COVID-19 impact on Financial Resilience of London Boroughs

Local Government is on the frontline in responding to the COVID-19 crisis and will have an equally important role to play in recovery when we come out of lockdown. However, in order to continue to be effective councils will need enough resources to do the job – and these are currently being strained by the crisis. In this series of articles, I will look at the impact of the crisis on all types of Councils, starting with the London Boroughs.

Financial Resilience was already an issue before COVID

There has been a lot of recent analysis of low reserves levels in local government. In 2018/19 reserve levels increased after two consecutive years of reductions. Average levels in London Boroughs are higher than other upper tier authorities but an analysis of individual London Boroughs reveals wide variations in usable revenue reserves.

​The analysis below shows individual levels of usable revenue reserves expressed as a percentage of 2019/20 budgeted net revenue expenditure. Each bar is an authority with Outer London Boroughs shown in light blue and Inner Boroughs in dark blue.

A number of Outer London Boroughs have little more than 4 months of net revenue expenditure in reserves. This is worrying given the level of additional costs and lost income associated with the COVID crisis and it seems certain that more Government support will be needed to protect all authorities but particularly those with low levels of usable revenue reserves.

Will the £3.2bn of funding to date cover COVID costs?

The Government has, to date, provided £3.2bn in financial support to Local Government. For London Boroughs, this is worth between 6% and 11% of Net Revenue Expenditure. But is this enough?

MHCLG has requested returns from all local authorities on the additional costs and lost incomes arising from the crisis and, in time, we will have a better idea of the impact on Councils' financial health. But for now, using 2018/19 revenue outturn data and 2020/21 council tax information, I have estimated potential annual losses using the following assumptions:
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• 50% reduction in highways and transport fees and charges (mainly car parks)
• 50% reduction in culture and related fees and charges
• 10% reduction in all other fees and charges
• 10% reduction in council tax income
• 10% increase in social care costs

The graph below compares these estimates of additional costs/lost income with the financial support received to date. The grant received (shown in white), expressed as a percentage of net revenue expenditure, is shown above the x-axis and this is compared with the estimated losses shown below the x-axis (shown in shades of green).

In most cases, the estimated costs of COVID are about three times the level of support received to date from the Government. This would indicate that unless there is further financial support for local authorities, there will be greater depletion of usable revenue reserves and a greater risk to financial health. How will this impact London Boroughs?

What will be the impact of COVID be on London Boroughs' reserves?

By combining the above analyses, we can get an estimate of the impact of the crisis, all other things being equal, on the financial health of Local Government in London. This time the graph adds the usable revenue reserves as at 31/3/19 to the grant received to date and compares this with an estimate of the costs of COVID. As with the other analyses all the figures are expressed as a percentage of net revenue expenditure. The results are worrying and show that those authorities with low levels of usable revenue reserves will come under significant financial pressure unless further financial support is forthcoming.

Conclusions

• London Boroughs tend to hold greater levels of reserves than other upper tier authorities. However, despite this, a significant number of authorities look set to suffer significant risk to their financial health unless further support is made available.

• Whilst, on the face of it, most authorities appear to have just enough resources to ride out the COVID storm based upon the assumptions that I have set out, any further pressures will really add to the strain. For example, I haven't made any allowance for reductions in business rates. If the crisis impacts further and deeper on services, already under pressure prior to the outbreak, then more authorities will move closer to the brink.

• The estimates are based on assumptions for lost income and additional costs as set out above. It will be important for authorities to monitor these costs closely throughout 2020/21. Pixel Financial Management have launched a monitoring tool for all its members which help measure the financial impact of the COVID outbreak.

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The analyses are taken from the Pixel Financial Resilience service which provides benchmark analyses of statement of accounts information from the last seven years. Next week, I will look at a similar analysis for Metropolitan authorities.