Local Authority Financial Sustainability and the Section 114 Regime

Housing, Communities and Local Government Committee Closed Inquiry
Opened: 1 Dec 2020 Closed: 25 Oct 2021 Parliament page
This inquiry will consider the scale and depth of financial sustainability issues within local authorities with the potential to lead to the issuing of S114 notices, including the effect of commercial investments and the impact of Covid-19, and the role of central government in helping councils avoid this outcome. Read more
9 Recommendations
11 Conclusions
1 Report
3 Oral sessions
3 Events
Activity timeline 5 events
21 Oct
2021
Report published
19 Jul
2021
Report published
25 Mar
2021
Oral evidence
22 Feb
2021
Oral evidence
8 Feb
2021
Oral evidence
Oral evidence sessions 3 sessions
25 Mar 2021
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Oral evidence
Chris Buss · Croydon Council Cllr Hamida Ali · Croydon Council Katherine Kerswell · Croydon Council Sarah Ironmonger · Grant Thornton
22 Feb 2021
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Oral evidence
Alex Skinner · Department for Levelling Up, Housing and Communities Luke Hall · Ministry of Housing, Communities and Local Government
8 Feb 2021
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Oral evidence
Cllr Richard Watts · Local Government Association (LGA) Rob Whiteman · CIPFA
Title HC No. Published Items Response
Second Report - Local authority financial sustainability and the… HC 33 19 Jul 2021 20 Responded
Recommendations & Conclusions
20 results
1 Recommendation Accepted
Second Report - Local authority fi…
The failure to properly fund children’s and adult social care, especially adult social care, is...
The failure to properly fund children’s and adult social care, especially adult social care, is the single biggest threat facing local government financial resilience. Given that the cost of providing social care consumes between 60% and 70% of the budgets … Read more
Government Response
The government has committed to investing an additional £5.4 billion over three years, following a 7 September 2021 announcement, to begin a comprehensive programme of reform for adult social care. Further details will be published in a White Paper later this year.
Ministry of Housing, Communities and Local Government
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2 Conclusion Rejected
Second Report - Local authority fi…
We agree with the principle of incentivising councils to grow business rates in their area,...
We agree with the principle of incentivising councils to grow business rates in their area, as a means of making them less reliant on central funding, but we are concerned about the impact on councils that, through no fault of … Read more
Government Response
The government stated it would not proceed with the implementation of the Fair Funding Review and business rates reset in 2021/22. It confirmed that decisions on the future direction of local government finance reform will be taken at the ongoing Spending Review.
Ministry of Housing, Communities and Local Government
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3 Conclusion Deferred
Second Report - Local authority fi…
The question of the BRRS is closely related to the debate about the longstanding role...
The question of the BRRS is closely related to the debate about the longstanding role of equalisation in how local government in England is funded. Whilst the purpose of equalisation is to ensure fairness between councils, there is little agreement … Read more
Government Response
The government has deferred decisions on local government finance reform, including the BRRS and equalisation rules, to an ongoing Spending Review, citing the need to assess the pandemic's impact.
Ministry of Housing, Communities and Local Government
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4 Recommendation Rejected
Second Report - Local authority fi…
We recommend that the Government implement the Fair Funding Review and business rates reset as...
We recommend that the Government implement the Fair Funding Review and business rates reset as soon as possible, as the quickest way of partly restoring the link between funding and need. The Government should also allow councils to retain 75% … Read more
Government Response
The government explicitly rejected the immediate implementation of the Fair Funding Review and 75% Business Rates Retention, stating that decisions on the way forward will be taken at the ongoing Spending Review.
Ministry of Housing, Communities and Local Government
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5 Conclusion Rejected
Second Report - Local authority fi…
We are pleased that the allocation of the £300 million grant for social care mitigates...
We are pleased that the allocation of the £300 million grant for social care mitigates the distributional impact of the council tax rises, but we do not think the fairness of the funding model should be reliant on one-off, short-term … Read more
Government Response
The government rejects the implied recommendation for council tax reform and revaluation, stating it has no plans for fundamental change. It argues that a revaluation would be expensive, lead to higher bills for many households, potentially penalise those on fixed incomes, and not address disparities in council tax base strength.
Ministry of Housing, Communities and Local Government
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6 Recommendation Rejected
Second Report - Local authority fi…
The Government should reform council tax by undertaking a revaluation of properties and introducing additional...
