Whitehall accounting rules risks council jobs and services, LGA warns

28 January 2011

Thousands of jobs may be lost and millions of pounds worth of services risk being cut because of the Government's decision to limit the ability of councils to spend their own money.

The Government has currently put a £200 million cap on the amount that councils can spend from their own capital resources to pay for redundancy costs.

The Local Government Association, which represents more than 350 councils in England and Wales, says this amounts to less than 1% of the local government pay bill and is preventing councils from making the best use of scarce resources.

Councils in the eight largest cities outside London alone estimate they will have to lose more than 10,000 posts at a cost of £317 million – more than one and a half times the total amount the Government has earmarked to help pay for all council redundancies.

Council leaders are warning that if the Government does not give councils greater flexibility over using their own capital resources to pay for redundancy costs they will have to cut deeper into their budgets reducing frontline services and staff numbers even further. It may also push up public spending by forcing more people onto benefits.

The capitalisation fund has previously been available for councils facing unavoidable, large costs such as redundancy payments or equal pay settlements.

The Government’s decision to frontload a large proportion of the cuts into the first year, rather than allow councils to spread them evenly over the four years of the spending review, makes the need for a relaxation of the rules around capitalisation even more urgent.

The frontloading of the cuts means that councils that may be less able to manage a reduction in their workforce through voluntary redundancies, natural wastage and not filling vacancies may now have to impose compulsory job cuts. Around 140,000 local authority posts are expected to be shed next year as a result of the cuts.

Cllr David Sparks, Vice Chairman of the LGA, said:

“Councils are determined to give taxpayers the best possible value for money. With frontloaded cuts, councils need to make rapid workforce reductions. Often, the money to fund these one-off reductions can only be found from capital resources.

“On one hand the Government is urging councils to dip into their financial reserves to protect services while on the other hand it is preventing them from spending their own money.

“Local residents and council taxpayers will not consider that locking up these resources in the bureaucracy of central Government’s accounting rules is a sensible use of their money. Councils should be given more flexibility over their capital resources to pay for redundancy costs as they need to.

“The severe and unexpected frontloading of the cuts limits the scope of councils to reduce their spending through more innovative measures, such as shifting to shared services, renegotiating longer-term service contracts or outsourcing service delivery. Major changes such as these take time and money to implement. Councils need the flexibility of capitalisation to help restructure their services as quickly and efficiently as possible to avoid unnecessary job losses.”

Notes:

Capitalisation simply means councils being able to use their capital resources to pay for spending that might otherwise be classed as revenue. This might mean using money raised by selling assets that are no longer needed, or by using money already raised for spending on capital projects. Councils are not asking for more money from Government, but permission to spend their own money to deliver the objectives the Government has set them.

Councils have to seek a ‘capitalisation direction’ from the Government for this kind of spending.

Example

A council might have an option to spend £1 million capital to improve the energy systems in a building, generating a saving of £100,000 a year. This could be paid for through capital – without reference to external bodies.

The same council might have the option to spend the same £1 million of capital funds on restructuring its workforce, paying for staff redundancies. That might save £200,000 a year. However, because this spending is considered revenue, the council can only use its own capital funds if it gets a ‘capitalisation direction’ from the Government

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