Stephen Fitzgerald FCCA, interim executive, and Yusuf Erol FCCA, head of public sector division, Langbrook Finance

This year, finance functions in local government will face a number of key issues. These include bankruptcy, budget constraints, talent management, skills gaps, digital transformation and the financial impact of recent strike action.

Here, we consider some of the major issues and how finance professionals can work to make their organisations more robust. (We haven’t looked challenges surrounding net zero targets, funding certainty, special educational needs, health and social care – these will be addressed in a later article.)

Funding pressure

The proportionate reduction in local government funding compared with much of the rest of the public sector has put considerable pressure on local authorities.

This has led to an increase in Section 114 notices, where the local authority CFO serves a notice that the council does not have the resources to meet its budgetary liability. The aim of S114 is to help local authorities avoid running out of cash and becoming bankrupt.

One in five council leaders think it is likely their CFO will issue a S114 notice this year

Despite being introduced in 1972, the notice has rarely been used – until recently. According to a December 2023 survey by the English Local Government Association, almost one in five council leaders and CEOs in England think it is likely their CFO will need to issue an S114 notice in 2024 due to a lack of funding to keep key services running.

This is not only due to the constraint on resources; in many cases it’s also down to poor financial and management decision-making in the past. The reputational damage of the serving of these notices to individual authorities and the local government sector generally has been considerable.

The professional guidance is that they should be only used as a last resort; ultimately, it is desirable that council politicians and officers should resolve difficulties in budget strategy through collaborative working rather than resorting to statutory processes.

Employers are often reluctant to employ and develop trainees

Struggle for talent

All this is adding to a degree of crisis in filling public finance posts at all levels. At director level there is an increasing shortage of candidates able to cope with the demands of these roles. Antisocial hours, unrealistic expectations, considerable political pressure and often uncompetitive salaries can make these posts unattractive.

At more junior level there are also considerable recruitment and retention difficulties. Employers are often reluctant to employ and develop trainees. Obtaining a professional accountancy qualification takes considerable effort from the trainee and significant support from the employer. During the period of austerity, professional training budgets were slashed, resulting in a shortage of candidates graduating from trainee schemes to compete for middle and senior management roles.

Accounting firms are already asking ChatGPT to summarise the tax implications of new legislation

If long-term investment is not put into finance teams, organisations will become increasingly reliant on interim management. This is a short-term and expensive option. Long-term workforce planning with investment in training will be essential for strengthening the public finance profession.

Embrace AI

Finance professionals often face challenges in adapting to the new technologies that are driving digital transformation. This needs to change if productivity is to improve.

In recent months, OpenAI opened up the ability to create custom versions of ChatGPT. Accounting firms are already uploading complex central government documents and asking ChatGPT to summarise the tax implications of new legislation. There are reports of very impressive results.

There is no reason why public sector finance professionals could not do something similar, such as uploading major grant funding conditions and asking an AI chatbot if a particular action would be compliant with the regulations. This ability to analyse large datasets could also be used to generate reports, saving time on manual report creation; see the panel for more applications.

Strike impact

Strikes across the transport, health, education and other sectors are likely to continue this year. They have a number of serious consequences for public finances.

Public sector organisations will usually need to allocate additional funds to deal with the impact of strike action. To maintain essential services, they often need to hire temporary staff or ask existing employees to work overtime.

Contingency planning is crucial to mitigate the impact of strikes on public services

Public perception of strikes and the government’s response can influence political decisions. Affected public sector organisations may need to balance fiscal responsibility with maintaining public support, which in turn might impact budgets.

Public sector organisations may also incur costs associated with legal proceedings, mediation or negotiations aimed at resolving disputes. They may need to consider the long-term financial implications of meeting the demands of striking workers, particularly if these involve changes to pension plans or benefits.

In addition, strikes can contribute to economic slowdowns, potentially impacting tax income generated to run public services. Central and local government may need to reassess revenue projections and adjust fiscal policies accordingly.

Organisations may need to dip into reserve funds to address the immediate financial challenges posed by strikes. Contingency planning is crucial to mitigate the impact on public services.

Overall, the financial considerations of strikes in transportation, education and health sectors have short- and long-term fiscal implications. Finance leaders in these sectors need to manage resources, balance competing demands, and engage in effective negotiation processes to address the concerns of striking workers while maintaining overall fiscal responsibility.

Focus on future-proofing

With the right systems in place, a collaborative approach to problem-solving and an openness to the benefits that digital transformation can offer, finance functions in the public sector have a better chance of future-proofing their organisations.

Applying AI

Ways in which AI can be used to improve productivity in public sector finance include:

  • Budgeting and forecasting. Algorithms can help predict budgetary needs based on historical data and economic indicators. AI chatbots can also be used to help generate financial models and forecasts.
  • Fraud detection and risk management. AI is already being used to analyse transactional data and identify unusual patterns. In addition, organisations might start to use AI chatbots to create risk assessment reports.
  • Process automation. AI can help with automating routine tasks such as data entry, invoice processing and reconciliation. Chatbots can also be integrated into workflow systems.
  • Training and knowledge transfer. AI could be used to assist in training new finance professionals by providing on-demand information, tutorials and simulations.
  • Regulatory compliance. AI tools can help in ensuring compliance with financial regulations by analysing transactions and identifying potential compliance issues. Chatbots can help summarise complex regulatory language and provide insights into compliance requirements.

Caveat: human oversight of AI outputs is crucial, especially in areas that involve critical decision-making and ethical considerations.