Local authority financial sustainability and the section 114 regime Contents


Impact on local government finances

45.The covid-19 pandemic has placed an enormous additional burden on local government finances in the last year. According to the NAO report, Local government finance in the pandemic, local authorities estimate the cost of covid-19 to their finances in 2020–21 to be £9.7 billion. Of this, £6.9 billion is from increased costs, including the delivery of new programmes and services, and £2.8 billion from lost income, including lost sales, fees and charges (SFC), lost commercial income, and lost council tax and business rates.91

46.Our inquiry heard about the uneven impact of covid-19 across different types of authority. London Councils estimated the cost of covid-19 on London boroughs in 2020–21 to be £2.2 billion, half of that arising from increased spending and the other half from lost income, particularly the loss of sales, fees and charges, council tax and business rates.92 According to the DCN, shire districts incurred additional expenditure of £209 million, excluding that incurred by districts with their own council housing stock, and lost £394 million in SFCs and £87 million in commercial income.93 As highlighted in a recent observation from the IFS, shire districts lost far more in SFCs as a percentage of their revenue expenditure than other councils.94

47.Core Cities UK told us that covid-19 had had “asymmetric impacts on places and people” and had “hit the economies of big cities and city centres particularly hard.” It attributed the “disproportionately negative effects on Core Cities” to “the concentrations of businesses in big cities” and described a “double whammy” of rising costs and “plummeting incomes from business rates and non-payment of council tax.” Among the extra costs, it listed housing homeless people, delivering free school meals to vulnerable children at home, distributing funding to small businesses and local track and trace services. It estimated the overall cost to the eight English cities it represents to be £1.2 billion.95

48.The LGA highlighted the “devastating impact” that covid-19 had had on councils that normally derive considerable income from their local airports, such as Manchester City Council, the other Greater Manchester councils and Luton Borough Council.96 Richard Watts repeated this point on behalf of the LGA in oral evidence: “It would be remiss not to mention councils like Luton and the Manchester authorities, which were very financially entwined into airports for very good, long-standing reasons, for which I would not criticise those councils at all. They have been hit very hard”.97 In oral evidence, the Minister, too, recognised the exceptional circumstances facing these councils, particularly Luton.98

Government support

49.As we heard, the Government has responded to the pandemic by providing substantial financial support to local authorities. The main elements of this support are: various grants, in particular a £3.6 billion general-purpose grant; a sales, fees and charges compensation scheme, covering 75% of all SFC losses below 95% of what councils had expected to raise before the pandemic; and a guarantee to cover 75% of lost council tax and business rates revenue in 2020–21, worth an estimated £800 million. The SFC scheme has now been extended to cover the first quarter of the new financial year.

50.In the last few months, both the NAO and the IFS have analysed the adequacy of the support and concluded that it broadly covers all covid-19 funding pressures arising in 2020–21, although, according to the IFS, the support has fallen unevenly. It estimated that 106 councils appear to have received more funding in 2020–21 than they had forecast for in-year pressures, whilst the remaining 233 councils are collectively under-funded by a total of around £800 million. Shire districts, in particular, are likely to face budget shortfalls.99

51.The evidence to our inquiry welcomed the Government’s financial support, but there was a general concern over the lingering impact of the pandemic and the extent of the Government’s commitment to covering all future costs.100 The DCN described the financial support from central government as “substantial” but thought there was “a long road ahead”. It welcomed the Government’s commitment to underwrite 75% of irrecoverable business rates and council tax losses for 2020–21 but was worried that under the definition of “irrecoverable losses” not all council tax losses would be covered.101 SIGOMA also welcomed the government support but warned that the “residual impact of covid may last for many years”.102

52.London Councils told us the Government should fully fund additional spending pressures and compensate for all lost income. It called the Government’s emergency funding of £1.6 billion for London boroughs an “unprecedented intervention” but said it would still fall far short of what was needed.103 Richard Watts from the LGA called on the Government to fund all irrecoverable lost income, though he acknowledged it would be a while before the full cost would be known.104 Core Cities UK welcomed “the Government’s commitment to work with local government on the lasting impact of the C19 pandemic” but called on it to cover in full “the financial challenge facing councils” as a result of the pandemic, including “funding for cost pressures and full compensation for lost income and local tax losses.”105

53.When asked about the support package, the Minister told us the money the Government had provided to cover councils’ increased expenditure in 2020–21 “far exceeds what councils are going to spend” and that the Government was confident it had provided the income support required through its compensation schemes, although he promised to keep this “fluid situation” under review. He also acknowledged that covid-19 pressures had not been “uniformly distributed” and that some councils might need particular support, through no fault of their own.106 In our one-off session on the Department’s Annual Report and Accounts 2019–20, when asked about the commitment to fund future cost pressures, Jeremy Pocklington, the Permanent Secretary, highlighted the additional support for the first quarter of 2021–22. When pressed, however, on the Department’s plans to support councils beyond June, he said he did not want “to get too far into hypothetical questions” and that the Department did “not have specific plans in place in terms of exactly what decisions we would need to take.”107

54.The Government deserves credit for having responded to an unprecedented crisis with significant emergency funding that, from a national perspective, broadly covers all the additional financial pressures consequent on the pandemic and lockdowns in 2021–22. The effects of the pandemic will be felt for many years, however, and we are concerned that the Government has not committed to covering costs arising in future years, including from lost council tax and business rates. We are concerned, too, that some local authorities have been worse hit than others, particularly shire districts, and that some of these councils, even with the additional government funding, will still be left out of pocket. The disproportionate impact on local authorities will not assist the Government’s levelling up agenda.

55.We urge the Government to consider ways of mitigating the uneven financial support across local authorities and provide greater certainty to councils over what future costs incurred as a result of the pandemic it intends to cover.

91 National Audit Office, Local government finance in the pandemic, (10 March 2021), p. 7

92 London Councils (FSS0014)

93 District Councils Network (FSS0013)

94 Institute for Fiscal Studies, Observation, 19 March 2021

95 Core Cities UK (FSS0004)

96 Local Government Association (LGA) (FSS0002)

97 Q4

100 District Councils Network (FSS0013); Special Interest Group of Municipal Authorities (FSS0007); Mr Pete Carpenter (Corporate Director Resources at Peterborough City Council) (FSS0010); Derbyshire County Council (FSS0006); County Councils Network (FSS0008)

101 District Councils Network (FSS0013)

102 Special Interest Group of Municipal Authorities (FSS0007)

103 London Councils (FSS0014)

105 Core Cities UK (FSS0004)

107 Oral evidence taken on 19 April 2021, HC 1216, Qq7–8

Published: 19 July 2021 Site information    Accessibility statement