The Government should reform council tax by undertaking a revaluation of properties and introducing additional council tax bands, in line with the recommendations of our predecessor Committee. In the longer term, the Government should consider options for wider reform of … Read more
Government Response
The government rejects the recommendation, stating it has no plans to replace or fundamentally reform council tax. It argues that a revaluation would be expensive, lead to bill increases for many households, potentially penalise people on fixed incomes, and not address disparities in council tax base strength.
Ministry of Housing, Communities and Local Government
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7 Conclusion Acknowledged
Second Report - Local authority fi…
The funding base of local government in England is very narrow.
The funding base of local government in England is very narrow. As the pandemic has highlighted, revenue derived from council tax and business rates is also insecure. As concluded by our predecessor Committee, greater fiscal autonomy could contribute to local … Read more
Government Response
The government defends the current charging regime and highlights existing local flexibilities for council tax. It states that the Chancellor’s Fundamental Review of Business Rates is considering reform options, including greater local flexibility, and will conclude in Autumn.
Ministry of Housing, Communities and Local Government
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8 Recommendation Accepted in Part
Second Report - Local authority fi…
We recommend that the Government widen the funding base of local government to make it...
We recommend that the Government widen the funding base of local government to make it less vulnerable to shocks such as the covid-19 pandemic, including by giving councils more flexibility over local taxes and other revenue-raising powers. This would also … Read more
Government Response
The government largely upholds the current charging regime and council tax flexibility, while noting an ongoing review of business rates that will conclude in the Autumn. It also highlighted a new Health and Social Care Levy that will provide revenue to local authorities.
Ministry of Housing, Communities and Local Government
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9 Conclusion Deferred
Second Report - Local authority fi…
We understand the Government’s reasons for resorting to a one-year spending review last year, but...
We understand the Government’s reasons for resorting to a one-year spending review last year, but we note it followed a one-year spending review in 2019 and that the last multi-year spending review came in 2015. Local government cannot manage its … Read more
Government Response
The government agrees that multi-year settlements provide certainty for effective planning. However, the approach to the next settlement will be informed by the ongoing Spending Review, and the government is exploring opportunities to simplify the funding system.
Ministry of Housing, Communities and Local Government
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10 Conclusion Acknowledged
Second Report - Local authority fi…
The proliferation in recent years of small, often one-off and ring-fenced grants, sometimes involving a...
The proliferation in recent years of small, often one-off and ring-fenced grants, sometimes involving a competitive bidding process, and the uncertainty around such funding, can hinder robust financial planning and management by local authorities, as has been acknowledged by the … Read more
Government Response
The government agrees that a stable funding environment is important and recognizes the challenges of multiple competitive funds. It states it is exploring opportunities to simplify the system, while also noting that ringfences and competitions can be helpful.
Ministry of Housing, Communities and Local Government
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11 Recommendation Deferred
Second Report - Local authority fi…
The next financial settlement for local government must be a multi-year settlement.
The next financial settlement for local government must be a multi-year settlement. The Government should also consolidate the number of small and ring-fenced grants, which can limit local authorities’ ability to provide services flexibly, and should reduce the number of … Read more
Government Response
The government agrees that multi-year settlements provide certainty and is exploring opportunities to simplify the funding system, but defers a decision on the next settlement being multi-year, stating it will be informed by the ongoing Spending Review.
Ministry of Housing, Communities and Local Government
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12 Conclusion Accepted
Second Report - Local authority fi…
The Government deserves credit for having responded to an unprecedented crisis with significant emergency funding...
The Government deserves credit for having responded to an unprecedented crisis with significant emergency funding that, from a national perspective, broadly covers all the additional financial pressures consequent on the pandemic and lockdowns in 2021–22. The effects of the pandemic … Read more
Government Response
The government highlighted over £12 billion in funding already committed to councils, stating that allocations are based on need and that it continues to monitor local authority finances to inform the ongoing Spending Review and support individual authorities.
Ministry of Housing, Communities and Local Government
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13 Recommendation Acknowledged
Second Report - Local authority fi…
We urge the Government to consider ways of mitigating the uneven financial support across local...
We urge the Government to consider ways of mitigating the uneven financial support across local authorities and provide greater certainty to councils over what future costs incurred as a result of the pandemic it intends to cover. (Paragraph 55) Local … Read more
Government Response
The government states it has committed over £12 billion in funding and distributed it based on need. It is using monitoring and engagement to inform the ongoing Spending Review and will continue to work with individual authorities and keep the situation under review, without committing to specific new ways of providing future certainty.
Ministry of Housing, Communities and Local Government
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14 Conclusion Accepted
Second Report - Local authority fi…
Commercial investment appears to pose no clear threat to local government financial resilience overall, and...
