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Councils' cash reserves will run out in five years if local authorities use them to cover the expected cuts in the money they receive from Government.

The warning comes as the latest figure on councils' cash reserves is released, showing that prudent local authorities have set aside £17 billion. This includes £12.4 billion in earmarked funds, most notably allocated for growth promoting infrastructure projects. The remaining £4.5 billion is to help dampen the impact of cuts to council funding and manage the risks associated with major policy changes such as the localisation of business rates and council tax benefit, which are both due to be introduced next year.

With cuts in public spending tipped to carry on until 2020, analysis by the Local Government Association shows that if councils used all of the £17 billion to cover the expected cuts to local government funding, the reserves would run out by 2018. Such a move would also leave councils with no funds to make vital investments or manage any new financial risks over the next five years.

Sir Merrick Cockell, Chairman of the LGA, said:

"Prudent councils fixed the roof while the sun was shining which is why they are now in a position to invest in the infrastructure and development projects which will help drive out of economic downturn. Billions of these reserves are essentially a growth fund which councils are using to build new roads, regenerate areas and attract investment from job-creating businesses.

"Councils are working extremely hard to shield frontline services from the 28 per cent cut to the money they receive from Government. But cash reserves can only dampen the impact, not fill the gap. If councils plundered their reserves to cover the cuts, the cupboard would be bare within five years and there'd be nothing left to invest in the growth promoting projects desperately needs.

"As with any prudent family budget, councils set aside money to invest for the future and hold some back for a rainy day. Similarly, a well-run business will keep at least six to eight weeks' outgoings in reserve. The latest figures show that council reserves cover exactly that. If the banks had taken a similar approach we wouldn't be in the mess we are in today."

Notes to editors

Latest figures on local authority reserves

The LGA's analysis of the impact of cuts on reserves shows:

The figure for five years is based on the LGA's predictions of future spending control totals for local government. It assumes cuts in spending control totals as follows:

2013/14             3.99%

2014/15             6.14%

2015/16             8.00%

2016/17             6.00%

2017/18             5.00% 

If the current level of reserves of £17 billion were used to support spending control totals at 2012/13 levels going forward it would be fully used up by 2018.

Examples of how councils use reserves to build infrastructure and promote local businesses include:

Northamptonshire County Council provided a £10 million secured loan to Silverstone Circuits to secure the future of the British Grand Prix in the UK, alongside a £1.5 million investment in a joint venture to expedite the Silverstone Masterplan technology park, which is promoting the high performance technology sector which locally employs 21,000 people and contributes £2 billion to the local economy.

The size of Bristol City Council's reserves fluctuates and currently stands at around £70 million. About 10 per cent of this is for 'rainy day' contingencies. The other 90 per cent (around £63 million) is money from central government and other sources earmarked for various parts of the council's current capital upgrades programme. It is money that is ready to spend on a variety of projects which in total are worth in the region of £370 million. The projects include a school building programme, a rapid bus transport scheme, climate friendly improvements to housing stock, new care housing to help people remain independent longer and broadband investment to support the technology industries.

In a jointly-funded venture, Staffordshire County Council and Wolverhampton City Council, with the support of South Staffordshire Council, led the development of the i54 South Staffordshire business park, convincing Tata Ltd to build the new Jaguar Land Rover (JLR) engine plant on the site. The local authority investment, which involved £36 million of council-backed prudential borrowing, includes the construction of a dedicated new junction off the M54, a unique scheme for a highways authority like Staffordshire, which does not usually invest in motorway related projects. JLR is investing £355 million in the new facility creating 750 jobs based at the new plant, and thousands more jobs in the wider supply chain. Moog, which manufactures products for the commercial aircraft industry, and Eurofins UK, a leading scientific testing and analysis company, are already up and running on i54 South Staffordshire site, which has been awarded Enterprise Zone status and is gaining a reputation as a major regional business and innovation hub.

The localisation of business rates and council tax benefit represents a risk because:

From 2013, councils will collectively retain 50 per cent of their business rate income, with the rest to be re-distributed to councils by the Exchequer. This means that for the first time councils will be directly exposed to the impact of any fall in business rates revenue. With the CBI forecasting GDP to shrink by 0.3 per cent this year, this shift represents a significant and unpredictable risk to local authority income. 

Next year, councils will assume direct responsibility for administering council tax benefit at the same time the Government will cut funding for the tax relief by 10 per cent (an estimated £425 million). Council tax benefit currently costs £4 billion nationally. The risk to councils is four-fold:

1) Councils must have reserves in place to cope with any sudden increase in residents requiring council tax benefit support, for instance if a major employer in the region goes out of business, sharply increasing unemployment rates in a local area.

2) The 10 per cent cut in funding may exceed the savings councils feel they can reasonably make by reducing support to current council tax recipients. Therefore they may choose to continue support from other revenue.

3) There is a high probability that council tax collection rates will fall due to the fact more people on low incomes will be asked to pay a higher proportion of council tax. In some cases people will be asked to pay council tax for the first time.

4) There is a high likelihood that more pensioners will take up council tax benefits due to automatic eligibility. Previously pensioners have had to apply for the benefit.

Author: LGA Media Office
Contact: Dale Atkinson, Local Government Association Media Office, Telephone: 020 7664 3333