Third Round Anyone!?

Last weekend (21 June), the Government released #localgov figures on COVID expenditure and income losses for March to May. With June returns now complete and more headlines revealing Councils considering S114 notices, the clamour for more Government support is growing.

I've taken a look at the figures released last week and here are my five main observations.

1. The £3.2bn support to date has already been used!

In actual fact councils have utilised 102% of their funding according to the Government return. COVID expenditure of £1.249bn and income losses of £1.987bn amounts to £3.236bn or £77m more than allocated.

The returns show monthly losses (expenditure and income) of about £1.5bn in both April and May and so it is likely that June will see a similar magnitude with the probability that July onwards might see reduced losses as lockdown measures start to ease.

Clearly, if the Government is to stand by Robert Jenrick's original promise to reimburse councils for 'whatever it takes' then a third round of funding should be on the cards.

2. Expenditure on social care and housing increasing whilst other expenditure falls

Perhaps it is a bit early to draw definitive conclusions from two (and a bit) months data but it does appear that additional expenditure on vulnerable groups might be incurred for some months to come. The graph shows that expenditure on social care and housing was higher in May than April whilst other expenditure reduced.

It comes as no surprise then that the authorities reported as considering S114 notices tend to be upper tier authorities. The social care funding gap and its impact on the financial resilience was already a hot topic before the pandemic and the Government figures show an immediate and ongoing financial impact which will exacerbate already unsustainable demands on social care.

3. Significant income losses expose the frailty of local government funding

For every £1 of additional COVID expenditure, councils have also lost £1.59 in income. I suspect that the magnitude of income loss has caught the Government by surprise and has undoubetdly exposed the frailty of the funding system. Years of funding reductions have seen Revenue Support Grant disappear leaving councils almost entirely reliant on council tax, business rates and fees and charges all of which have been hit hard during the COVID crisis as the graph below shows.

Two important points here. First, there is not only the immediate hit to councils as shown by the above figures but a more significant long term impact on council incomes. The Government has designed a funding system where additional funding arises from economic and housing growth but a prolonged recession will likely wipe out most of this growth.

Second, the analysis shows the importance of fees and charges to councils and particularly to district councils and London boroughs. Income from culture and leisure will continue to be hit through July as establishments remain closed whereas car park income and commercial income might recover as the economy re-opens. Ironically, it is these latter two incomes that the Government has attempted to restrict in recent years!

4. Levels of losses and Government COVID grant have had a disproportional impact on different types of authority

The graph below compares the impact from March to May with the COVID grant received from the Government for each type of authority. I have adjusted the figures for council tax and business rates to reflect respective shares between counties and districts.

The analysis shows that districts and London Boroughs appear to have lost significantly more than they have received in grant so far. This has more to do with their relative reliance on fees and charges and business rates income and as time progresses and the economy re-opens, losses might decrease as fees and charges recover. Counties and Mets which do not appear to have utilised all of their grant so far are less reliant on fees and charges and business rates income but are likely to incur additional expenditure associated with continuing social care pressures as time goes on.

5. Unless the Government provides further support soon, it is probable that a number of authorities will experience significant financial difficulties

It isn't just the local government media that are reporting the likelihood of financial failure of councils but the national media has caught on as well.

As things stand without additional support, most, if not all, authorities will experience significant budgetary overspends. The size of these overspends will become clearer as more returns data becomes available. However, taking account of statements from councils to date, it is not unreasonable to predict that losses might be as high as a quarter of net revenue expenditure, and maybe up to half of net revenue expenditure for districts, particularly those with high levels of fees and charges.
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A look at usable revenue reserves levels reveals the vulnerability of many councils to the COVID losses. The graphs below show the upper tier authorities with 25% or less of net revenue expenditure (NRE) in usable revenue reserves and districts with 50% or less.

The graphs suggest that there are 27 vulnerable upper tier authorities and 8 districts (with a further 22 districts with less than 75% of NRE in reserves). Worryingly, over a third (59) of upper tier authorities have less than a third of their NRE in reserves and more than two thirds (104) have less than half a year's NRE in reserves. It is therefore no surprise that local government financial sustainability has been the subject of recent headlines. The Government must surely have to act and provide more financial support to councils, as was promised at the start of the pandemic, if it is to avoid catastrophic consequences.
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​LGi will shortly be launching its financial resilience benchmarking service which will include bespoke analyses such as those in the above article. We are currently offering a free one-page comparative analysis of usable revenue reserves. If you would like to receive this for your authority, please apply using this link.