Falling incomes & rising expenditure could tip councils over the edge
Could the coronavirus crisis force local authorities to cut back on essential services, including adult social care.
Despite a central government pledge for an extra £3.2 billion of general-purpose funding to English councils, the financial situation at many local authorities looks pretty dire.
The central government funding pledge looks set to increase local council budgets by a little more than 5%, on average.
But councils could need an extra £6 billion to keep pace with their funding requirements.
A new report from the Institute for Fiscal Studies (IFS), funded by UK Research and Innovation, looked at how financial risks and resilience varies between councils.
Different local authorities are likely to face different risks at different times, because of their reliance on different revenue streams and variation in population vulnerabilities.
In the immediate future, councils’ locally generated incomes are likely to change more than their expenditure.
The coronavirus crisis is likely to hit income from local taxes, including council tax and business rates. Income from sales, fees and charges and commercial activities are all likely to fall.
In more affluent parts of the country, councils tend to be even more dependent on these streams of income. So, affluent council areas could be hit the hardest, in financial terms, by the pandemic.
However, councils in the more deprived parts of the country are more likely to see increases in demand for their services in the coming years.
Families and individuals who are already struggling are likely to face further health and social disadvantages due to the crisis.
The report found that councils’ resilience when income falls and spending increases are likely to vary significantly across the country.
They found that one-in-eight councils sat on reserves forecast to be less than 20% of their annual non-schools expenditure before the coronavirus crisis started. With reserves this small, managing a decline in income will be harder.
In more deprived parts of the country, populations are likely to be more vulnerable to the health and social impacts of the coronavirus crisis.
For example, incidents of mental ill-health are more than 1.5 times higher in the most deprived tenth of the country, compared with the least deprived tenth.
Kate Ogden, a research economist at IFS and an author of the report, said:
“The fact that councils are facing unprecedented spending pressures and declines in income is not surprising. But given that COVID-19 itself is hitting more deprived communities and families the hardest, what may be surprising is that it is councils serving more affluent areas that are likely to see the biggest short-term financial hit. This is because they rely more on revenue streams – such as local taxes and sales, fees and charges – that are likely to be hit especially hard by lockdown and the wider economic effects of the crisis.
“Where councils serving more deprived areas look more at risk is the vulnerability of their residents to the impacts of the crisis on health and well-being given high pre-existing prevalence of mental ill-health, housing difficulties, interactions with children’s services and child poverty. This is likely to push up their spending needs into the longer term.”
David Phillips, an associate director at IFS and another author of the report, said:
“The government should bear the complex patterns of risk and resilience our report finds in mind when deciding its next steps with local government funding. Big differences in financial risk and significant variation in the reserves councils hold mean the government should also consider temporarily relaxing the rules that prevent councils from borrowing to cover day-to-day spending.
“If it does not, difficulty in targeting funding means it will either have to provide more funding to the sector as a whole than is necessary or step in to provide specific support for councils that are particularly struggling. Otherwise there is the risk that some councils could have to impose restrictions on all but the most essential expenditure.”