Local government finances hit by pandemic fallout

The latest report into local government finance by the National Audit Office (NAO) warns that many local authorities face significant funding gaps and the financial outlook for the sector is 'concerning'

During the covid-19 pandemic, local authorities in England have reported combined cost pressures and income losses (excluding tax losses) of £9.7bn, equal to 17.6% of their total spend in the year before.

Local authorities forecast that the Covid-19 pandemic will create £6.9bn of additional costs in 2020-2021 because of the need to deliver new services and the increased cost of delivering some existing services. There have also been fewer opportunities to deliver savings programmes.

The pandemic has caused a forecast loss of £2.8bn of income for local authorities in 2020-21, as a result of a reduction in their sales, fees and charges, commercial and other income streams.

Authorities expect to lose £695m alone from reduced car parking income, and £554m income from facilities such as leisure centres, theatres and museums that they run. Further losses of £1.3bn in council tax and £1.6bn in business rates are expected but will not affect budgets until 2021-2022.

The sector needs to be able to absorb these pressures. System-wide financial failure would undermine the delivery of public services that many vulnerable people rely on.

The Ministry for Housing, Communities and Local Government has engaged extensively with local authorities to gather data on the financial impact of Covid-19. Alongside other departments, it has so far announced £7.9bn in grant funding to address the pressures facing the sector. The NAO estimates that authorities will also receive £1.23bn in compensation for lost sales, fees and charges income.

Despite this, 75% of local authorities have a reported gap between their financial pressures and the NAO’s estimate of financial support from government. In some case these gaps are substantial; 30% of authorities have reported funding gaps equivalent to more than 5% of their spending last year.

Many local authorities still need to take further steps to ensure that they fulfil their legal requirement of balancing their books in 2020-21. Some 26% of single tier and county councils (local authorities with social care responsibilities) that responded to a NAO survey said they were forecasting a year end material overspend relative to their budget.

In most cases these authorities plan to use their reserves to balance their books. Overall, 46% of single tier and county councils had either used their reserves, or planned to, in response to COVID-19 pressures in 2020-21. In addition, nearly a third (31.5%) of local authorities reported a funding gap that exceeded their level of available reserves.

A combination of high funding gaps and low reserve levels means that some local authorities are at risk of financial failure. By 10 February 2021, the Ministry for Housing, Communities and Local Government had provided exceptional financial support totalling £50.5m to four authorities.

Local authorities will continue to be under serious financial pressure in 2021-22 and are setting their budgets with significant uncertainty, which risks poor value for money, the NAO warned. The local government finance settlement only provided certainty on a short-term, time-limited basis, until the middle of the financial year. Many finance directors the NAO spoke to regretted that the settlement was not on a multi-year basis.

Overall, 94% of single tier and county councils and 81% of district councils who responded to the NAO’s survey expected to reduce service budgets in 2021-2022. Examples, provided by local authorities, of how this could impact services included reviews of adult social care and special educational needs packages; the closure of, or restricting the opening hours, of libraries, information centres and theatres; and reductions in subsidies and grants. Some 53% of single tier and county councils do not expect their finances to recover to their pre-pandemic position until 2023-24.

In order to improve budgeting and financial planning for 2022-23, the NAO called on the Department of Housing and Local Government and the Treasury to produce a long-term financial plan for the sector that sets out when the various paused elements of the local government finance reform programme will be restarted; and to consider any further steps that will be needed to support the sector to recover from the financial scarring from the pandemic.

Gareth Davies, head of the NAO, said: ‘Government’s support to local authorities during the Covid-19 pandemic has averted system-wide financial failure. Nonetheless, the financial position of the sector remains a concern and authorities are setting budgets for 2021-2022 with limited confidence.

‘Authorities’ finances have been scarred and won’t simply bounce back quickly. Government needs a plan to help the sector recover from the pandemic and also to address the longstanding need for financial reform in the sector.’

NAO Local government finance in the pandemic report, March 2021

Sara White |Editor, Accountancy Daily, published by Croner-i

Sara White is editor of Accountancy Daily, published by Croner-i, and in...

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