Local authority financial resilience at a time of severe stress

25 June 2020: Institute for Fiscal Studies report looks at the strengths and weaknesses of local government finances in the context of the coronavirus pandemic.

The Institute for Fiscal Studies (IFS) has published a report on how different demographic and economic structures in local areas affect health, families, jobs and income. It looks at the ways local authorities raise revenue, have built up reserves, and have varying debt commitments leads to differing levels of financial risk and resilience.

Although local authorities have been allocated £3.2bn in additional funding (see the previous article) to help them at a time of reduced income and increased expenditure, the IFS reports variations in revenue sources and demographics mean that council funding needs differ significantly.

The first £1.6bn of the additional funding was principally based on estimated needs for adult social care expenditure, with very little going to district councils without social care responsibilities and most going to both county and unitary authorities. The second £1.6bn was allocated on a per-person basis, with more going to district councils.

Local authority data suggests that the crisis has had a more significant impact on income than on expenditure. Particularly impacted is income from business rates, sales, and charges, albeit most of the lost business rates has been replaced by central government funding. District councils in the shires have disproportionally lost income from parking, cultural and leisure services, planning and trade waste schemes, unlike London boroughs and county councils which rely less on these sources of revenue.

Where local authorities serve more affluent communities, they seem more likely to be subject to revenue risk than those serving more deprived communities. This is because they rely less on council tax receipts, a more significant share of jobs in their areas are in sectors most impacted by the lockdown, and more of their residents are self-employed and have had to wait until late May for financial support.

The level of increased debt that local authorities might be able to finance varies considerably. To emphasise this point, the IFS compared the level of reserves held by local authorities to non-schools revenue expenditure. In some local authorities, reserves were less than 20% of non-schools revenue expenditure and in others more than 160%. Those with more significant reserves should be able to support higher levels of debt and so are likely to be more financially resilient.

Quite obviously, local authorities with higher levels of deprivation are likely to have increasing service demands and challenges across several areas, beyond the funding provided by central government. The requests for support from local authorities will increase in these deprived areas to respond to individuals in financial difficulties and issues relating to, for example, mental ill-health, homelessness and overcrowding.

When it comes to the allocation of further funding from central government the patterns of income loss in affluent communities compared with increased expenditure in deprived communities will have to be considered to make sure that the funding gets to the right people and has a greater impact.

Alison Ring, director for public sector at ICAEW said: “Local authorities have been impacted on all fronts by this crisis. Not only has their income reduced, but expenditures have increased, and look set to increase further in the future. Local authorities have met these challenges while at the same time dealing with the large cuts to funding which have taken place over the last decade.

“When the Government is approached for more funding, which surely it will be, it must bear in mind the significant variations in the impact the crisis has had on both income and likely expenditure. HM Treasury may have to relax the rules that prevent local authorities from borrowing to cover current expenditure. Otherwise, it might run the risk that local authorities will have to issue s114 notices, preventing all but the essential expenditure with the adverse impact this would have on local economies and their prospects for recovery.”

‘IFS Briefing Note 296: The financial risk and resilience of English local authorities in the coronavirus crisis’ is available on the IFS website.

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