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NAO report outlines local government finance in Covid-19 pandemic

A report from the National Audit Office (NAO) has found that while effective action from the government has assisted local authorities in surviving financially during the Covid-19 pandemic, many authorities face significant funding gaps and the financial outlook for the sector is concerning.

The ‘Local government finance in the pandemic’ report states that councils in England have made a major contribution to the nation’s response to the pandemic, working to protect local communities and businesses, while continuing to deliver existing services.

In the process, local authorities have reported combined cost pressures and income losses (excluding tax losses) of £9.7bn, equal to 17.6% of their total spend in the year before.

Local authorities forecast that Covid-19 will create £6.9bn of additional costs in 2020-21 because of the need to deliver new services and the increased cost of delivering some existing services, while there have also been fewer opportunities to deliver savings programmes.

The pandemic has caused a forecast loss of £2.8bn of income for local authorities in 2020-21 as a result of a reduction in their sales, fees and charges, commercial and other income streams.

Authorities expect to lose £695m alone from reduced car parking income and £554m income from facilities, such as leisure centres, theatres and museums that they run and further losses of £1.3bn in council tax and £1.6bn in business rates are expected, but will not affect budgets until 2021-22.

The report says that that the sector needs to be able to absorb these pressures and system-wide financial failure would undermine the delivery of public services that many vulnerable people rely on.

The Ministry for Housing, Communities and Local Government (MHCLG) has engaged extensively with local authorities to gather data on the financial impact of Covid-19 and alongside other departments, has so far announced £7.9bn in grant funding to address the pressures facing the sector.

The NAO estimates that authorities will also receive £1.23bn in compensation for lost sales, fees and charges income.

Despite this, the report states that 75% of local authorities have a reported gap between their financial pressures and the NAO’s estimate of financial support from government and in some case these gaps are substantial, with 30% of authorities reporting funding gaps equivalent to more than 5% of their spending last year.

Many local authorities still need to take further steps to ensure that they fulfil their legal requirement of balancing their books in 2020-21.

Some 26% of single tier and county councils (local authorities with social care responsibilities) that responded to a NAO survey said they were forecasting a year end material overspend relative to their budget and in most cases, these authorities plan to use their reserves to balance their books.

Overall, 46% of single tier and county councils had either used their reserves, or planned to in response to Covid-19 pressures in 2020-21.

The report stated that a combination of high funding gaps and low reserve levels means that some local authorities are at risk of financial failure and by 10 February 2021, MHCLG had provided exceptional financial support totalling £50.5m to four local authorities.

It also states that local authorities will continue to be under serious financial pressure in 2021-22 and are setting their budgets with significant uncertainty, which risks poor value for money.

Continuing, the report says that the local government finance settlement only provided certainty on a short-term, time-limited basis until the middle of the financial year and many finance directors the NAO spoke to regretted that the settlement is not on a multi-year basis.

Overall, 94% of single tier and county councils and 81% of district councils who responded to the NAO’s survey expected to reduce service budgets in 2021-2022.

Examples provided by local authorities of how this could impact services included reviews of adult social care and special educational needs packages, the closure of, or restricting the opening hours of libraries, information centres and theatres and reductions in subsidies and grants.

Some 53% of single tier and county councils do not expect their finances to recover to their pre-pandemic position until 2023-24.

The NAO recommends that MHCLG learns from 2020-21 and clearly communicates whether the sector is likely to receive further funding or support and in addition, should look for ways to reduce financial uncertainty in local authority budget-setting processes.

Commenting, Comptroller and Auditor General of the NAO, Gareth Davies said: “Government’s support to local authorities during the Covid-19 pandemic has averted system-wide financial failure. Nonetheless, the financial position of the sector remains a concern and authorities are setting budgets for 2021-2022 with limited confidence.

“Authorities’ finances have been scarred and won’t simply bounce back quickly. Government needs a plan to help the sector recover from the pandemic and also to address the longstanding need for financial reform in the sector.”

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