1.The Department was not sufficiently prepared for the local government finance implications of a severe emergency. Local authorities went into the pandemic with 82.6% of their (non-education) income, such as council tax, retained business rates and car parking charges, dependent to some extent on local conditions. The pandemic has caused sudden and severe drops in local authority income, which the Department needed to respond to urgently to reduce the risk that the local response to the pandemic would be hampered by a lack of funding. In addition, authorities face cost pressures from the pandemic such as the need to deliver new programmes and services alongside increases in the cost of delivering existing services. However, the existing national pandemic emergency plan did not cover local government finance and the Department’s previous contingency planning did not provide an immediate basis for this response. There has been some confusion in parts of the sector about the government’s position in the earliest stages of the pandemic. While the Department announced emergency funding in March and April 2020, it was July before the Department set out the principles it would use for dealing with local authority income losses and arrived at a stable method for allocating funding to support COVID cost pressures.
Recommendation: The Department should capture learning from the pandemic and write to us by the end of 2021 setting out how it will use this to prepare a flexible framework for responding quickly to the implications of severe national emergencies for local government.
2.The pandemic has exposed limitations in the data that the Department normally collects from local authorities, meaning it has not had a proper picture of local financial resilience. Prior to the pandemic, the Department’s collection of local authority finance data covering areas such as service spending and income from sources such as council tax, business rates and sales fees and charges was generally undertaken on an annual basis. This approach could not provide information quickly enough to navigate a fast-moving and unprecedented pandemic. The Department has put in place a monthly survey collecting data on authorities’ spending and income pressures due to COVID-19. The data from the monthly survey has underpinned decision making in the Department and has also informed decision making in some other government departments. The Department’s new approach to data collection included gathering experimental data on the level of reserves authorities had available to respond to the pandemic. Information on the financial reserves held by local authorities is central to understanding local authorities’ financial resilience and their ability to balance their budgets. However, the Department accepts that its experimental approach has not been entirely successful, with 65 local authorities responding that they had no reserves available to respond to the pandemic. In addition to data collected specifically in the pandemic to assess financial sustainability the Department has an existing financial risk framework with which it monitors the sector. Using information collected through this framework, the Department was aware of some financial weaknesses at Croydon Council before the pandemic. However, the Department did not fully understand the depths of the commercial and other problems facing the council, and had not begun intensive work with the council until April 2020. The financial pressures faced by the council have ultimately resulted in a £120 million bailout via capitalisation directions, which allow authorities to borrow or use capital receipts to support revenue spending.
Recommendation: The Department should draw on the experience of collecting data during the COVID-19 pandemic to improve its regular collections of local government financial data. In particular, it should write to us by October 2021, setting out:
Recommendation: The Department needs to examine its arrangements, and make changes as necessary, for oversight of financial risk in the sector and ensure that lessons from the financial issues at Croydon Council have been learned. The Department should set out its response when it writes to us by October 2021.
3.Government support schemes during the pandemic were not always designed with sufficient knowledge of local government finance or input from the sector. Representatives of the local government sector assert that government departments other than MHCLG did not always engage with the sector during the pandemic sufficiently and consequently were not well informed about the pressures and needs of the sector when designing support schemes. This has resulted in support schemes being designed with too much bureaucracy, a lack of co-ordination, and a focus on speed of delivery that does not always take account of the need for assurance against fraud. These issues place additional burdens on local authorities. For instance, an announcement that business support grants would be simplified came almost one year after they were introduced. The Department recognises that communication with local government is variable across Whitehall. At least one other department has now recognised this itself. The Department for Health and Social Care has identified lessons in relation to adult social care through the work of the Adult Social Care taskforce, including the need to boost its expertise and capacity in relation to social care, and improve local engagement. We are less confident that other departments have recognised the issue.
Recommendation: HM Treasury, the Department for Education, the Department of Health & Social Care, the Department for Business, Energy & Industrial Strategy, the Department for Environment, Food & Rural Affairs, and the Department for Digital, Culture, Media & Sport, in co-operation with the Department, should write to us by October 2021 setting how they will improve, and then maintain, their understanding of the operational realities of local government finance and the financial pressures authorities face.
