Treasury failing to monitor local government financial risks

The Treasury has been accused of a ‘laissez faire’ attitude towards the precarious financial position of local authorities, with the Public Accounts Committee (PAC) warning of ‘significant risk’ to government because of a lack of planning

In the report on the whole of government accounts (WGA) 2018/19, the committee said that where new risks such as Covid-19 emerge, there is an apparent lack of ownership by the Treasury of the analysis and scenario planning activities necessary to making difficult decisions about public spending.

PAC said the financial sustainability of some local authorities presents a significant risk to government.

In November last year, Croydon Council became the first London borough in 20 years to issue a section 114 notice banning all new non-essential spending after admitting it had identified a £66m shortfall.

PAC pointed out that while local authorities have autonomy over their spending, the Treasury is the 'funder of last resort' should a local authority become insolvent.

As Covid-19 has increased the fiscal pressures many government bodies face, the committee ‘expects that more local authorities will soon be unable to balance their books and will be forced to issue section 114 notices in order to suspend non-essential expenditure’.

The committee said it expects the Treasury to have oversight of local government finances in the round in order to properly manage the wider risk to the public finances, but said the Redmond review highlighted a lack of this oversight, and serious issues in the local government sector, including failures in current local audit arrangements.

It argued the government’s response to the Redmond review should be agreed and implemented as soon as possible.

Meg Hillier, PAC chair, said: ‘As we reported earlier this year, some local authorities have taken on extremely risky levels of debt in recent years in an effort to shore up dwindling finances, much of it investments in commercial property.

‘The pandemic has doubly exposed that risk – in the huge extra demands and duties it is placing on local authorities, and in the hit to returns on commercial investments.

‘The Treasury has a worryingly laissez faire attitude to what now presents a significant risk to the whole of government.

‘It must step firmly back into the driving seat, demonstrating that it has a clear handle on significant risks in our public finances and is managing them – and that it’s ready to take on the unprecedented additional impact of Covid-19 and EU Exit.’

The PAC report raised a number of other concerns about the Whole of Government Accounts (WGA) produced by the Treasury, saying it is not meeting the needs of its users.

The committee said in its recommendations: ‘We have made previous recommendations that the Treasury should include more information on the principal risks and uncertainties facing the economy in the WGA, but it remains a backward-looking document that does not tell the reader about these risks or how they are being managed.’

PAC said it is also concerned that delays in local government audit and the extension of the administrative deadlines for central government accounts will lead to delays in the Treasury receiving returns for the WGA.

The report stated: ‘In the current WGA, the delay in completion of audits of local government bodies has already led to a lower quality picture of the financial performance and position of the UK public sector than in the previous year.

‘In addition, the consolidation module of the new OSCAR II IT system is not yet finalised. These are significant challenges to Treasury’s expectation to publish the WGA 2019–20 in June 2021, one month earlier than was achieved for the WGA 2018–19.’

Whole of Government Accounts 2018–19

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