IFS: The Council overestimated the financial blow from pandemic

IFS: The Council overestimated the financial blow from pandemic

A report from the IFS today says in a survey from last April, councils told the government the pandemic had increased their net spending on non-education services during 2020-21 by about £7.8bn.

But councils have said the findings indicate how demand for some services was suppressed during Covid restrictions and that their finances remain under pressure as this re-emerges.

Highlights

  • The IFS said the findings mean overall, councils received “billions more in funding than their net expenditure actually increased by”.

  • In contrast, official data on councils’ spending and income published last month indicates that net spending increased by only £4.1bn more than would have been expected in the absence of the pandemic.

The IFS said “this does not mean councils were purposefully overestimating” the pandemic costs but noted they “did have an incentive to err on the higher side when estimating the likely financial impacts”.

While some had to draw down their reserves and or agree special temporary borrowing powers, “councils as a whole were able to pay substantially more into their reserves last year than had been anticipated prior to the pandemic”.

The report says the over-estimate may have arisen partly because government surveys asked councils where spending was higher and income lower due to the pandemic – but not where spending was lower due to temporary service closures or reduced demand.

For example, gross spending on culture and leisure services fell – including a 44% reduction in spending on ‘theatres and public entertainment’ that was likely due to lockdown measures.The report said the findings “may provide a justification for the government to have not met in full the additional financial pressures in 2021–22 identified by councils in their survey responses. Not unreasonably, most councils could instead draw down unused funding from last year”.

The report however warns: “The government should not be overly relaxed about the financial outlook for local government. The Covid-19 pandemic could cast a long shadow, increasing demand for a range of services, most notably adults’ and children’s social care services and public health services.” The IFS says that the government could consider “alternative approaches” for future crises, including vetting survey responses and asking about where spending had fallen as well as risen.

“Rather than provide up-front funding, the government could also relax borrowing rules and compensate councils after the event, using vetted financial information to do so,” it adds. David Phillips, an associate director at IFS and an author of the report, said the research indicated that “English local government as a whole saw its funding from central government increase by substantially more than its costs last year”.Kate Ogden, another author of the report and a research economist at IFS, said: “The fact councils as a whole were able to build up reserves in 2020–21 means that the sector’s financial position was not quite as precarious going into this year as is sometimes claimed. And it means the government’s decision not to meet this year’s reported financial pressures in full is not unreasonable.

“But this approach may not work for all councils – some have been particularly hard hit and faced real financial difficulties. And the government shouldn’t be too sanguine about the longer-run picture for council funding.” Martin Reeves, local government finance spokesperson for the Society of Local Authority Chief Executives and Senior Managers, said: “While council budgets might have held up better than expected during the first year of the pandemic this does not mean councils’ finances are in a strong position; far from it.

“Local authorities are still assessing the lasting impacts of Covid-19 on their finances and communities, and there will inevitably be more costs to bear in the future while the resource base is evidently in need of reform. “The sector has also seen section 114 notices issued in recent years, which relate to the reality that reserve levels are very low in some areas. We must be careful to not fall into the previous traps of the Pickles era where reserves and longer term resilience were misunderstood.”

Rob Whiteman, chief executive of the Chartered Institute of Public Finance and Accountancy, said the body remains “concerned with the medium and long-term outlook for local government finances”. “It’s important to note that the research focuses on an atypical year in which demand across a swathe of services was artificially suppressed during various stages of lockdown. As with other public services, including the NHS, that pent-up demand – and much more – is now presenting itself, in particular in adults’ and children’s social care, and putting increased pressure on what are already stretched services, weary workforces, and constrained budgets. This demand, and the expenditure needed to meet it, was merely delayed, it was not removed from the system.”