4.The Department has not fulfilled previous assurances that it will be transparent about financial risk in the sector by sharing information with the National Audit Office. The Department previously told us that it would ensure the National Audit Office can see any information that it needs to about local authority financial risk in order to support proper scrutiny by this Committee on behalf of Parliament. However, the Department has not provided all the information the National Audit Office has requested. Without this information, it is not possible for the National Audit Office or Parliament to get a full picture of the financial stress in the sector or evaluate how effectively the Department has addressed any issues. The Department has not yet found a satisfactory way of being transparent about the level of financial stress within the sector while maintaining appropriate levels of confidentiality in respect of information provided by local authorities. In the absence of other oversight mechanisms, Parliamentary scrutiny of the Department’s handling of financial risk in the sector is essential.
Recommendation: In discussion with the National Audit Office, within three months the Department should find a way to share information relevant to financial risk in the sector, including about individual local authorities, while indicating on what basis it can or cannot be shared further.
5.The Department’s over-optimism about the impact of the pandemic on local authorities risks leading to reductions in services for local people. The Department is confident about the sector’s stability and sustainability in relation to the immediate and short-term impacts of the pandemic. However, it recognises that there will be financial impacts on local authorities. Local government sector representatives are clear that most councils will not be able to manage solely using reserves and will also need to make service cuts in 2021–22. We were told about many councils facing multi-million pound budget reductions due to COVID-19, even after government support. Typical council tax bills will rise by an average of 4.3% across England in 2021–22, meaning that local people could be paying more for less. We have previously found that there is insufficient monitoring of the way that local government financial pressures affect services. Given this, we are not convinced by the Department’s confidence about the sustainability of services. Both the Department and local government representatives recognise that the pandemic will affect the sector’s finances in the short and medium term as they seek to understand the ‘new normal’ for local services.
Recommendation: The Department, working with other government departments, should ensure that decision-making about actions to stabilise local government finance is informed by sufficient information about the service implications of current financial pressures.
Recommendation: The Department and HM Treasury should ensure that their work for the next Spending Review includes full consideration of the longer-term effects of the pandemic on local government finance and the demands placed on local authorities.
6.The Department has yet to address the longstanding structural issues within local government finance. Since 2015–16, the government has been planning to put in place significant changes to local government finance, but these have yet to be introduced. Parts of the current finance system are broken or flawed. The pandemic has also cast doubt on planned financial reforms which were centred on greater local retention of business rates. For instance, local authorities expect to collect £1.6 billion less in business rates for 2020–21 than planned. Reforms to local government finance need to be co-ordinated with long-awaited reforms to adult social care, with social care proposals now promised in 2021. The Department recognises that there are a range of significant issues that should not be dealt with separately. It will be crucial to put in place meaningful and well thought-through reforms that reflect the lasting changes flowing from the pandemic and ensure that there is a period of financial stability in the interim while new reforms are being devised.
Recommendation: The Department should write to us by October 2021 setting out its plans to ensure that:
7.It is unacceptable that local authorities continue to face uncertainty about the level of financial support they can expect from government on top of the other pressures and uncertainty with which they are currently required to cope. The pandemic has created financial uncertainty for local authorities about their future commercial and other income, service needs, ability to make savings, and ability to collect local taxes. Additional uncertainty and late information about government funding on top of this could risk cuts to the services residents and businesses rely on. The Department and HM Treasury recognise the importance of funding certainty and early information to good financial management. Yet neither have committed to improving their current approach in light of recent experience. Local authority public health grant allocations were published by the Department for Health & Social Care in mid-March 2020, after local authorities had set their budgets for 2021–22, and only 15 days before the end of the financial year. We welcome the announcement that the government will take steps to rule out business rates appeals related to changes in circumstances due to the pandemic, removing a source of uncertainty for local authority finances. However, this decision came less than a week before the end of the financial year.
Recommendation: HM Treasury, working with the Department and other departments as necessary, should explore ways that the government can give local authorities more financial certainty as they develop their 2022–23 spending plans and write to us with conclusions by June 2021.