The Bottom Line

A vision for local government

Author: KPMG and Localis - Nov 9, 2009

It is beyond doubt that the UK public sector is facing a period of austerity that will last for several years – possibly as long as a decade. The start will be deferred for a year or more, because the government is committed to a Keynesian policy of fiscal stimulus – using public money to help ease the economy out of recession. However, the government’s own figures show that from 2011 onwards we will face one of the tightest squeezes on public spending in the post-war era.

The Institute of Fiscal Studies has undertaken a thorough analysis of the 2009 budget1 and has concluded that Departmental Expenditure Limits (the total amounts available to government departments and therefore to the public sector as a whole) are likely to fall, on average, by 2.3% a year (£790m for DCLG) in real terms between 2011 and 2014. It is unlikely that the cuts will be spread evenly: health, education and international aid will probably be shielded to some degree. It is therefore reasonable to assume that other areas including local government could face year-on-year cuts of 7% (£2.4bn for DCLG) or more. The Institute of Fiscal Studies estimates cuts in the order of £26bn by 2013.

There is considerable uncertainty about what will happen after 2014, but it would be prudent to assume that public expenditure will be flat, or grow very little in real terms, in the period 2014 to 2018. It seems most unlikely that we will see a rapid return to the substantial year-on-year spending increases that the public sector including local government has enjoyed in the last decade.

It is in this context that councils have begun reassessing their investment strategies and service delivery models. The public mood is becoming increasingly skeptical towards the public sector and its levels of spending, with less than one-third of people agreeing that they receive good value for money from their local council. At the same time, many commentators are calling for a radical shift of power away from Whitehall to local government. A combination of budget cuts, low public trust and increased responsibility combined with little local control of funding has the potential to create the perfect storm for local government. The public sector has over the past 12 years seen overall real terms cash growth. But overall productivity in those years has not improved, and between 1997 and 2007 actually fell by 3.2%. Local government is hampered by a low level of financial independence; but the sector must nevertheless deliver significant cuts in the coming years.

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