Commercial investment appears to pose no clear threat to local government financial resilience overall, and where it has contributed to financial instability, the councils concerned must bear ultimate responsibility. We also welcome the Government’s reforms to the PWLB’s lending terms, … Read more
Government Response
The government is strengthening the capital system and Prudential Framework by working with CIPFA to amend statutory codes, with planned implementation from April 2022, and by tightening legislation on Minimum Revenue Provision duty and borrowing capping powers.
Ministry of Housing, Communities and Local Government
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15 Conclusion Accepted in Part
Second Report - Local authority fi…
Furthermore, whilst we welcome the Minister’s commitment to gathering the best quality data to better...
Furthermore, whilst we welcome the Minister’s commitment to gathering the best quality data to better understand councils’ exposure to commercial investment, we think this should have been done by now. We are also concerned about the lack of a statutory … Read more
Government Response
The government is improving its monitoring of the sector through enhanced data collection, intelligence gathering, and developing tools for earlier risk identification, and requires local authorities to submit three-year capital spending and borrowing plans. However, it does not directly address the concern about the lack of a statutory requirement for compliance with the prudential code.
Ministry of Housing, Communities and Local Government
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16 Recommendation Accepted in Part
Second Report - Local authority fi…
We recommend that the Government legislate to make compliance with the prudential code by local...
We recommend that the Government legislate to make compliance with the prudential code by local authorities a statutory duty. The Government should also make good on its commitment to improving the data it collects on local authority commercial investment. (Paragraph … Read more
Government Response
The government states that local authorities already have a duty to "have regard to" the Prudential Code and is working with CIPFA to make changes to statutory codes, with implementation from April 2022. It also details a programme of work to strengthen the capital system and compliance, including improving data for monitoring sector risk and tightening related legislation.
Ministry of Housing, Communities and Local Government
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17 Conclusion Accepted in Part
Second Report - Local authority fi…
As highlighted in Sir Tony Redmond’s independent review of local authority audit, the local audit...
As highlighted in Sir Tony Redmond’s independent review of local authority audit, the local audit market is deeply flawed. We are particularly concerned about the shortage of specialist local auditors, about the principle of allowing local councils 42 Local authority … Read more
Government Response
The government has undertaken several activities in response to the Redmond review, including extending audit deadlines and confirming its intention to establish ARGA as the new system leader for local audit, while also keeping existing arrangements under review following a consultation.
Ministry of Housing, Communities and Local Government
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18 Recommendation Accepted
Second Report - Local authority fi…
We recommend the Government remove the ability of local authorities to choose their own auditors.
We recommend the Government remove the ability of local authorities to choose their own auditors. The risk is that auditors will be reluctant to flag up potential problems for fear of losing their contract. The Government should consider who will … Read more
Government Response
The government has confirmed its intention to establish the Audit, Reporting and Governance Authority (ARGA) as the new system leader for local audit and considers the Public Sector Auditor Appointments Ltd (PSAA) as the best placed appointing body. It has also undertaken a consultation on the local audit framework and will keep arrangements under review.
Ministry of Housing, Communities and Local Government
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19 Conclusion Rejected
Second Report - Local authority fi…
The absence of section 114 notices before 2018 is adduced as evidence that the regime...
The absence of section 114 notices before 2018 is adduced as evidence that the regime has been broadly successful. The consequences for a council of issuing a notice are serious, however, and we are concerned that, rather than concentrating minds, … Read more
Government Response
The government defends Section 114 notices as an important and effective part of the finance system, stating they operate within a wider system of checks and balances that should lead to earlier action, thus not committing to an intermediary "yellow card" measure.
Ministry of Housing, Communities and Local Government
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20 Recommendation Accepted
Second Report - Local authority fi…
We recommend that the Government consider changing the section 114 regime to provide Chief Finance...
We recommend that the Government consider changing the section 114 regime to provide Chief Finance Officers with intermediary measures that can be applied at a much earlier stage to highlight concerns before a council’s finances deteriorate so far as to … Read more
Government Response
The government defends the existing Section 114 regime as effective and states that a wider system of checks and balances, including statutory reporting duties for Section 151 Officers and powers for external auditors, already provides mechanisms to highlight financial concerns.
Ministry of Housing, Communities and Local Government
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Government Response AI assessment · 20 of 9 classified
Accepted 5
Accepted in Part 4
Acknowledged 3
Deferred 3
Rejected 5
Total 9 recs + 11 conclusions