The pandemic has compounded local authority funding deficits – more so than most of us can imagine.
Waverley Borough Council’s budget 2021/22 aims to maintain frontline services while seeking further cost and efficiency savings and new revenue streams to offset the financial impact of the COVID-19 pandemic and the continued reduction in government funding. It is the same story around the UK: do more with less, feel the brunt of covid compounding austerity measures, and think like an entrepreneur to identify potential new revenue.
Waverley’s council tax is forecast to rise by 2.0%, but savings, new revenue, less funds held in reserve and a decrease in capital expenditure is the only way the books can be balanced – council tax rises are capped and will do little to achieve this, while most of the business rates received have to be handed back to central government.
The cost of covid just to the local authority’s General Fund for 2020/21 alone is £6.6m with just £4.3m coming from government to plug some of the gap with a significant unfunded hit in 2021/22 and beyond. Councillor Mark Merryweather FCA, Waverley Borough Council Portfolio Holder for Finance, Assets and Commercial, is realistic about pre-pandemic financial conditions: “Our costs are rising but the government plans to cut our retained business rates and grant income faster than we can replace it through a combination of efficiency savings, council tax increases, and building sustainable income from investments. This situation has been eclipsed by the pandemic.”
The local authority needs new income of over £5.8m annually by 2025/26 to break even – and must also identify significant savings. The solution, hopefully, will come in part from collaboration and Waverley and Guildford Borough Councils are recruiting a Joint Chief Executive who will create a single management team and an Inter-Authority Agreement which will confirm the legal basis for how the two councils will work together – but the two councils will remain entirely separate with their own constitutions, councillors and democratic processes. The move demonstrates a realisation that only so much can be achieved by one local authority working solo.
Focusing on Waverley, the General Fund gross capacity is just north of £30m annually. The Housing Revenue Account is around about the same value. The latter was not as affected by COVID as the general fund as residents were still, by and large, able to pay their rent, but it is being affected by climate change and construction inflation. “One of our workstreams is not only to make sure that new houses are sustainable, but we are also retrofitting green technologies into as many of the 5,000 that we already have as possible,” says Merryweather.
Covid and climate aside, conventional local authority income – grants, business rates and taxation – simply cannot fund everything. “You can see from our accounts that we don't get any central grant funding now to speak of, and our share of business rates is declining to the point where 95% of the £38m in business rates that we collect goes elsewhere,” he says. “Covid has had an impact on business rates because we're dependent on the government reimbursing us what businesses haven’t paid. That's a huge threat for us.”
Although COVID could not have been planned for, in keeping with every UK local authority, since 2017/18 Waverley's annual medium-term financial plans identify new income streams as well as cost savings to mitigate lost income.
Graeme Clark, Waverley Borough Council’s Chief Financial Officer and the Statutory Officer appointed by the Council under Section 151 of the Local Government Act 1972, points out that local authorities are under increasing scrutiny about how they replace funding with commercial income and how they manage exposure to risk. “Within a relatively short period of time there's been a reversal of attitude,” he says. “There are new restrictions on what we can borrow and what we can do. A knee jerk reaction to a minority of over-confident local authorities has now restricted the ability for the majority to do things that the government fairly recently was encouraging us to do to plug the gap.”
On top of all that, there is the harsh reality that action taken by county councils in a two-tier area to address their severe financial challenges can negatively impact a district and borough council’s finances – quite severely.
“Borough Councils can pick up the impact of county councils changing certain funding streams and stopping doing things. Recycling credits are a case in point,” says Clark, adding that the impact to Waverley Borough Council has been a reduction of about £0.8m a year.
“The demand comes to us,” says Merryweather, “And it comes to our grant-funded partners, such as the Citizens Advice Bureau, with whom we have service level agreements. The pressure before covid was high but the pandemic has magnified this need intensely. We have to find ways to help because our residents will suffer if we do not.”
As if this were not enough to negotiate, there is also the imperative for local authorities to act in such a way that the UK reaches its net-zero carbon goals. Waverley Borough Council itself is moving to be a carbon-neutral council, but it stresses that it can only control its own behaviour, not that of others.
“Everything we take to the Executive is assessed in terms of its impact on the environment,” says Merryweather. “There is a whole spectrum of funding available for projects that have a positive impact – there is still a significant residual cost to councils and it is complicated because there is no central government single source.”
While government policy can change swiftly around net zero, funding does not always follow through at the same pace. “But we’re pretty good at finding our own solutions,” says Clark, “albeit that it is hard to plan three years ahead.”
Nothing is straightforward in the local government environment and all this complexity is manifest in the accounts. Clark says: “Even local government accountants can struggle to understand the increasingly complex nature of local authority accounts. It’s no wonder that our businesses struggle to understand where their business rates go.”
He continues: “I would give local authorities greater freedom in their financial reporting to express their own position to their own community. I’m all for transparency and comparability but I think local authority accounts have become too complicated.”
Merryweather concurs: “I think the annual accounts are the tip of the iceberg. We can’t reasonably expect people to spend their valuable time trying to understand how local authority funding works; the distinctions between cash and funding and revenue and capital funding, let alone things like Minimum Revenue Provision,” (an annual charge local authorities have to make on top of interest to provide a sinking fund for the repayment of debt principal) – another local government quirk.
Clark concludes that the biggest challenge the council faces is uncertainty – whether that be over government policy or funding, both of which can materially change overnight. Uncertainty has a significant impact on how the council operates, but still provides much-needed services for residents within budget.
Insights special: Repairing public finances
ICAEW Insights takes a closer look at the efforts being made to repair public finances in the wake of the coronavirus pandemic.
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