How Local Authorities Are Thinking Differently Under Unprecedented Financial Pressures
Kezia Pugh, Urte Macikene, Jessica Studdert
Councils are at a critical moment for sustainability, resilience and public service provision. Pressures have built up from over a decade of austerity reducing funding, rising demand for services and increasing costs to deliver support. It is increasingly urgent to recognise the complex structural situation now facing the sector, beyond the headlines of some individual councils going bankrupt.
The International Public Policy Observatory (IPPO) is partnering with New Local to carry out a research project exploring how local authorities are responding to financial pressures and what we can learn. This article is based on discussions at three workshops with senior local authority officers from across England. Despite the significant challenges, there are clear areas of consensus regarding how the sector can be put on a more sustainable footing.
The state of the local state: The nature of the challenge facing local government
1. Inadequate and unstable short-term funding cycles
Councils exist on a “hand to mouth funding model”, characterised by lack of sufficiency overall and uncertainty from year to year. Annual funding cycles create perverse incentives to salami-slice budgets incrementally, limiting the ability to plan over the longer term, for example through investing in early help provision that would have payback periods over multiple years. Overall funding pressure means councils’ capacity is increasingly stretched – there is limited “headroom” to shift out of a short term reactive footing. Unlike other services such as the NHS, there is no core seed funding to drive innovation – the current funding model does not recognise the value of this capacity for evolution and future sustainability.There is strong agreement that shifting towards multi-year funding settlements, which the new Government has committed to, is seen as a crucial first step to break free from this cycle of short-termism.
2. Demand is rising, with certain services facing extreme volatility
A range of factors are creating rising demand for services, including changing demographic profiles such as ageing and socio-economic trends like deepening poverty and inequality. Councils are at the sharp end of responding to how these structural challenges manifest in practice – for example increasing referrals for children’s and adult social care, Special Educational Needs and Disabilities (SEND) provision and lack of affordable housing meaning more people require temporary accommodation. One facet of local government’s funding insufficiency is that national policy has so far failed to recognise and respond to these changing population need profiles. For example, social care funding reform has been repeatedly postponed, as has the long-promised fair funding review for local government. Government action has in recent years tended to miss the depth and breadth of the structural challenges the sector is managing, with the previous government’s requirement on councils to simply become more efficient and produce Productivity Plans cited as an example of this.
3. Councils are increasingly confronted with broken markets which are driving up costs
One aspect of the funding pressures facing local government is rising costs as a result of the range of broken or imperfect provider markets they must deal with. This varies from place to place and service to service, but as one participant put it, councils are increasingly “a slave to markets”. For both adults and children’s social care, private providers have high costs but councils have little ability to influence quality. In some rural areas or in smaller authorities there isn’t a functional market for provision. Children’s social care relates to fewer overall numbers but extremely high placement costs, which creates huge volatility in spend. Temporary housing costs have risen significantly in recent years, with one participant noting “housing is a massive issue to address, as it is both important to our communities and it risks sinking us financially”.
4. Prevention is a priority, yet there is no shared understanding over what it means in practice
Although there is significant consensus that shifting to a more preventative approach is required, there is a lack of clarity over what it means in practice, albeit with recognition that it is context dependent. Across different agencies – local government, health, the voluntary and community sector – there is no common definition of prevention. To some extent, the concept has narrowed as a result of funding and capacity pressures – shifting from broader notions of upstream wider determinants to a narrower, more immediate focus on managing prevailing demand.
Making the case for investing upfront in prevention is hard in this context. Proving it will lead to cost savings is a practical barrier – as it is hard to prove a counterfactual. But as one participant noted, the process of austerity itself provides evidence of its value, “because when you cut early help and decimate that support, it eventually skews the funding from early help into acute” and the system gets trapped in the cycle of crisis response which it now finds itself. Pressures on other public services have a direct effect on those facing local government – one participant cited the NHS as having a “sausage factory” approach to managing demand, with integrated care strategies limited to efficiencies and better coordination to alleviate hospital pressures, which falls well short of true prevention.
For prevention to become meaningful, there is a recognised need to pivot collectively from the traditionally separate public service “business models” which focus on response, towards common approaches built around understanding the profile and needs of the shared communities they each intersect with.
