By CIPFA Chief Economist Jeffrey Matsu and Phillip Woolley, Partner, Grant Thornton
Approaching six months into lockdown, local authorities have moved from the initial emergency response phase to focusing on recovery planning. This runs in parallel with the ongoing pandemic response, such as supporting vulnerable people and managing the capacity challenge of delivering business as usual.
The government has confirmed three tranches of funding to support the impact of increased spend and reduced income directly attributed to the COVID-19 lockdown, and are in the process of confirming further support via the income compensation scheme.
Local authorities' finances remain significantly impacted and our financial foresight model indicates that UK local authorities have a funding gap of £1.9bn this financial year, rising to over £10bn in 2021/22.
There is significant uncertainty as to whether the government will provide further coronavirus-related funding to local authorities, and what the medium-term funding for the sector will be, following the autumn comprehensive spending review.
Our modelling currently assumes that government funding will remain broadly unchanged, with income being affected by ongoing reductions to council tax and business rates, both in terms of a reduction to these tax bases and lower payments as a consequence of the recession.
Spending pressures and reduced income for local authorities
This uncertainty also impacts on future spending pressures and sales, fees and charges income. For example, leisure centres, swimming pools and libraries have re-opened, but must now follow government guidelines on issues such as social distancing.
Capacity reductions and consumer caution have meant that many of these services are not able to generate the levels of income originally forecast pre-coronavirus and social care faces uncertainty in relation to future demand.
For example, most councils responsible for children's services are forecasting an increase in case load now children have returned to schools. For adults, where in some cases demand has fallen during the pandemic, there is uncertainty over future levels of demand.
There is also concern over provider failure in relation to social care and other services, such as leisure and transport, with many councils providing financial support and loans to some providers, which will not be sustainable in the medium term.
Time for local authorities to re-evaluate
Local authorities should evaluate their financial resilience in light of changes to income and the adequacy of their reserves and how this intersects with broader levels of deprivation in their area. This invariably will affect spending on public services relating to areas such as social care and homelessness. Differences across space and time should inform how public resources are distributed so that issues such as age, income, gender and ethnicity are taken into consideration as well.
As place leaders, councils are managing the conflict between revitalising footfall in high streets and keeping people safe, with some leading by example and encouraging council officers to spend some of the week in council offices.
Businesses are also re-imagining the use of built assets across their portfolio and reconfiguring regional branches to encourage more-local forms of commuting. Use of public transport as a key mode of travel to get to work remains a particular challenge, but could accelerate infrastructure projects relating to cycle superhighways, enhanced bus lanes, e-car sharing and 'greenways' that prioritise pedestrian traffic.
Lessons learned from our local authorities Financial Foresight model
All organisations, including councils, have been reflecting on the lessons learned from the pandemic, and are seeking to maintain the positive experiences, as well as learn from the challenges, as part of recovery planning.
There is a recognition that technology has enabled many people to successfully work remotely, and that this will have a fundamental impact on working patterns well after coronavirus has passed.
Councils are reviewing their property portfolios to understand the changes required in terms of future usage patterns, including how councils interact with their communities, whether parts of the municipal estate should be disposed of, and whether alternate use of space can support income generation.
No one size fits all solution
There will be demographic variations between places, meaning there is no 'one size fits all' solution to economic recovery. For example, home-to-work geographies will vary, with some people who previously commuted into a council area for their work now considering office space closer to home. This could lead to a rise in demand for shared office space in some areas, that will, in part, countervail the fall in demand elsewhere.
Many councils have noted the improvement in community engagement and partnership working with the voluntary sector and other public sector organisations during lockdown, and are seeking to build on this, recognising that sharing responsibility for place-based recovery plans can help sustain the improvements gained. However, a shared view of place-based recovery takes investment of time and resource that not all partner organisations are able to provide.
Wider learning relates to central versus local responses to issues such as provision of PPE, housing the homeless and rough sleepers, and provision of food and equipment to the vulnerable. This is currently playing out through test and trace and how local lockdowns should be managed, with ongoing tension between national and local government.
Many councils are also understanding the importance of data in deciding where to prioritise resources and activity to achieve the right outcomes to support recovery planning.
The future for local authorities
Coronavirus has only increased volatility and uncertainty for local government and, when working with councils delivering financial foresight, we have prioritised scenario planning to support strategic financial planning.
Understanding the reasonable best, worst and optimum case scenarios from the impact of lockdown is critical in strategic discussions when setting next year's budget and updating medium-term financial plans. This needs to reflect the impact on the place and communities, as well as on the council's services and the council as an organisation.
Some councils are more confident than others in being able to manage their financial position during 2020/21, but all are concerned about 2021/22 and beyond. And it isn't just coronavirus scenarios that need to be understood, but other global, national and local issues that will impact over the medium term, including the impact of a no-deal Brexit, and new government policies, such as those expected on devolution, and health and social care integration.
Our model suggests new strategies for local authorities
Our financial foresight model makes it clear that, without doing something differently, most councils will run through their reserves, and quickly. The data projects that over 100 (or indeed up to 150) councils face reserves depletion within five years. To support financial resilience, councils should implement targeted financial recoveries, establish good growth models, trace service-line trajectories and reshape transformation plans, including digital.
As already noted, places will vary depending on their socio-economic and demographic characteristics, but all councils are working through demand impacts arising from the ongoing pandemic and the associated recession. Ensuring their workforce continues to be supported will be required to ensure they remain personally resilient.
Local authorities' role in 'levelling up' the economy
In its upcoming spending review, the government may clarify its objectives relating to "levelling up" the economy, with an agenda to address disparities that exist both within and across geographic regions.
Coronavirus has made it abundantly clear that there is substantial variation in the revenue sources for local authorities, which affects underlying exposure to financial risk. Fiscal objectives should focus on performance to ensure that limited resources are used efficiently to level-up across the UK.
Until a vaccine has been successfully produced and rolled out, the public health threat remains, and there are likely to be further local lockdowns, like we've seen in Leicester and towns in the north west of England.
There could be difficult trade offs for national and local politicians to consider to avert further waves of restrictions. For example, to keep schools open, will there be a need to increase restrictions elsewhere to ensure the cases of coronavirus remain at a manageable level? How will a more-targeted policy response affect the financial position of local communities and the resourcing of public services?
The resilience of local authorities
Local government has always demonstrated a remarkable resilience in managing significant challenges, including 10 years of austerity, and being at the forefront of the coronavirus response. While significant uncertainty remains, we are confident that councils will continue to demonstrate the capacity to lead places, deliver services and support the vulnerable, whatever scenarios play out in the medium term.
Find out more
Learn more about Financial Foresight by CIPFA and Grant Thornton here.