The Government must improve oversight and transparency over local authorities to ensure their financial sustainability, the National Audit Office (NAO) has said.

In a report released today, the NAO called for the Ministry of Housing, Communities and Local Government to adopt a stronger leadership role to help local authorities cope with increasing financial and demand pressures.

Since 2010 local government’s real-term spending power has reduced by a third while demand in social care has increased dramatically, leading to more than 60% of single tier and county councils overspending their service budgets over the last year, the NAO said.

Auditors said these challenges required good governance arrangements, but spending by councils to support this had fallen by a third over the last nine years.

Head of the NAO, Sir Amyas Morse, said: ‘Poor governance can make the difference between local authorities coping and not coping.

‘Given the significant challenges these bodies face, the Government needs to take the lead in addressing weaknesses in the local governance system to ensure that local arrangements function as intended and support local decision-making.’

A survey by the NAO found a third of auditors felt many authorities were struggling in more than one aspect of governance, ‘demonstrating the stress on governance at a local level’.

More than a quarter of external auditors surveyed agreed that the risk profiles in many local authorities had increased in the last year due to financial pressures.

Chief executive of the Chartered Institute of Public Finance and Accountancy, Rob Whiteman, said: ‘By following principles of best practice governance local authorities can provide greater assurance about their financial position and ensure that any signs of trouble are recognised early when action can be taken.

‘This is particularly important now, when we are in a time of unprecedented uncertainty for local government, with commercialisation and growing pressure on the finances of the sector meaning the overall risk profile is increasing.’