Covid-19: Financial stability of local government

 Published Thursday, July 02, 2020 Nicole Winchester

Local government finance and the impact of coronavirus is the focus of an oral question to be asked in the House of Lords on 7 July 2020: 

Lord Kennedy of Southwark to ask Her Majesty’s Government what assessment they have made of the financial stability of local government in England in the light of the additional (1) costs incurred, and (2) income lost, as a result of the COVID-19 pandemic. 

This In Focus article considers how the Covid-19 pandemic has affected local government finance to date and how the Government has responded so far.  

Impact of Covid-19 on local authorities 

Estimates suggest local government is facing a multi-billion pound shortfall of between £4–10 billion due to the Covid-19 outbreak. James Jamieson, chair of the Local Government Association and Conservative leader of central Bedfordshire council, has estimated councils will face costs of nearly £13bn to tackle the crisis this year.  

Despite the additional government support, Local Government Chronicle has estimated local authorities could face a total shortfall in revenue of around £9 billion in 2020/21. That figure was based on information from 51 councils who reported a projected shortfall of £1.4bn in 2020/21. The representative bodies SIGOMA and the County Councils’ Network have put the figure at £4bn, while one leading local finance officer has suggested that the total support needed may be above £10bn. The Local Government Association (LGA) suggested the shortfall “could reach at least a further £6 billion this year”. 

Government data published in June 2020 that showed local government was facing a combined spending and income pressure of £3.24 billion between mid-April and mid-May 2020. The survey did not include fire and rescue authorities or combined authorities.  

Loss in revenue 

Local authorities are expected to lose revenue because of the crisis. The main sources of affected income include:  

• Council tax: Responding to residents’ financial difficulties, a number of local authorities have announced ‘council tax holidays’. Councils can accept ten monthly instalments from June to March, instead of the normal pattern of April to January. This builds in a delay in revenue for authorities, but the payments are being rescheduled rather than cancelled. 
• Commercial property: Businesses with little or no turnover may be unable to pay rent. Many local authorities have substantial property holdings and are financially exposed if rents on those properties go unpaid. 
• Other commercial income: Local authority income from sources such as car parks and leisure centres has fallen dramatically during the lockdown. This is a significant source of income for district councils in particular. 
• Lost grant/local income: Local authorities may have budgeted for income from the New Homes Bonus or business rate retention. This cannot now be relied upon as property construction may be paused or abandoned. 
• Business rates: The Chancellor has instituted schemes that have the effect of removing liability for business rates from many businesses. However, the Government has committed to reimbursing local authorities for any revenue lost as a result of those schemes. 

Government support for local authorities 

In March 2020, the Government said it stood ready to do whatever is necessary to support councils in their response to coronavirus. The House of Commons Library has chronicled government support to date, which has included: 

• 11 March 2020: A £500m ‘hardship fund’ for residents struggling to pay council tax bills. This funding is to be allocated to residents currently benefitting from local council tax support schemes. Government guidance was published on 24 March, and additional guidance on 16 April. 
• 19 March 2020: £1.6bn additional funding made available to local authorities. £1.4bn of this funding was allocated via the adult social care needs formula. The remaining £200m was allocated in line with each council’s Settlement Funding Assessment. The Institute for Fiscal Studies has argued that the impact of the virus on different councils “may not reflect historical differences in social care spending needs.” As a result, the formulas used to allocate funding are “out of date”. 
• 25 March 2020: £1.8bn grants paid to local authorities in advance. This followed the Chancellor’s announcement of widespread exemption from business rates for 2020–21. Normally, business rates relief would be applied first, and local authorities would seek reimbursement after it had been applied. 
• 1 April 2020: £12bn funding for business rates grants transferred to local authorities. These funds will be distributed under the Business Rates Grants schemes. 
• 16 April 2020: Councils will be allowed to defer £2.6bn in business rates payments to central government from April to June 2020. This is in respect of the ‘central share’ of business rates. 
• 16 April 2020: £850m in central government social care grants for both children and adults, from April to June 2020. This was paid up front in April. 
• 18 April 2020: A second £1.6bn of additional funding for local government. This is to be distributed on a different basis from the funding announced on 19 March, with district councils receiving a considerably larger share of the 18 April funds. 
• 2 May 2020: A further discretionary fund of £617m to be made available for grants to businesses that do not qualify for the Small Business Grant scheme and the retail grant scheme. 

Richard Watts, chair of the Local Government Association’s Resources Board, said in May 2020 that “extra funding for councils will be helpful but they will need up to four times the funding they have been allocated by government so far”. He also warned that were the Government not to meet its commitment to give councils the resources they needed, some would face the prospect of a section 114 report. Section 114 of the Local Government Finance Act 1988 requires chief finance officers to report on a local authority’s budget where expenditure in a financial year is likely to exceed resources available to meet that expenditure. Several local mayors have suggested some councils could go “bust”. 

Institute for Fiscal Studies analysis 

The Institute for Fiscal Studies (IFS) has examined local authority revenue and financial resilience, and the extra funding that central government has made available this financial year. The report’s authors concluded the challenges for individual local authorities would vary, depending on their reliance on different revenue sources and the extent of their financial reserves and commitments.  

Income and spending factors would influence each LA’s individual financial risk and resilience. For example, local authorities serving more affluent communities, and especially shire districts, appear to be exposed to greater revenue risks. This was because such authorities are more reliant on local taxes and sales, fees and charges than on central government grants. On the other hand, local authorities serving more deprived communities could see increases in service needs and challenges if the coronavirus crisis hits individuals and families already suffering disadvantage harder. These effects could be long lasting. The IFS report recommended that these patterns should be borne in mind by the Government were it to allocate further funding to local authorities. 

Responding to the IFS report, the LGA’s Richard Watts argued that “further funding and financial flexibilities” were needed to help councils meet their shortfalls. He called on the Government to bring forward its comprehensive plan to address the ongoing financial challenges councils face this financial year as soon as possible, arguing that “this is vital if councils are to avoid taking measures, such as in-year cuts to local services, to cope with funding shortfalls and meet the legal duty to balance their budgets”. 

Read more 

• House of Commons Library, Business Rates, 19 December 2018