Local government funding in crisis
26 May 2020: extra government funding has not been enough to cover growing deficits in local authority finances as lockdown measures have caused council revenue streams to plummet.
Local authorities in England are struggling to balance their books as rising costs and falling revenues combine to put their finances into the red. Not only have councils had to spend more money keeping local businesses going or housing homeless in hotels but they have seen a dramatic fall in their income. No-one is using local car parks or leisure centres, resulting in many revenue streams dropping off a cliff edge.
The Ministry of Housing, Communities and Local Government (MHCLG) has provided an extra £3.2bn in emergency funding for local government so far, together with £12bn to cover lost business rates and grants to businesses, and £500m for council hardship funds.
Even with the additional funding, council finance officers are concerned about the level of losses that are building up, with council tax receipts also under pressure and claims for council tax benefit increasing significantly. Although the scale of the impact will depend upon the size, locality and type of council, most local authorities are facing material shortfalls in income compared with their expenditures.
Mixed signals from MHCLG about the extent to which there will be further emergency funding are increasing the risk that many local authorities will have to dig deep into scarce reserves to cover deficits, weakening balance sheets already strained from a decade of cuts in central government funding and constraints on the ability to raise council taxes.
The plight of local authorities was raised in Parliament on 28 April in oral questions to the Secretary of State for Housing, Communities and Local Government. However, it was unclear from the responses whether the extent of potential deficits was fully recognised by the government. For example, Wigan is reporting likely income losses of £40m, leading to a potential £20m deficit if it does not receive further funding.
Sanjiv Kholi ACA, Deputy CEO and s151 Officer at Newark and Sherwood District Council said that while the funds from central government were incredibly welcome, his council is losing approximately £400,000-£500,000 per month.
Despite this, Kholi remains optimistic that there may be a silver lining, with an opportunity to use the £3.6bn Towns Fund to invest in regenerating towns to grow locally out of the recession. Instead of cutting back on services, regeneration could provide employment and also bring in income via local business rates. Local authorities can work in partnership with the private sector – regenerating local areas.
Sian Moore ACA, Corporate Director (Resources) and s151 Officer of Richmondshire District Council says that one of the challenges for councils is around the discretionary nature of the grants that councils are handing out to support local businesses.
Moore emphasised that the impact of the crisis was dependent upon the type of council, with unitary and county councils responsible for social care and education feeling the cost impact much more with district councils being more affected by reduced income. However, irrespective of the nature of the council Moore commented that s151 finance officers should ensure money is available for a rainy day in case of a crisis such as this one.
Unfortunately, this is such a big rainy day that some councils are contemplating s114 notices, noting that there is, or is likely to be, an unbalanced budget, and indicating a lack of reserves to continue discharging all statutory responsibilities.
The pandemic has had other consequences, with the fair funding review into how councils are funded being deferred. The future of business rates is also still under consideration.
Funding local authorities is a conundrum at the best of times, but even more so now as the COVID-19 crisis puts the spotlight on local government finances.