Councils need a new approach to budgeting

Local government budgeting is stuck in a rut. Councils have suffered massive funding cuts from central government and their long-term financial future remains uncertain. They have worked tirelessly over the last few years to reorganise services to strip out costs and focus on long term financial sustainability through prevention and demand management.

However, NLGN’s recent report, Smart Budgeting argues that the practices and processes of financial planning, which are needed to underpin this transformation, must catch up. Few authorities have fundamentally rethought the way they are distributing funds between their different functions and what outcomes they are trying to achieve when planning their finances – even when doing so with their strategy.

To put it simply, local authorities are facing 21st century problems with a 20th century approach to budgeting.

Traditionally, councils have taken an incremental approach to the annual budget cycle and our research showed that, despite radical changes in service delivery, 39% of councils are solely reliant on this method. Whilst this approach has its merits (it is relatively straightforward, low-cost and rarely involves conflict) over the years it has come under increased scrutiny.

Over 80% of the councils we surveyed are open to experimenting with new approaches,

while half thought a different budget process could improve outcomes.

Critics argue that incremental budgeting merely maintains a status quo. Incremental budgeting is built for times when income is increasing or is relatively stable. It is an effective way to distribute new money, but much weaker at scrutinising the cost and effectiveness of existing spending. Councils that continue to solely use incremental budgeting are merely slicing money from each service, except with recent cuts, these ‘slices’ are sometimes as much as 40%.

Our report argues that continuously slicing money from services, without fundamentally questioning the impact each cut has on impacts is not sustainable. We have reached a point where we need to think more about how financial planning can be far more closely integrated with strategic and operational planning.

We call for a different approach. Instead of sticking with incremental budgeting, councils should increasingly adopt outcome-based budgeting, in which the priorities of the whole area are considered.

Such a ‘smarter’ budgeting process would bring together good practice from local councils and budgeting theory. At the heart of this is a commitment to budgeting in relation to broader outcomes rather than individual departments. But it also involves a move away from the annual budget cycle and adoption of more flexible, rolling and long term processes; use of non-financial evidence to monitor the impact of spending on outcomes; and a process which fully involves staff, councillors and citizens.

The shift towards a smarter way of budgeting has already begun. Although only a few authorities have fully moved away from incremental processes, many more are experimenting with elements of outcome-based budgeting. Over 80% of the councils we surveyed for this report are open to experimenting with new approaches, while half thought a different budget process could improve outcomes for their communities.

Local authorities generally understand the improvements in financial and social outcomes that can be achieved through a change in the budgeting process. The challenge is to find ways to overcome a number of barriers and fears relating to staff capacity, defining outcomes and changing organisational culture. We hope this report goes some way to help councils budget in such a way that will enable further transformation.

• Maia Beresford and Dr Claire Mansfield are the authors of NLGN’s latest report Smart Budgeting.