Local councils face £7bn black hole

Research from IFS predicts massive financial shortfall as local authorities struggling with rising costs and falling income

The public health and economic effects of the Covid-19 crisis are creating a perfect storm for local councils’ finances, simultaneously increasing spending and reducing incomes, according to the Institute of Fiscal Studies.

While councils are taking on more responsibilities to house rough sleepers, support those shielding at home, and help with the testing, tracing and control of Covid-19 outbreaks, the wider economic effects of the crisis are hitting councils’ various income sources, such as council tax, rent and service charges.

According to the IFS, councils forecast spending pressures of £4.4bn during 2020–21, with around £1.8bn of those estimated to have been incurred between April and June. They also forecast a £2.8bn shortfall in non-tax income, with £1.3bn of this arising between April and June.

Taken together, this means in-year pressures are forecast to be £7.2bn, with billions of pounds more in losses in local tax collections also hitting councils’ main budgets from next year.

Central government has already provided local authorities with additional grant funding of £3.6bn during the pandemic and some councils have been able to take advantage of other central government support, but that would still leave them £2bn short of the expected £7.2bn hit to their finances in 2020-21, the IFS estimated.

According to the think tank, additional support and/or financial flexibilities – especially if pressures are revised further upwards – may also be needed for 2020–21 if the government wants to avoid some councils depleting a significant portion of their overall reserves or making in-year cuts to services.

Philip Smith |Contributing editor, Accountancy Daily

Philip Smith is contributing editor at Accountancy Daily and a freelance journalist specialising in accountancy and tax matters. He ...

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