Copied from Local Government chronicle online
30 January, 2013 | By Ruth Keeling

The government must establish mechanisms for dealing with “widespread financial failure” in local authorities, the National Audit Office has warned in its first assessment of the sector’s financial robustness.

A report by the watchdog said Whitehall was failing to understand the combined effects of its policy reforms on councils’ finances. Despite councils having “generally coped well” with the significant cuts made to their budgets, the NAO’s head Amyas Morse warned that councils would struggle to absorb further cuts over the next two years without reducing services.

“The [Department for Communities & Local Government] will need to be able to detect emerging problems and respond flexibly and quickly,” Mr Morse said.

Margaret Hodge, the Labour chair of the public accounts committee, went further, describing herself as “alarmed” by details in the NAO report and describing the lack of transparency over the scale of the cuts ministers had made to council budgets as “extraordinary”.

“The department needs to make clear what it will do if multiple authorities fail financially,” she said.

DCLG ministers and officials will be expected to appear before the committee’s MPs to answer questions on how they have assessed risks and intend to monitor for failure.

“My committee will expect the department to provide us with a clear statement on the financial impact of the government’s changes to authorities’ funding and what this might mean for local services,” Ms Hodge added.

The NAO report details several significant funding and policy changes that have heightened risk and uncertainty for local government.

And in a key finding, it claimed some Whitehall departments had failed to provide DCLG with costed estimates of the effects of their policies on councils.

The watchdog’s researchers discovered that the Department for Education’s 2010 spending review submission failed to include an estimate of aggregate cost pressures or possible cost savings across children’s services.

This omission resulted in DCLG assuming cost pressures on children’s services would be no greater than inflation over the spending review period.

The NAO also discovered that Whitehall departments lacked data on how policy reforms would hit different regions.

Research by the Association of Directors of Children’s Services last year revealed that demand for services had not only gone up – meaning service costs outstripped inflation – but also that geographical cost variations ranged from -30% to +100%.

LGA chair Sir Merrick Cockell said: “It is concerning that the departments examined by the NAO had not fully scoped the demand for and cost of delivering services to different areas and that not enough effort was made across Whitehall to assess what savings were possible before cuts would start eating into frontline services.”

Speaking as the government embarks on a new spending review, Sir Merrick called for assessments of cumulative impact of changes to become “a basic feature” of future government decisions.

DCLG did not respond to the specific recommendation of the NAO report but said: “Every bit of the public sector needs to do its bit to tackle the deficit left by the last administration, including local government which accounts for a quarter of all public spending. Councils need to do their bit to deliver sensible savings, and in turn, protect frontline services and keep council tax down.

“Our broader local finance reforms will reward councils which promote local jobs and enterprise, driving economic growth and making councils less dependent on Whitehall handouts.”

A Department for Education spokesperson said: “Local authorities know best how to meet the specific needs of their communities. That is why we have removed ring-fencing from a number of grants so that local authorities have more freedom to spend their resources where they are needed most – on disadvantaged children and families.

“We are working with local authorities to consider the possibility for efficiencies in major spending areas.”

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