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How can councils square the circle of public service demands and public spending cuts?

The Audit Commission today offers practical self-help to councillors, council chief executives, finance directors and service leaders as they face severe social and financial challenges.

The paper Strategic Financial Management in Councils: delivering services with a reduced income gives a route map to 'managing for today while getting fit for the future'. It says councils need to make some urgent and tough decisions. The best are doing this already, but many are not. Aimed at all council staff, but especially those who hold the purse strings of local government, it points out potential financial pitfalls, highlights successes, and features a value for money self-assessment questionnaire they can use locally.

In June, Chancellor George Osborne's emergency budget outlined immediate public spending cuts of £6.2 billion, £1.166 billion of which is to come from local government. October's spending review will say how and where future annual cuts will fall.

These cuts will have to be made against a backdrop of increasing demand for local services, such as social care for an ageing population, and pressure on school places.

To add to the squeeze, councils' income from investments, planning, rents, parking fees and capital receipts has generally been falling since the recession first bit. The government has also warned it will freeze council tax bills in the next financial year.

Chief Executive of the Audit Commission, Eugene Sullivan, says:

'Coping with falling income and increased demand is a delicate balancing act for councils. The trade-off is between cuts to meet the immediate challenge, and preserving long-term capacity to deliver essential services. What matters is the quality of planning over a realistic time frame, and a well judged assessment of future risks

We hope the tools and techniques in this paper will help councils to help themselves. Our report sets out important principles for managing council finance sustainably. It was compiled with the help of councils that take a long-term view of managing finance. It gives councillors, chief executives, and finance directors the tools to test and improve their councils' financial health'.

Good financial management is at the heart of an effective council. Staff and councillors in organisations with a culture of good financial management understand and ensure that money is everyone's business, not simply the responsibility of finance departments. Decisions are made based on sound financial information. Financial risks are anticipated and managed appropriately. Good financial management requires different skills and practices at each level within the council.

It is also underpinned by timely and appropriate resource allocation and good quality performance and financial information. The paper describes catalysts for 'making change happen'. The acid test for councillors and senior managers is the 'good-practice checklist' that describes the key issues for improving financial management, along with the potential problems that can arise.

Councillors and managers can use the checklist to evaluate their current approach to financial management. There is also a self-assessment questionnaire based on the government's 2010 spending review framework questions for Whitehall departments. The self-assessment includes separate questions for the leadership team, the senior management team; and for service heads and managers. Answers to the questions will help councils review how to deliver their priorities with reduced resources and still achieve value for money.

The paper finds that organisations with a strategic approach to financial management are better able to plan and manage for the long term, are more adaptable and resilient.

Eugene Sullivan adds:

'The paper and its questionnaire should stimulate debate and discussion about the mechanisms and culture of councils, to get them in a fitter state for the future. The financial and social pressures are undeniable, and are mirrored across much of the public sector. This paper should help councils to deliver balanced budgets, use public money wisely, and continue to provide vital frontline services to a high standard.'

Notes to editors

In compiling this paper the Audit Commission team:

• examined 42 financial plans across 34 local authorities;
• carried out detailed interviews with senior officers and councillors at 14 councils;
• held four business workshops, and;
• reviewed guidance from other organisations and government on strategic financial management.

They found that councils with good strategic financial management displayed five essential characteristics:

• strong and accountable financial leadership;
• an organisational culture of financial awareness;
• an ability to specify priorities and make choices within means;
• comprehensive financial information that clearly underpins decisions; and
• an ability to anticipate changing circumstances and manage financial risks.

Previous relevant reports by the Audit Commission include:

Crunch Time? Published in December 2008
When it comes to the crunch… Published in August 2009
Surviving the crunch Published in March 2010

For further information please contact Mark Nicholson, Media Relations Manager, Audit Commission, Millbank Tower, London SW1P 4HQ

Direct line 0844 798 2135 / 0207 166 2135. 24hr Press line 0844 798 2128 Mobile 07813 038132. E-mail m-nicholson@audit-commission.gov.uk