English councils are facing a financial double whammy, with increases in costs and losses in income as a result of the COVID-19 crisis coming on top of underlying upwards pressures on spending, especially for adults’ and children’s social care services.
A new report from IFS researchers – funded by the Economic and Social Research Council and the Local Government Association – finds that even before the recent surge in COVID-19 cases, forecasts by councils implied that COVID-19 spending and overall revenue pressures arising this year could exceed the additional funding made available so far by around £3.1 billion. £2.0 billion of this will hit budgets this year, but accounting rules mean that the £1.1 billion of it that relates to falls in local tax revenues can be spread over the next three years. Given councils made their forecasts before most local lockdowns came into force, and before more stringent national restrictions were announced, there is a significant risk the final shortfall could be higher.
COVID-19-related pressures should abate over time, but councils also face underlying financial pressures. To analyse these, the report looks at three scenarios for revenues and spending over the period to 2024–25. Under its middle scenario, if council tax is increased by 2% a year – the current default limit without a local referendum on bigger increases – English councils would need a further £3.2 billion of funding in real terms in 2024–25 to maintain services at their pre-COVID-crisis levels. This assumes a modest long-term hit to business rates and income from parking and transport services as a result of the COVID-19 crisis, but no additional long-term demands for council services.
Without additional funding, councils would have to further reduce the range and quality of services that they provide – following cuts of 40% to many services in the decade between 2010–11 and 2019–20. Reserves could help address shortfalls for many councils this year but once used cannot be used again and so are not a viable source of funding to address the longer-term financial challenges facing councils – which would continue growing after 2024–25.
Kate Ogden, a research economist at IFS and an author of the report, said:
‘Increases in the cost of discounts to households with low incomes and in the number of households being unable or unwilling to pay their bills mean council tax will raise less than councils had budgeted for. And even putting to one side the business rates holiday for many businesses, councils are also collecting less in business rates, with businesses arranging to defer bills or failing to pay up.
‘Our middle scenario suggests councils could ultimately lose out on £1.1 billion as a result of falls in tax collections this year. The government has said it will look at ways it could take on a share of these costs though, with an announcement expected in the Spending Review.’
David Phillips, an associate director at IFS and another author of the report, said:
‘Our middle scenario implies that councils will need an extra £3.2 billion in real-terms funding by the mid 2020s to meet rising spending needs. But this figure is highly uncertain and could be billions higher or lower, depending on what happens to underlying demands and costs, and the scale and duration of ongoing impacts of the COVID-19 crisis.
‘This uncertainty, combined with the myriad of policy reviews that could impact on local government funding – including those of adult social care services and business rates – means that it would be unwise to expect the Spending Review to set firm and fixed funding allocations for councils. Instead, it may be better to consider the Spending Review as a chance to set baseline allocations. These could then be varied as more evidence on councils’ revenues and spending needs, and the overall economic and public finance outlook, becomes available over time.’