COVID-19: Local government finance Contents

---

2The prospects for financial and service sustainability

Impacts of the pandemic on local authority finance and services in the future

18.In its examinations of the local government sector prior to the pandemic, our previous Committee raised concerns in 2018 that “the Department may not know if pressures in one service area quickly transfer to others or the extent of the risk that this poses to local authorities or service users” due to insufficient data.42 In 2019 we remained similarly concerned that the Department was not fully evidencing financial sustainability using expectations across the full range of local authority services.43 When we asked about the immediate prospects for the sector, the Department told us that the local government finance settlement for 2021–22, which provides authorities with their grant funding levels and other key financial parameters, would allow, “the sector to stabilise and be sustainable.” It also explained that it had a degree of confidence in the sustainability of the sector in relation to the immediate and short-term impacts of the pandemic. The Department told us that it had been clear that “there would be financial impacts on local authorities” but suggested this would not necessarily affect services due to authorities finding efficiencies rather than reducing service provision, and the use of reserves. We asked the Department about the impact of over a decade of financial pressure on the ability of local authorities to make further efficiency savings. The Department responded by saying it recognised the pressures that authorities are managing and had consequently enabled real-terms funding increases in the last few years. It did not provide further explanation of its confidence in authorities’ ability to make widespread efficiencies.44

19.Manchester City Council told us that government support has not fully mitigated the impact of the pandemic, and the average pressure on next year’s budget is £15 million across the 10 authorities in Greater Manchester and £32 million across the eight core cities.45 In written evidence, SIGOMA told us that despite government support, member councils would be “assessing the viability” of the services they provide in 2021–22.46 CIPFA noted that in the same financial year, council tax will rise by 4.3% on average, representing a funding gap of £217 million relative to the government’s assumption in the local government finance settlement.47 The Society of County Treasurers explained that “there will be real challenges across the country in balancing the budgets next year” and that it thought this would be “a combination of the use of reserves and having to make cuts in services”.48 An NAO survey found that 81% of respondents from district councils and 94% of respondents from single tier and county councils intended to make savings from service budgets in 2021–22.49

20.The Department and HM Treasury explained that their judgement of the sustainability of the local government sector was not a long-term one and any government assessment of funding needs beyond 2021–22 was a matter for the next spending review.50 Sector representatives told us “the impact of Covid will be with us for a long time yet.”51 The Department recognised that there would be short-, medium- and long-term impacts from the pandemic. In particular it told us that it was reflecting on the difference between “the scarring effects of COVID”, which would “diminish over time”, and any permanent changes as a result of the pandemic.52 We have previously expressed concern about the quality of evidence about the funding needed to sustain local authority services that has been assembled for past spending reviews.53 Around half of authorities did not expect their finances to return to pre-pandemic levels until 2023–24 at the earliest. The Department said using £400 million of reserves in 2020–21, as forecast by the Office for Budget Responsibility, was an “appropriate way of helping to manage the impact of the pandemic on local government finance.” Nonetheless, this will have lasting effects: 53% of NAO survey respondents from single tier and county councils indicated that they would need to build up their reserves in the next two to three years, but only 16% of these respondents felt confident that they would be able to do this.54

The need to reform local government finance

21.Government has had plans to enact a range of local government financial reforms for a number of years, but these have not yet been introduced.55 Witnesses from the sector were clear that this reform was still required. The Society of Local Authority Chief Executives (SOLACE) described current arrangements as “a very broken system”.56 However, CIPFA raised questions over whether simply restarting the previous planned reform arrangements to increase the share of locally retained business rates to 75% and design a new funding allocation model were appropriate in the light of the impact of the pandemic. Manchester City Council explained that a key issue was the uncertainty over the impact that the pandemic has had on business rates over the long-term. This was in addition to existing concerns, expressed by SOLACE for instance, over whether a business tax system based on physical properties was effective in the context of the rapid growth of online business activity. As a result of the pandemic local authorities expect to collect £1.6 billion less from business rates for 2020–21 than budgeted.57

