Croydon’s collapse shows the Government needs a long-term plan to keep local authorities afloat

Councils across the UK face a grim outlook for councils in 2021, unless more long-term support is provided by the Government.

Croydon council has become the first London borough to fall casualty to the pandemic, after filing a notice declaring itself virtually “bankrupt” with debts of over £60m.

This reinforces the bleak message that councils are under severe financial strain and up to 100 may need to issue a section 114 notice.

Help needed

Councils are hoping for more long-term solutions, potentially in the spending review. One of the most promised reforms is that of social care. A green paper on its future was due in 2017. Prime minister Boris Johnson has promised to deliver that by the end of this year.

Adult social care accounts for £1.8bn of councils’ additional spending pressures this year, with the pandemic exposing the weaknesses in care for the elderly. There has already been speculation that social care could be transferred into the NHS, creating a national care service.

The Fair Funding Review was launched in 2016 and was originally due to be implemented by this year. For small district councils it could have a major impact and has been consistently delayed. In parallel, the Treasury is also reviewing business rates and the business rates retention scheme. These raise around £25bn a year, with councils collecting them and passing 50% direct to the Treasury. In a booming economy business rates are a vital source of funding and councils have been pushing to keep 75% to fund their local economies.

Councils have been pushing for greater powers to be devolved for over 15 years, arguing that local people are better placed to run their own communities. A prime example outside of London is the Greater Manchester Combined Authority, which brings 10 councils and 2.8m people under one city region. It has more devolved powers than single councils, including over public transport and regeneration, but it is still limited. A devolution white paper has also been promised with Johnson stating that his “levelling up agenda” will also feature. The LGA is pushing for more fiscal devolution, allowing councils more tax-raising powers such as a tourist tax, to help plug the funding gaps.

Spending review

However, more immediately, the Treasury has confirmed that it will only conduct a one-year spending review for the third year in a row.

The Treasury said it had done so “in order to prioritise the response to Covid-19, and our focus on supporting jobs”.

The view in local government is that this is short-sighted and will put more councils at risk.

 “This is a missed opportunity for the Government to draw a line under inefficient short-term budgeting, that leads to higher costs to the public purse, and to allow councils to set reliable medium-term financial strategies,” said councillor James Jamieson, chair of the Local Government Association.

“The Government has provided some much-needed support but significant challenges remain. It is vital that the Government addresses in full the financial challenges facing councils as a result of Covid-19, including all lost income and local tax losses, and provides further investment so councils can protect and improve local services next year.”

Summary

The Government has shown a willingness to heed criticism and change direction – when sufficient pressure is brought to bear. Help for the self-employed, the introduction of simpler Bounce Back Loans, instead of the Coronavirus Business Support Loans, and the extension of furloughing a just a few examples.

However, it remains to be seen whether there is sufficient clamour to force a change of direction over local authorities to provide long-term support.

AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.

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