The response of the local state: How councils are responding to financial pressures
There are a variety of ways in which councils are responding to the financial and demand pressures they are facing. Some notable trends have consequences both for sharing innovative practice across the sector, and for how national policy-makers could enable more of a systemic shift towards these ways of working.
1. Using existing financial levers to create social and community value
Despite financial pressures overall, councils recognise the significant heft of their local purchasing power, and how this could be better aligned on creating social value for their communities, who themselves face financial pressures. Many have active plans for community wealth building and are creating more expansive social value frameworks that seek to build community resilience, for example by nurturing local supply chains and working with anchor institutions to keep public spend in the local economy. One more radical approach is that of Camden Council, which has embarked on a shift towards ‘mission-based’ procurement, for example by testing how a new approach to commissioning and procuring home-based adult care provision can also contribute to the council’s wider estates mission.
2. Recognising diseconomies of scale: a shift away from outsourcing to pragmatic insourcing
The notion that “bigger is better” to drive efficiencies, which characterised the early days of austerity for many councils, is fast losing traction. Whereas a decade ago trends towards outsourcing were a feature of the response to budget reductions, there is increasing adoption of approaches which are less rigid and more adaptable to the complexity facing councils. Outsourcing delivery has not always returned the promised savings and in many cases have led to less control over quality, cost and agility in the face of rapidly changing circumstances. Councils appear to be taking more of a pragmatic than an ideological approach to what works best in what circumstance. But a trend towards establishing direct provision, particularly as provider of last resort within weak markets, is apparent – for example in some instances of the direct provision of domiciliary care or purchasing children’s homes.
3. Shifting towards more distributed models of working with communities at hyperlocal level
Another way in which councils are recognising the diseconomies of scale is through a shift towards more hyperlocal, neighbourhood level arrangements which are more responsive to communities, particularly those experiencing deprivation. Many are shifting their approach to early intervention away from a service delivery approach featuring big partnerships with structured formal meetings and heavy governance, towards community hub models that are more responsive to different community preferences and circumstances.
This entails working in a more distributed way, with resources and provision structured around neighbourhoods (often wards) and an increasing desire to work alongside communities “as equals”. This has implications for how councils themselves are structured to manage parallel pluralistic approaches, with localised multidisciplinary teams and greater recognition of the leadership role of local voluntary and community sector (VCS). The role of existing community assets and anchors such as schools or GP practices is also recognised as crucial for helping galvanise communities and build around wider connection and support such as food hubs. Frontline autonomy and discretion is crucial in this context, as locality approaches are built on local insight and method rather than replicable “lift and shift” models even between neighbouring wards where circumstances can vary considerably.
4. Taking a whole-system approach
In the absence of national analysis of changing demographics and needs, councils have a granular understanding of their local population profile and projections for future shifts – for example, rates of ageing – which they need to prepare for. There is a strong recognition of the limits of services working in separate silos across the same place, and the need to share and layer data across service partners for deeper insight. As one participant working on a borough-wide inequality strategy noted, even the best data is limited without deep community insight informing priorities and shaping interventions. There is recognition of the need to adapt culture and ways of working in places that maximise value across the organisations and agencies.
In sum, there was a clear message from participants that the challenges are not insurmountable, but there is a need for local government as a sector to speak with a single voice, with a clear position on the structural challenges over funding and support for innovation. The importance of local adaptability and flexibility was cited as crucial, rather than solutions imposed uniformly top down – councils and partners need to develop shared ways of working rooted in place and communities.
The next article in this research project published in the Autumn will present more detailed case studies with practice from councils responding to financial pressures, and outline some practical recommendations for the sector, alongside policy recommendations for the new Government.
If you’re interested in being informed about future work on this project, please contact IPPO.
Notes on our research approach:
During 2024, IPPO coordinated an initial scoping roundtable attended by senior local authority officers, followed by two deep-dive workshops.
The first workshop focused on how councils are working to leverage their existing financial powers to respond to fiscal pressures, while the second explored how councils are maintaining a focus on prevention despite the increased demand as a result of the cost of living crisis, longer term demographic shifts, and cuts to budgets.
The aims were to better understand how local governments are responding to the financial crisis, if there is potential to share transferable practices between authorities and what national policy changes might enable sustainability.