COVID-19: Local government finance Contents

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1Supporting local authority financial sustainability in the first year of the pandemic

1.On the basis of a report by the Comptroller and Auditor General, we took evidence from the Ministry of Housing, Communities & Local Government (the Department) and HM Treasury about local government finance in England during the COVID-19 pandemic.1 We also took evidence from the Society of County Treasurers, the Society of Local Authority Chief Executives and Senior Managers (SOLACE), the Chartered Institute of Public Finance and Accountancy (CIPFA) and Manchester City Council.

2.The Ministry of Housing, Communities and Local Government has overall responsibility for the financial framework for local authorities. This includes maintaining a system of local accountability that assures Parliament about how local authorities use their resources, including preventing and responding to financial failure. Other government departments have policy responsibility for statutory services delivered by local authorities.2

Government preparedness at the outset of the pandemic

3.Leading into the pandemic, local authority finances were under pressure following a period of funding reductions, growth in service demand and delayed reforms to the local government finance framework. As a result, local authorities’ finances were potentially more vulnerable to the impact of the pandemic than they might otherwise have been. The spending power of local authorities (which consists of government grants, locally retained business rates and council tax) fell by 26.3% in real terms from 2010–11 to 2020–21.3 In our report on the Financial sustainability of local authorities, we highlighted that demand for key services such as adult and children’s social care had also increased.4 A number of planned major financial reform initiatives such as the Fair Funding Review, a proposed move to 75% local retention of business rates, and a reform plan for adult social care funding, have not been delivered due to competing pressures such as the UK’s exit from the European Union.5

4.During the last financial year before the pandemic, 2019–20, 82.6% of local authorities’ income came from sources such as council tax, locally retained business rates and sales, fees and charges, that depended to some extent on local conditions. The pandemic very quickly had significant financial impacts on local authorities.6 We received written evidence from the Special Interest Group of Municipal Authorities (SIGOMA) which told us that even in March 2020, as government action started, councils reported £174 million of income pressures. These were alongside £79 million of cost pressures, such as new services to support their communities, delivering programmes for government, or increased costs within existing services.7 The National Audit Office (NAO) found that the lockdown and other COVID restrictions had led to local authorities losing income from fees and charges such as car parking income and from the closure of council-owned facilities like leisure centres.8 The government committed to supporting the sector to respond to the unprecedented challenge of the pandemic, and that support would be “timely, targeted and temporary”. The Department responded quickly to support the sector’s finances early in the pandemic. It announced £3.2 billion in grant funding for the sector, spread across two equal tranches, on 19 March and 18 April 2020. In the same months, it introduced measures worth a total of £6.85 billion to support cash flow in the sector.9

5.The Department did not have a strategy or framework to draw on in the early stages of the pandemic. Local government finance was not mentioned in the government’s high-level plan for pandemic flu. In addition, at the start of the pandemic there was no structured data on COVID-19 pressures on local authorities. The NAO found that the uncertainty of the situation, the lack of information and the need to respond quickly meant that the initiatives developed in February, March and April 2020 prioritised speed over the information needed to design a targeted response. The Department told us that its response drew on “experience of contingency planning—for example, in relation to EU exit, the end of the transition period and Operation Yellowhammer”. However, this contingency planning did not cover impacts as large or as fast as those that flowed from the pandemic. The Department told us that during the pandemic it developed approaches to supporting local authorities, which were now available for future use if needed.10

6.Ministerial statements in March 2020 that government would do whatever was necessary to support councils were taken by some finance directors and stakeholder bodies as meaning that it had issued a blanket guarantee as opposed to setting an expectation that the sector would cover some of the costs of the pandemic. We heard and received evidence that early in the pandemic the Government had not communicated the extent of, or limits to, its support for local authorities sufficiently clearly. CIPFA told us that “the language did change, in that the original language of ‘whatever it takes’ changed to language of burden sharing” and added that a lot of councillors were led by the original language to think they would get more resources than they ultimately got. SIGOMA similarly submitted that support had fallen short of the expectations raised by statements that government would do ‘whatever it takes’ to support local government.11

7.We asked the Department when it became aware that Ministerial statements had potentially been misinterpreted and what action it had taken to clarify the situation. The Department asserted that the commitment to support local authorities for their legitimate expenditure costs was clear from the start and that it had been in regular dialogue with local authorities about its approach.12 We and the Housing, Communities and Local Government Committee attempted to establish the boundaries of this commitment through several evidence sessions with Departmental witnesses and correspondence with the Department in May, June and July 2020.13 The Department told us that it had been clear with the sector that its approach for compensating local authorities for income losses would be different to that for supporting authorities to manage new expenditure costs. It further asserted it had been clear in discussions with local authorities and finance chiefs that it would be necessary to share the income losses due to the pandemic between central government and local government to a degree.14 However, the earliest example it gave of communicating this message was in July 2020, when the principles underlying the government’s approach to local authority income losses were set out. The scheme the Department introduced provided partial compensation for local authorities’ lost income from sales, fees and other charges; it does not cover commercial income losses.15

