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Levelling up funding gap as local authorities cut spending

Author: ICAEW Insights

Published: 10 Mar 2021

The NAO reports that 94% of county and unitary authority chief finance officers expect to cut service budgets in 2021-22.

The National Audit Office (NAO) has released a report on Local government finance in the pandemic, setting out the £9.7bn of cost pressures and income losses that local authorities in England have experienced in 2020-21.

The Ministry of Housing, Communities & Local Government (MHCLG) has provided funding to cover most of the additional costs incurred by councils, but it has not covered all lost income, nor any losses made on commercial investments.

According to the NAO, cost pressures amounted to £6.9bn and non-tax income losses were £2.8bn, a total of £9.7bn or around 17.6% of total revenue expenditure. Grants and other funding provided by central government amounted to £9.1bn, a net shortfall of approximately £600m. 

The NAO reports that 252 authorities are ‘underfunded’ by just over £900m, while 85 authorities are ‘overfunded’ by £300m or so due to the way MHCLH structured its support packages, particularly at the start of the pandemic. However, this does not take account of an estimated £1.6bn in business rates and £1.3bn in council taxes not collected in 2020-21. Some of this will be recovered in future years but councils will need to absorb in the order of £700m within their budgets over the next three financial years as the government has agreed to only cover 75% of the uncollected amounts.

Key points raised by the NAO in their report include:

  • Councils have taken action to reduce spending where they can but many authorities still needed to take further steps to balance their 2020-21 budgets, including using reserves to absorb losses incurred.
  • A combination of high reported funding gaps and low reserve levels means that some authorities are at risk of financial failure – with 1.5% at acute risk and 5.9% at high risk.
  • Exceptional financial support has been provided to four authorities through capitalisation directives amounting to £50m. Further support may be needed for Croydon Council (which has issued an s114 notice) and Nottingham City Council where non-statutory reviews are underway.
  • Local authority finances will continue to be under significant pressure in 2021-22 and beyond, with late information from MHCLG on funding hampering budgeting preparations. Many finance directors believe multi-year financial settlements would improve financial planning and provide better value for money.
  • Many authorities will reduce service budgets in 2021-22, with 94% of finance directors from single-tier and county councils and 81% from district councils expecting to do so.
  • Local authority finances have been scarred by the pandemic and will not simply return to business as usual once the pandemic ends. Financial recovery is expected to be a medium to long-term process, with only 20% of single-tier and county council and 15% of district councils expecting their finances to return to pre-pandemic levels within the next two financial years.

The NAO concludes by commenting on how local authorities have played an important role in the public response to the pandemic, despite being under significant financial pressure. MHCLG’s successful monthly collection of data and continued intensive engagement with the sector has provided a good evidence base to underpin the financial and other support provided by government. The actions taken to support the sector averted system-wide financial failure at a very challenging time and means the most severe risks to value for money in the short term were managed.

However, the NAO report adds that the financial position of local government remains a cause for concern. “Many authorities will be relying on reserves to balance their 2020-21 year-end budgets. Despite continuing support into 2021-22 the outlook for next year is uncertain. Many authorities are setting budgets for 2021-22 in which they have limited confidence, and which are balanced through cuts to service budgets and the use of reserves.”

The NAO makes several recommendations on the lessons MHCLG and other government departments can learn from their experiences during the pandemic. These include a better understanding of local government finances, greater clarity over funding earlier in the budgeting process and the need to maintain exceptional support for local government in the short-term. 

In the longer-term, a greater focus is needed on service sustainability in addressing long-standing issues and there should be a long-term financial plan for local government. MHCLG also needs to assess the sector’s resilience to future crises and create an emergency financial response framework to ensure it is better prepared.

Commenting on the report Alison Ring, Director Public Sector for ICAEW, said: “The NAO has complimented the government on the essential financial support it has provided to local government in England through the course of the pandemic. However, it also highlights how many councils are under severe financial stress, with several at acute or high risk of failure. 

“The government will be concerned that planned cuts in service levels may affect its objective of levelling up opportunities across the country. While not the whole answer, the NAO’s recommendation to provide greater certainty on funding earlier in the local authority budgeting cycle would help councils plan with more confidence and help improve the value they get for the money they do spend.”

NAO report: Local government finance in the pandemic

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