At the start of the year, the hope had been for 2022 to bring with it more stability and a degree of normality that had been absent during the pandemic years.
The reality has fallen far short of this. In fact, the economic and political turbulence has increased. The invasion of Ukraine in February had considerable impacts across the world including population dispersal, inflationary pressures and supply chain failures. Domestically, the United Kingdom has faced unprecedented political instability leading to paralysis in decision making and a weakening of reputation.
This has been the backdrop against which local authorities have had to continue to deliver key services to their communities and directors of finance have had to produce their medium-term financial strategies. Ensuring they have a balanced budget to deliver services is paramount.
So, it is hardly a surprise to anyone that local authorities are feeling an increasing level of financial stress and that some have predicted collapse.
While experiencing financial stress is not a precursor to failure, it is important that all key players understand the potential weaknesses and risks. This is where the CIPFA Resilience Index plays a significant role. Its job is to highlight possible exposure to risks and identify points of failure. There is no magic formula for identifying risk, however. The Resilience Index uses the published data from the government revenue outturns and compares it to areas that CIPFA knows can often indicate problems for local authorities.
The 2022 edition of Resilience Index reveals that local authorities' reserves have grown to £31bn, up from £29bn in 2020/21. With the domestic economic situation showing no signs of improvement, councils are increasingly using their reserves to protect against further uncertainty.
Of the £31bn of reserves, £27bn has already been earmarked for future use, leaving only £4bn unallocated. As inflation and energy prices continue to stay at extremely elevated levels, many councils will be using reserves to fund these additional and unforeseen costs.
It's worth noting that in the 2021/22 financial year, central government made grants to councils to be used over more than one year, which will also partly account for the increase in earmarked reserves for 2022/23.
Reserves are not the only measure of risk, however. The Resilience Index also includes indicators of financial standing, the predictability of income streams, cost and demand pressures and management of governance and audit processes. Given the restrictions in government grant funding, the limits placed on the level of council tax increases, the continuing impacts of COVID-19, the growing unavoidable pressures of inflation along with the need to deliver savings, most budgets will inevitably contain a degree of financial risk. It is how that risk is understood and treated that is key, and reserves play a significant role in this.
Looking at past data, it would appear the last time reserves reduced was when there was a longer financial settlement for local authorities. So, for reserves to start to decrease again, we need more long-term funding settlements, so authorities have the security and stability they so badly need.
Up and down the country in every local authority, conversations around risk and resilience need to be had in an open, informed and professional manner. Bad news and legitimate concerns should be accompanied with a desire to understand the reasons behind decisions and a willingness to act where necessary.
As we move into 2023, I know many difficult conversations will need to be had in local authorities and I hope that the Resilience Index can play a constructive part in these discussions.
The 2022 edition of Resilience Index is now on CIPFA's website.
Joanne Pitt is acting head of policy at CIPFA