8.In addition to the March and April unringfenced funding, the Department provided two further tranches of unringfenced funding in 2020–21, bringing the total value of these grants to £4.55 billion. The Department took us through the ways in which its approach to allocating unringfenced funding changed. It used three different approaches (existing funding formulas, population, and a new formula drawing on pandemic data returns) to allocate funding of £3.7 billion between March and July 2020. Since July 2020 the approach to funding allocation has been stable, although when asked if the current formula needed further revision the Department did not commit itself either way.16 By early December 2020 estimated financial support for the sector from the Department in unringfenced grants and support for sales, fees and charges income losses, funding from other government departments, and support from clinical commissioning groups stood at £9.1 billion. In December 2020 authorities estimated their full COVID-19 costs pressures and income losses for 2020–21 at £9.7 billion.17

Departmental data on local authority financial resilience during the pandemic

9.The Department introduced a monthly survey in April 2020 to collect data on the financial pressures faced by local authorities due to the pandemic. Prior to the pandemic, the majority of its regular financial data sets tended to be collected on an annual basis. The Department told us that the switch to a monthly approach did not necessarily mean there was a problem with the data it collected before, but reflected the unprecedented nature of the challenge faced by the sector. The Department told us that the survey had given it “huge insight” into local authorities’ finances on a more immediate and responsive basis than it would normally have. The survey data was also a valuable source of information for other departments.18 In terms of learning from this experience, the Department recognised that there was a benefit to having more information on the sector over the longer-term, but that this needed to be balanced against the burden this placed on authorities. The Department told us that this type of lessons learned exercise in relation to data was now actively “in train”.19

10.Local authorities need to hold sufficient reserves to deal with known future needs and the financial risks they face. Accordingly, reserve levels are a key measure of the financial sustainability of local authorities over the medium-term.20 As part of its monthly survey the Department collected data on local authorities’ reserves in order to assess the extent to which their reserves were under pressure. To do this the Department did not use the traditional categorisation in which reserves are classed either as allocated (for defined purposes) or unallocated (and therefore available for any purpose). Instead the Department introduced a new, experimental category of “available” reserves. The concept of availability reflects the fact that owing to local authority accounting practices not all an authority’s unallocated reserves are necessarily available, while some of their allocated reserves may be. This means that despite the publication of data on allocated and unallocated reserves it is not possible to identify the level of reserves that an authority actually has available to respond to the pandemic or any other issue. However, the Department told us that it was “not sure that [the collection of this experimental data] has been entirely successful” as 65 authorities simply replied that they did not have reserves available to respond to the pandemic. The Department told us that later in the year, rather than concentrating on reserves it instead focused on the capacity of authorities to set their 2021–22 budgets. It explained that it was reassured by the fact that all authorities either had, or were in the process of, agreeing their 2021–22 budgets.21

11.The Department’s monthly survey is an addition to a broader framework of risk monitoring that draws on a range of other information sources.22 Through the use of this framework the Department had placed Croydon Council on its ‘long list’ of councils at financial risk for some years. However, it was only in the light of the council’s return to the Department’s monthly survey in April 2020 and subsequent conversations that the Department became fully aware of the scale of the financial challenge faced by the sector.23 The council’s section 151 officer subsequently issued a section 114 notice in October 2020, indicating that the council was at risk of failing to balance its budget, which is unlawful. We challenged the Department on whether it should have taken earlier action in relation to the council. The Department told us that in its view the authority itself was not fully aware of the scale of its own financial pressures for much of 2020, and by extension that the Department could not have been expected to know.24 The Department has agreed £120 million worth of capitalisation directions, which allow local authorities to either borrow or use receipts from the sale of capital assets to support revenue spending, in order to stabilise the council’s finances.25

Designing schemes to support local authorities and their communities during the pandemic

12.We asked representatives of the local government sector how well the Department had engaged with it over the last year. We heard and received evidence praising the quality of the Department’s engagement with the sector during the pandemic. For example, Manchester City Council told us that the Department’s engagement had been good both in relation to individual authorities and collectively with the sector as a whole.26 However, the Society of County Treasurers conveyed an equally clear message that the engagement by other government departments was not as good and that other departments had not listened as much to the sector. It suggested that this should be a key lesson the government should learn from the pandemic.27 The Department told us it recognised that communication with local government “is variable across departments” because they differ in their normal exposure to local government, but asserted that increased joint working during the pandemic had strengthened relationships in key areas of public health and social care.

