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Councils hold financial reserves so they can plan for the future. They often come under pressure to use reserves to plug ongoing budget gaps but using reserves is not the solution to the financial pressures councils are facing.
Councils hold financial reserves so they can plan for the future. Reserves are split in three:
- earmarked for known risks such as insurance
- ringfenced for a specific purpose
- unallocated for events or emergencies.
In other words, the money is used to pay for both planned projects, such as regenerating the town centre, or for harder to predict situations, such as coping with a pandemic, or responding to emergencies like flooding.
Reserves also help councils even out their cash flow. Government grants often cover spending that will happen in more than one year – having reserves lets councils use unspent funding for a specific purpose when it is actually needed.
At the end of the last financial year councils collectively held unallocated reserves that would cover 25 days spending on (non-education) services (less than four weeks) and earmarked reserves (that are allocated for specific risks and projects) equal to a further 141 days spending (roughly five months). Of course, many councils hold less than this, and importantly, reserves can also only be spent once.
Councils often come under pressure to use reserves to plug ongoing budget gaps, but using reserves is not the solution to the financial pressures councils are facing.
Last year councils faced significant extra pressures due to increases in inflation, the National Living Wage and energy costs. We estimated that these additional costs added pressures of £6.9 billion to the cost of council services in 2022/23. Recent provisional statistics published by the Government show that in the 2022/23 financial year councils took £2.3 billion from their reserves.
In the current year councils face a funding gap of £2.4 billion and a further £1.6 billion next year in 2024/25. If these gaps are also funded from reserves that will mean that a further £4 billion will be taken over this year and next collectively, on top of the £2.3 billion in 2022/23. This is not sustainable.
Reserves can only be spent once. For some councils, having to meet this level of pressure may wipe out all their available reserves and potentially place them in severe financial difficulties. Even for councils with otherwise healthy reserves it could mean using funds earmarked for projects such as capital investment in infrastructure that will not now take place.
Any unallocated reserves held to cover general risks that have been spent will need to be replenished to make sure councils can continue to deliver local services whatever unexpected situations arise. When a council sets a balanced budget at the beginning of the year, by law its Chief Financial Officer must certify that it has sufficient reserves to cover it.
The Government needs to come up with a long-term plan. Inflation is not going to come down overnight and the demand for services keeps going up.
We’re calling on the Government to provide adequate funding for councils, more clarity on financial reform and a move away from one-year finance settlements, so councils can continue to provide services their communities rely on.
#SaveLocalServices