Councils overestimated financial hit from pandemic
Councils reported that they would have to spend £7.8bn more due to the Covid-19 pandemic however that figure was actually around £4.1bn
According to research by the Institute for Fiscal Studies (IFS), conducted on behalf of the Economic and Social Research Council, local authorities have reported that the pandemic increased net spending on non-education services for 2020-21 by approximately £7.8bn with an estimated reduction of the sales, fees, and charges (SFCs) income of £2.1bn, which includes parking revenue.
Official data published last month suggested that the increase was just £4.1bn more than normal expenditure which was far less than expected.
The IFS stated that an increase of around £2.2bn would have been expected in the absence of the pandemic and the actual figure is ‘not much more than half that was previously reported by councils’.
Overall, councils received ‘billions more in funding than their net expenditure actually increased by’. While some councils had to draw down their reserves and or agreed to special temporary borrowing powers, the IFS stated that ‘councils as a whole were able to pay substantially more into their reserves last year than had been anticipated prior to the pandemic’.
The IFS ‘cannot conclude that councils purposefully overstated the financial impacts of the Covid-19 pandemic’ due to the fact that the surveys issued to the local councils asked to identify increases in expenditure as a result of the pandemic and not where areas of spending were reduced due to temporary service closures or reduced demand.
The research highlighted areas that gross spending for councils dropped significantly, these areas are theatre and public entertainment, which included local fairs, festivals, Christmas markets, and firework displays, which dropped by around 44% or around £145m, library services down by £37m, and museums, galleries and arts and development support dropped by £17m.
The biggest increases in spending was seen in the council’s central and other services which saw an increase of £1.3bn. Adult social care services increased by £2.9bn with physical support for older people increasing by £208m and learning disability support for 18- to 64-year-olds up by £240m.
Spending on highways and transport increased by around £800m which was the result of a 90% fall in parking costs. Income from off-street parking fell by 54%, £356m, and on-street parking income dropped by 26%, £233m.
The report found that nine out of 10 councils saw their total income from sales, fees and charges fall by around 18% while nearly one in five councils saw their sales, fees, and charges income fall by more than a third.
Kate Ogden, research economist, IFS, and author of the paper said: ‘The fact councils as a whole were able to build up reserves in 2020–21 means that the sector’s financial position was not quite as precarious going into this year as is sometimes claimed. And it means the government’s decision not to meet this year’s reported financial pressures in full is not unreasonable.
‘But this approach may not work for all councils, some have been particularly hard hit and faced real financial difficulties’.
The IFS warns that the government should not be ‘overly relaxed’ about the current financial outlook for local councils as the pandemic could ‘cast a long shadow’ by increasing the demand for local services such as adult and children’s social care and public health services.
The report stated that the findings ‘may provide a justification for the government to have not met in full the additional financial pressures in 2021–22 identified by councils in their survey responses. Not unreasonably, most councils could instead draw down unused funding from last year’.
The councils struggling most with covering day-to-day spending costs were Croydon, Luton, Nottingham, Peterborough, Wirral, Eastbourne and Bexley. The IFS stated that these examples ‘illustrate the picture that every council was not always so rosy’.
The IFS stated that at the beginning of the pandemic, rather than providing upfront funding based on the ‘rough formulae’ of council’s financial forecasts, the government should have relaxed the borrowing rules to allow councils to fund higher spending and offset income losses themselves in the short term.
The IFS concludes that the difficulty in ensuring reliable forecasts and estimates of financial impacts ‘on the fly’ means that the government should consider whether alternative approaches may work better in a future crisis.
Rob Whiteman, CEO, CIPFA commented: ‘While the short-term picture may appear sustainable, we remain concerned with the medium and long-term outlook for local government finances, which largely remains unsettled.
‘Local authorities are still assessing the lasting impacts of COVID-19 on their finances and communities, and there will inevitably be more costs to bear in the future while the resource base is evidently in need of reform.
‘The sector has also seen s114 notices issued in recent years, which relate to the reality that reserve levels are very low in some areas. We must be careful to not fall into the previous traps of the Pickles era where reserves and longer term resilience were misunderstood.
‘It is important to not let this short-term good news detract from the much-needed focus on the long-term financial health of local authorities.’
Story by Ruby Flanagan from Accountancy Daily