of revenue within the confines of the current legislation. However, there has been a growing degree of criticism of commercial investment decisions from commentators and the Government in recent years. 15. Local authorities have a long track record of investing in property - including commercial property - for the benefit of the local area. This is a core part of regeneration and place-shaping activity (a core local government duty) with many projects containing a blend of objectives. The powers to do so are well established3, and the use of legal powers is subject to checks and balances. This includes the prudential framework, an array of guidance provided by CIPFA, as well as internal oversight and scrutiny, and the external audit regime.