Adequacy of funding for local authorities during the COVID-19 outbreak, House of Commons, 24 November 2020

Taking into account the grant support received so far, and assuming that the income guarantee scheme parameters will compensate councils for around £1 billion of lost non-tax income, the Institute for Fiscal Studies estimate there is still an unfunded overall pressure of £1.1 billion in 2020/21 that councils will be forced to absorb unless further funding is announced. 


Key messages

  • Councils have shown leadership and have supported their communities during the COVID-19 pandemic. Local authorities and their essential workforce have worked hard to protect the most vulnerable within our communities.
  • Prior to the pandemic, councils had already dealt with a £15 billion reduction to core Government funding between 2010 and 2020. The extra costs, loss of income and cash flow pressures arising from COVID-19, have only enhanced this financial pressure.
  • It is positive that Government has recognised councils’ efforts in the response period by providing additional funding, including unringfenced funding totalling £4.6 billion; specific funding to support their work on a range issues; £6 billion in cash flow measures; and a new scheme to compensate for income losses from a proportion of sales, fees and charges. 
  • However, taking into account the grant support received so far, and assuming that the income guarantee scheme parameters will compensate councils for around £1 billion of lost non-tax income, the Institute for Fiscal Studies estimate there is still an unfunded overall pressure of £1.1 billion in 2020/21 that councils will be forced to absorb unless further funding is announced. These estimates were made prior to the introduction of the national lockdown so this gap could grow to be in the region of £2 billion. 
  • The Government has provided some much-needed support to councils but significant challenges remain. It is vital that the Government addresses in full the financial challenges facing councils as a result of COVID-19, including all lost income and local tax losses, and provides further investment so councils can protect and improve local services next year.
  • The announcement of a one-year Spending Review was hugely disappointing, and will mean councils will only get a one-year funding settlement for the third year in a row. This makes it incredibly difficult for them to plan how to provide the local services our communities rely on many of which have proved so vital during the pandemic.
  • We are calling on the Government to provide an additional £8.7 billion in core funding in 2021/22, made up of the £4 billion funding gap to sustain 2019/20 service levels (already assuming annual inflationary increases to grants and 2 per cent annual council tax increases), £1.8 billion to deal with other quantifiable pressures to stabilise the sector and £2.9 billion of other core funding requirements to help councils improve their core service offer.
  • We are also calling on the Government to resume the Fair Funding Review, with a guarantee that the transitional mechanisms will not only ensure that no councils experience a loss of income. The same call for transition mechanisms applies to any business rates reset, should one go ahead.

Impact of COVID-19 on local authority services and budgets

Many council services have either seen an increase in the cost base that will be very difficult (and not necessarily desirable) to drive back down, or are expected to see a ‘bounce-back’ in demand once the pandemic is over. To provide some examples of some of the service pressures councils are envisaging: 

  • Adult social care: Councils have rightly provided adult social care providers with support to help meet additional COVID-19 costs. However, even when the pandemic is over, care providers will be struggling as they were before and there is a concern that increased care home vacancies will mean some providers will struggle to stay sustainable on the current fee levels. All this implies that councils will find it very difficult not to make the ‘temporary’ cost uplifts permanent and might need to go further to sustain a functioning market. 
  • Public health: Years of significant underfunding coupled with rising demand and costs for care and support, have combined to push public health services to breaking point. As we navigate our way out of the pandemic, well-resourced services for children and adults, combined with a reinvigorated local public health offer, provide the opportunities to tackle health inequalities, manage the on-going impact of COVID-19 and ensure older and disabled people can access the care and support they need. Getting the support right for those who need it most is essential to minimise the costs of poor health, extreme inequalities and poor outcomes later on.  
  • Homelessness support: Councils’ support for homeless people in their areas will be expected to operate at the increased intense level. The efforts to get 90 per cent of rough sleepers into accommodation has been a big success but it comes at a large cost and the pressure will be on to keep these people supported in accommodation once COVID-19 passes. Councils also have wider responsibilities to supporting homeless members of their communities and those at risk of homelessness, beyond those who are rough sleeping. 
  • Children’s social care: There is increasing evidence that demand for children’s social care has reduced during the pandemic. This means that, regretfully, a spike of pent-up demand for support to vulnerable children is likely in the ‘new normal’, especially with the evidence that domestic violence is sadly on the rise. 

The future of local authority financial sustainability

We estimate that over 95 per cent of councils’ 2020/21 core spending power is subject to one source of uncertainty or another ahead of 2021/22. It is therefore imperative for the Government to think creatively about how to provide more certainty to councils in the absence of a multi-year Spending Review. One way of doing so would be for the Government to commit, explicitly and in principle, to 2021/22 funding being a real-terms floor beyond which funding will not be reduced in this Parliament for any individual council.  

The Institute for Fiscal Studies (IFS) has independently reviewed the future funding outlook for councils prior to the Spending Review, including ‘business as usual’ pressures, cost impacts of the pandemic that might be permanent and the potential long-term impact of the economic changes on local income, such as local taxes, sales, fees and charges.  

As part of its analysis, the IFS estimates that councils face cost pressures of over £5 billion in 2021/22 in comparison to the 2019/20 starting point. This includes £1.3 billion of ongoing COVID-19 cost pressures and income losses in 2021/22: 

  • Adult Social Care COVID-19 future spending pressure: £533 million 
  • Public Health COVID-19 future spending pressure: £148 million 
  • Future non-tax income losses due to COVID-19: £634 million 

Resources are also needed to stabilise the adult social care provider market. With an assumption about future income available to local authorities, based on a 2 per cent increase in council tax and an assumption that grants will increase in line with inflation, this led the IFS to estimate a £4 billion funding gap in 2020/21. 

This included the impact of 2020/21 local taxation losses which will hit council and central government budgets from 2021/22 onwards, currently estimated to be £3.1 billion although it is not clear if some of this may be recovered from taxpayers at a later date. The Government has committed to announcing how those losses will be shared between central and local government at the Spending Review. It has also just laid regulations that will allow local authorities to spread the deficit over a three-year period rather than one year. 

Councils need a stable financial foundation to build on in order to deliver on their and national government’s priorities. We are calling on the Government to provide an additional £8.7 billion in core funding in 2021/22, made up of the £4 billion funding gap (as highlighted above) to sustain 2019/20 service levels (already assuming annual inflationary increases to grants and 2 per cent annual council tax increases), £1.8 billion to deal with other quantifiable pressures to stabilise the sector and £2.9 billion of other core funding requirements to help councils improve their core service offer.