13.The Department highlighted “the excellent work” within the Department for Health and Social Care (DHSC) as an example of “that deepening of the connection with local government”.28 In June 2020, DHSC created the Social Care Sector COVID-19 Support Taskforce to oversee the delivery of two packages of support for the care sector as well as support the government’s work on community outbreaks and consider how to reduce the risk of infection in care homes and the wider social care sector. The Taskforce was chaired by an individual with substantial operational experience as the former President of the Association of Directors of Adult Social Services and drew members from across the sector. In September 2020, the Taskforce published its report setting out progress and learning from the first phase of the pandemic and recommendations to help improve resilience in the sector. As part of this, it recommended that DHSC “significantly boosts its own expertise and capacity in relation to social care”, to continue beyond the pandemic, and used this expertise to link effectively with regional and local structures. This included bringing in senior local authority figures with experience within social care and public health.29

14.We received written evidence from representative of the local government sector criticising a range of support schemes that were introduced during the pandemic, particularly business grants, as being complex or challenging to administer.30 Pandemic business rates relief started in March 2020 and the first business support grants distributed through local authorities started in April 2020.31 In relation to business grants, SOLACE told us that “the centrally set rules have been counterproductive” and on occasion had led to some councils “rapidly trying to ‘chuck the money out of the door’”, risking the effectiveness of spending and some assurance against fraud. SOLACE also told us “we made it clear to the Government early on with our business community that [the proliferation of business grants] just needed to be rationalised.”32 However, the District Council Network (DCN) observed that it was not until March 2021 that BEIS responded to calls to simplify the schemes.33 SIGOMA pointed out in relation to a wide range of grants that “there seems to be a lack of appreciation in government” that the nature and timing of the government’s own scheme rules would have an impact on the speed with which authorities would start to make payments under the schemes.34 In April 2020, the London Chamber of Commerce and Industry said “the pace of funding delivery to businesses is imperative”, as cashflow was fast running out for many small and medium-sized enterprises across London and these grants were important to keeping them afloat in the short term.35

Transparency about financial risks in the sector

15.The Department told us that during the early months of the pandemic it developed greater structure and a stronger framework around exceptional financial support for individual authorities. Exceptional financial support is used where the Department accepts authorities face unmanageable financial pressures despite other government support measures.36 The Department asserted that it had been transparent in relation to cases where Ministers had agreed to provide exceptional financial support.37 However, the Department did not and does not share information on the total number of authorities that have approached it in relation to financial pressures, or the number of authorities where the Department has identified financial concerns itself. Similarly, while the NAO calculated the number of authorities at different levels of risk of financial failure using Departmental thresholds for comparing COVID-19 related funding gaps to reserves for individual authorities, the Department did not share with us or the NAO its own assessment of authorities at risk or how this had changed over time.38

16.The Department told the NAO that sharing information on the number of authorities interested in exceptional financial support or at risk more generally would invite public speculation on the identity of the authorities affected. However, the information the Department does not share is valuable for assessing the level of financial stress in the sector and therefore how well the Department’s other measures have served to deal with the burdens the pandemic has placed on local authorities. This information is needed to support Parliamentary scrutiny: the NAO told us it was not possible for it to get a full picture of the financial stress in the sector or evaluate how effectively the Department had addressed any issues without knowing the level of demand for exceptional support or the Department’s view on financial risk more generally.39

17.We previously discussed the provision of this type of information with the Department as part of our examination of the Department’s Starter Home programme. We recognised that sensitive information should not necessarily be made public, but we asked the Department to commit to ensuring “the National Audit Office can see anything it needs to” in relation to financial pressure on individual authorities. The Department agreed at the time.40 We therefore asked the Department why, given this commitment, the NAO had struggled to access this information. The Department told us that its position was that information relating to individual councils and its analysis of their financial position should remain private and confidential. It asserted that it was important that it had “a private space where we can have confidential discussions with local authorities”. The NAO explained that it understood the need for this safe space but would have liked to have had more information shared with it. The NAO regularly receives confidential and highly sensitive information, in order to support Parliamentary scrutiny, and has demonstrated it can reach sensible judgements about what is put into the public domain. We therefore asked the Department what steps it thought it could take to ensure that the NAO and Parliament were aware of the scale of risk in the sector in future. The Department told us that it took its responsibilities to be open to Parliament and the NAO seriously and agreed to think further what more could be done.41