The Institute of Fiscal Studies has released a report on Covid-19 and Council funding called: ‘COVID-19 and English council funding: how are budgets being hit in 2020–21?’
The report looks at loss of income and the use of reserves in a range of local authorities. There are caveats but the IFS conclude that this is a multi billion pound problem. As councils forecast spending pressures of £4.4 billion during 2020–21, with around £1.8 billion of those estimated to have been incurred between April and June. They also forecast a £2.8 billion shortfall in non-tax income, with £1.3 billion of this arising between April and June. Taken together, this means in-year pressures are forecast to be £7.2 billion, with billions of pounds more in losses in local tax collections also hitting councils’ main budgets from next year. They note that spending pressures are relatively more important for areas with high levels of deprivation like Lewisham.
The Government has provided some more funding. This amounts to £5.2 billion according to the IFS and still leaves a shortfall of £2.0 billion across the sector.
The Government could ease these pressures by providing more grant. If grant funding is provided but does not cover the full costs then Councils will have to use their reserves.
The IFS warns against this saying that relying on reserves to meet these unfunded pressures would lead to a significant increase in the number of councils with low reserves relative to their pre-crisis expenditure. Under our baseline scenario, for instance, the proportion with reserves below half of the pre-crisis average for their council type would increase from around one-in-six to just over one-in-four. The proportion with reserves below a third would increase from around one-in-sixteen to around one-in-seven. Councils in such a situation could face a tricky trade-off between making in-year cuts or making cuts in coming years to rebuild their reserves.
The IFS report does not include changes to the Housing Revenue Account – this includes the rent collection and service charges account for councils. London Councils represents all London Boroughs, they say: “With no government plan for addressing lost Housing Revenue Account, commercial and other income – which are estimated to total almost £200 million for London boroughs this year – and the government not confirming the extent of support for lost council tax and business rates income until the Comprehensive Spending Review, boroughs face huge uncertainty and the prospect of extremely tough budget decisions for next year.”
Lewisham Council has been dipping into its reserves over the recent years regularly. Before Covid-19 it had forecast the need to make cuts over the coming years. An inevitable conclusion if the IFS and London Councils are correct is that the level of cuts needed to balance the budget in Lewisham will have increased. There are likely to be ‘in year’ cuts. These budget changes for 2020/21 will have to be taken soon as there are only seven months left in the financial year. In the latest Lewisham financial report, the assessment says:
“The Council’s finances have been severely affected by the ongoing pandemic. The cost of the Council’s response to COVID-19, after government funding confirmed to date, is £25million. That is, £15m on the tax base and £10m on lost income and additional
expenditure. The ongoing impact of economic recession (including Brexit) is still to be determined but it is anticipated that demand for benefits will increase going forwards. The Council’s current Medium Term Financial Strategy estimates a shortfall of £40m over the next three years. Lewisham Council Officers are assessing the scale and nature of the challenge, identifying opportunities to capture positives from the crisis, and considering how these options may contribute to future cuts. This work is ongoing and includes reviewing progress with agreed cuts of £16.6m, the impact of COVID-19 on service delivery and budgets, and the continuing need for £19.0m of service pressures funded in 20/21.”
The South London Press revealed that Lewisham Council officers will put forward a ‘stabilisation’ budget in the autumn to confirm the position for the remainder of the financial year.