Around 100 councils are in confidential discussions with the Government as the financial crisis from coronavirus takes its toll, writes Karen Day.
Local government in England is in the most precarious financial position in its history.
There’s a conservatively-estimated £2bn shortfall for this financial year alone. Circumstances – including the surge in Covid-19 related spending and drop in income – may overtake many councils’ ability to contain the financial damage.
As we begin a second lockdown, councils’ room for manoeuvre is restricted to either slashing much-needed services or raiding reserves to balance their budgets.
Without additional government funding, many are warning that even the last resort option of a section 114, which effectively freezes spending, might not be enough to plug the gaps.
So how and why did this pandemic leave councils teetering so close to the edge?
Analysis by the Institute for Fiscal Studies (IFS), an independent research institute, shows the scale of the pandemic on council finances. It found that in the three months between April and June this year, councils had spent 61% of their total year funding on environment and regulation, 46% on adult social care and 46% on transport.
It predicts that local authorities will face extra spending pressures of £7.2bn this year – that’s £4.4bn in extra costs and £2.8bn of lost income, excluding council tax and business rates. Added together these equate to around 13% of pre-crisis expenditure. The IFS estimates that with the Government’s support packages (see box), it leaves a best-case scenario of a £2bn shortfall. With a second wave coming, this could quickly rise to £3.5bn.
Firstly, going into the pandemic, English councils were not in good financial shape. “We went into this with councils having 10 years of austerity,” says Andrew Burns, associate director at the Chartered Institute of Public Finance and Accountancy (CIPFA). “Councils didn’t start this in a good, sound place.”
Back in 2010, the Government launched its austerity programme, cutting public spending in order to reduce its budget deficit. By 2018, this had resulted in a 49% reduction in councils’ grant funding. The Local Government Association (LGA), the membership body for councils, says this equates to a cut of over
£16bn in the last 10 years. But while cuts have increased, so has the demand for services, particularly in adult social care. Prepandemic, the LGA was warning that spending demands were growing at about £2.6bn a year and by 2024/25 the funding gap in day-to-day budgets would stand at £6.4bn.
In addition, as grant funding was cut, councils were encouraged to find alternative cash streams, resulting in a dependence on income from investments and charges. As the pandemic hit, these changes combined to create a perfect financial storm for councils. As their income nose-dived, with shops and businesses closed and people struggling to pay rent and council tax, authorities’ unforeseen spending rocketed, and they took on new responsibilities including test and trace and controlling local outbreaks
How councils can go ‘bust’
Councils have a legal duty to set a balanced budget. If that’s not possible, a chief financial officer issues a section 114 notice. This effectively freezes spending, except for “statutory services” such as safeguarding vulnerable people. These are incredibly rare in local government. The last one was 2018, the first for 18 years, issued by Northamptonshire County Council.
Several councils have publicly warned that they are getting close to a section 114. Croydon Council has said it is working with the Government to secure a support package to plug its reported £62m funding gap – this includes a 15% reduction in its services. Peterborough City Council is also in talks with the Government on a long-term package of support. Meanwhile, Hackney Council has warned that a funding gap of £19m for 2021/22 may take it over the edge in the next financial year after forecasted losses of £37.2m in income from waste, parking charges, rent and council tax.
According to CIPFA, there are three groups of councils most at risk – those most reliant on incomes from sales, fees and charges such as coastal councils and district boroughs, those already in a weak position with low reserves, and those with significant incomes from commercial activities including airports, such as Luton and Greater Manchester.
Lack of support
But so far there is no indication there will be extra funds. The Treasury is understood to be reluctant to move until after its spending review, where is sets out its financial plans, and that could be as late as November 2020. “The Government needs to listen and respond to what councils say they need in-year,” urges Jessica Studdert, deputy director of thinktank, the New Local Government Network. “With a second wave likely, councils need to be able to work with a fleet of foot approach and denying them funding certainty undermines their capacity to respond to fast-moving events.”
Around 100 councils are already in confidential discussions with the Government in a bid to stem section114 notices for this year and next. These are issued when they can’t deliver their legal requirement of a balanced budget and are the last resort. There is an expectation of more targeted government support for those most in need, although this is again uncertain. But it is the next financial year and beyond that are of most concern. In 2021/22 the drop in council tax and business rates, already thought to be around £3.7bn, will hit budgets. And if councils have already raided reserves and cut services, it leaves them in a parlous state.
“Securing the long-term sustainability of local services must be the top priority for this year’s spending review,” says councillor James Jamieson, chair of the Local Government Association.
“It also needs to place emphasis on communities by properly enshrining long-term, locally-led investment.”
Local government has been lobbying hard for a long-term financial settlement and a shopping list of much-delayed and over-promised reforms. This includes a long-term plan for the future of social care, a review of funding, business rates and a white paper on devolution to give councils more powers. Many are pinning their hopes on the spending review delivering all of these. The next few months are critical.
AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.