Local authorities have been preparing their revenue budgets and financial strategies for the forthcoming financial year and beyond. The economic effects of the pandemic have made this a more challenging process than ever.
In its March 2021 report Local government finance in the pandemic, the National Audit Office (NAO) estimates that councils will have racked up £9.7bn in Covid-19 cost pressures and losses during the 2020/21 financial year. It also estimates councils received £9.1bn in additional financial support from central government in 2020/21.
The report finds that 75% of local authorities have a reported funding gap even with that extra government financial support. Every local authority’s financial position is different, and in some cases, these funding gaps are significant: 30% of councils report funding gaps equivalent to more than 5% of their spending in 2019/20. To a degree the shortfall can be mitigated by drawing down from reserves, but this inevitably is only a short-term respite.
Committed leaders in public services need to consider actively and creatively what the local service offering should be
Additionally, some local authorities have a poverty of usable reserves. In this case, the CFO can invoke a section 114 notice under the Local Government Finance Act 1988 to ensure the rebalancing of a deficit budget. There now appears to be a group of local authorities that are reaching this position.
In addition to the support that it has provided through the grant system, the government has said it will consider applications for ‘exceptional financial support’, which will be provided through a ‘capitalisation directive’. This is where the secretary of state for local government grants the local authority the power to draw from its own capital resources to fund revenue expenditure. The sources for this are first, capital receipts held in reserves, and second, borrowing, normally through the Public Works Loans Board (PWLB).
The local authorities of Eastbourne, Bexley, Luton and Peterborough have been granted a capitalisation directive, and several other local councils also have applications under consideration.
The granting of a capitalisation directive is an important safety valve for local authorities that are in the most extreme circumstances. But it must be emphasised that this is only a short-term solution – one that enables local authorities to spend their own financial resources in a different way rather than getting new money from central government.
CFO and their teams alone cannot resolve all the financial issues
Council tax is an issue that attracts an acute amount of public interest, and a key part of the budget decision-making process is the setting of this tax.
The assumption in the 2021/22 local authority finance settlement is an increase of 1.99% in the council tax for general services, and 3% for the adult social care element of the tax. Any increases above these levels would require approval by referendum, except in the case of the Greater London Authority, which has been allowed to increase its element of the tax by 9.5% to cover the deficit income to Transport for London.
Indications are that most local authorities are raising the maximum they can. However, this is not universal, and we appear to be looking at an England average tax uplift of 4.3%, with a small number of authorities not applying the full 4.99% increase.
The UK delivers local services on a model based on the legacy of the 20th century, but we must now have arrangements that work for the 21st century
Facing the future
There is no doubt that a significant swathe of local government is now financially challenged. Temporary measures such as drawing from reserves and releasing money through capitalisation are short-term palliatives only.
In the current economic situation, a major increase in revenue support for local government appears unlikely, and the delayed fair funding review is likely to be a distributional exercise rather than one that addresses the issue of national levels of resourcing.
Additionally, the crisis in the economy has meant that business rates are coming under scrutiny. This represents a risk to local authorities, as business rates are a major source of council funding.
In this position, if local authorities are to remain solvent, they cannot rely on the CFO and their teams alone to resolve all the financial issues. Only mainstreaming awareness, understanding and commitment to financial sustainability throughout the organisation is going to maximise the prospects of a positive financial outcome.
Committed leaders in public services need to consider actively and creatively what the local service offering should be. This should include an evaluation of the relationship and governance of all local services including local government, health, police, fire and transport.
The UK delivers local services on a model based on the legacy of the 20th century, but we must now have arrangements that provide community service and leadership for the middle of the 21st century.
It is essential that those committed to local public services creatively take up this challenge. Otherwise a single central government agenda will be the one that prevails at the expense of local input.