IFS warns of financial pressure on councils as a result of Covid crisis

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Financial pressures on councils as a result of the Covid-19 pandemic will continue into the next year “and beyond”, it has been suggested.

A new report by the Institute for Fiscal Studies (IFS) indicates that the crisis is pushing up councils’ spending and reducing their locally-sourced incomes by billions of pounds.

The document, produced by IFS researchers and funded by the Economic and Social Research Council and the Local Government Association, suggests that councils’ forecasts of the spending and non-tax income pressures resulting from the crisis will exceed the additional funding made available this year by around £2 billion.

Researchers also warn that large falls in council tax and business rates revenues will hit councils’ spending capacity next year.

They say the drop will leave some councils facing a “difficult choice” between depleting their reserves to low and potentially risky levels or cutting spending on important local services.

The IFS has urged the Government to provide additional support or financial flexibility to councils to help support them as they face the impact of the Covid-19 crisis.

Kate Ogden, a research economist at IFS and an author of the report, said that more targeted support for councils should be considered.

She said: “Just how much the Covid-19 crisis will cost councils this year is highly uncertain, but councils’ current forecasts imply around £2 billion of unfunded spending and non-tax income pressures.

“And while drawdowns from reserves may be sufficient to address these for many councils, particularly high pressures or low reserves mean this will unlikely be enough for all.

“Uncertain and highly variable pressures across councils mean it may be difficult and costly for the Government to address this problem by further increases in general grant funding alone. More targeted support should therefore be considered too.”

The Government has been urged to provide flexibility to councils Credit: Andy Buchanan/PA

David Phillips, an associate director at IFS and another author of the report, said that the Government will need to assess the financial pressures placed on councils.

He said: “Even if more funding or flexibilities are forthcoming this year, councils will still not be out of the Covid-19 woods.

“Financial pressures will continue into next year and beyond, not least because shortfalls in council tax and business rates collections will have to be reflected in councils’ main accounts.

“In the upcoming Spending Review, the Government will therefore need to assess these pressures.

“It must ensure that the resources made available to local Government are consistent with its expectations of the range and quality of services councils should provide as well as the role it sees them playing in the social and economic recovery from the Covid-19 crisis.”

Councillor James Jamieson, chairman of the Local Government Association, said that councils must be able to lead their communities out of the crisis.

He said: “The funding already received from Government has been a positive step and recognises the crucial role councils have played in keeping the country going throughout the Covid-19 pandemic.

“This independent research shows that there remain un-met funding pressures though. The LGA therefore reiterates its call for the Government to meet all extra cost pressures and income losses in full so that councils aren’t faced with making tough decisions on in-year cuts to services to meet their legal duty to set a balanced budget.

“Councils need to be able to lead their communities out of this crisis and support recovery, but they cannot do this successfully and also address pressures in social care if they are having to focus on addressing budget cuts.

“The LGA wants to continue working with Government on the further measures and funding needed to protect local council services.”

A Government spokesperson said: “We’re giving councils unprecedented support during the pandemic to tackle the pressures they have told us they’re facing. This includes £4.3 billion funding, compensation for irrecoverable income losses and a scheme allowing them to spread their tax deficits.

“For relevant losses of sales, fees and charges, over and above the first 5% of planned income, we’re covering 75p in the pound for revenue they haven’t been able to generate in areas including parking fees and museum entry. For many councils, this will be a significant portion of their income lost as a result of the pandemic.

“We will continue to work closely with councils as they support their communities through the pandemic and if any are concerned about their future financial position, they should contact MHCLG (Ministry of Housing, Communities and Local Government).”