22.CIPFA and SOLACE called for a broader review of potential reform options rooted in a deeper understanding of the impact of the pandemic on council tax and business rates, encompassing the government’s promised reforms to adult social care funding, and potentially leading to more radical reforms than current proposals.58 However, Manchester City Council and the Society of County Treasurers were clear that these reforms should not be rushed. This was both to allow the effects of the pandemic on local government finance to settle down, and also to ensure that sufficient time was available to allow for the creation of substantive and workable reforms. SOLACE also called for stability in any interim period, ideally in the form of a multi-year settlement, while a new system is designed.59 The Department told us that it will set out its plans for taking reform forward before the end of this calendar year. However, it was clear that there was a “big suite of moving parts” involving other departments such as HM Treasury’s review of business rates, and the Department of Health and Social Care’s plans for social care. Nonetheless, the Department committed to reflecting on the messages from the sector “which is first, […] ‘Do not rush,’ and secondly, ‘Please make sure it is fit for purpose.’”60

Financial uncertainty for local authorities

23.Local authority representatives told us about the unprecedented level of financial uncertainty they have faced and continue to face as a result of the pandemic.61 Manchester City Council said that the impact on local authority commercial income, which does not attract any government support, was beyond what could “have reasonably been planned for or fully mitigated in the budget and reserves”.62 DCN similarly told us that councils faced significant uncertainties on the income they will receive from business rates and council tax. It explained that the long-term impact of the pandemic on business was still to be seen and increasing numbers of households were seeking support with council tax.63 Business failures can reduce authority business rates income, for example if properties become vacant.64 If a household receives council tax support, then the council tax income received by the authority is reduced by up to 100% .65 SIGOMA stressed that council 2020–21 budgets and plans included changes to increase efficiency which would have delivered savings into 2021–22 and beyond. These changes, and so these savings, may now not be possible.66 Manchester City Council told us that the pandemic had created pressures in its services due to ongoing demand for homelessness, adult social care and children’s services. CIPFA, SOLACE and Manchester City Council suggested that public expectations of some local authority services, such as libraries, parks and open spaces, may well have also increased.67

24.Representatives of the local government sector told us that the way in which government support had been designed or announced has also created or perpetuated uncertainty. SIGOMA explained that “2020–21 has been a year of month to month existence with incremental and mostly reactive funding without which all of our members would have failed”.68 The LGA highlighted that councils were receiving more funding through specific grants accessed by making bids in competition with other councils; while CIPFA observed that “this preponderance of bids [as a basis for funding decisions] is making life even more uncertain”.69 We also heard about delayed or late announcements of the details of funding, leaving local authorities in uncertainty, for example the date of the local government provisional finance settlement or of public health allocations.70 For local authorities the financial year 2021–22 starts on 1 April 2021, and local authorities were legally required to set their budgets and council tax levels for 2021–22 by either 1 March 2021 (precepting authorities) or 11 March 2021 (billing authorities).71 Local authority public health grant allocations for 2021–22 were published on 16 March 2021, so authorities were required to set their budgets for that year without full knowledge of their funding.72 We received evidence from DCN expressing concern that business rates appeals related to changes in circumstances due to the pandemic could have “serious material financial impacts” on district councils; such impacts would affect financial years from 2021–22.73 The government announced on 25 March 2021 that it will take steps to rule out such appeals. Authorities had to set their budgets while this uncertainty about their business rates income was still an issue.74

25.We received written evidence from SOLACE, which told us that “one-year financial settlements, which are delivered late in the budget planning cycle, presents risks and can result in very damaging cuts to services residents and businesses rely on.” Similarly, CIPFA argued that delayed or incomplete information from government adds to the complexity of financial planning and leads to increased financial instability and may result in service reduction. SIGOMA similarly emphasised that without certainty, councils “cannot plan a future service structure that fits within a known, sustainable funding envelope”.75 The provisional local government finance settlement for 2021–22 was published on 17 December 2020 and Manchester City Council stressed the need for earlier information next year, citing that not having certainty on funding for 2022–23 until December was going to be “incredibly difficult to manage”.76

26.We asked the Department about the sector’s concerns that government information coming late in the day and leaving little time to finalise plans tended to lead to decisions that were not the best value for money. We also asked when local authorities can expect to see a long-term financial plan for the sector. HM Treasury praised local authority finance directors for driving value for money “based on the information they have at any given time” and recognised that this had been particularly difficult and challenging in the last year. The Department and HM Treasury told us they had heard the desire for greater certainty by local authorities. Neither department made any commitments, however. HM Treasury stressed “the importance of multi-year certainty for good financial management and good financial planning”, but also emphasised that the length of spending reviews were Ministerial decisions.77