IFS - Councils in deprived and affluent areas face serious financial risks from the COVID-19 crisis as incomes fall and costs grow, but nature and timing differ

22 Jun 2020 02:08 PM

The government has provided an additional £3.2 billion of general-purpose funding to English councils to help support them through the coronavirus crisis. This will increase their budgets by just over 5% on average. But councils have warned a further £6 billion could be required.

A new report from IFS researchers – funded by UK Research and Innovation – examines how financial risks and resilience vary across councils, and which types of councils and regions are most exposed.

Reliance on different revenue streams and variation in population vulnerabilities mean different councils will face different financial risks at different times. The main findings of the report are:

• In the short term, councils’ locally generated incomes are likely to be more affected than their spending. Income from local taxes – council tax and business rates – and especially sales, fees and charges and commercial activities will all be hit by the economic effects of lockdown and social distancing.
• Councils in more affluent areas tend to be more dependent on these income streams and could therefore be hit hardest. However, there are big differences between even neighbouring councils, which will make it hard for central government to target help.
• On the other hand, councils serving more deprived communities are more likely to see increases in demand for their services over the next few years if those individuals and families who are already disadvantaged are hit harder by the health and social impacts of the crisis.

Looking in further detail, the report finds that: 

• Shire district councils are especially vulnerable to income losses. Income from sales, fees and charges from culture, planning, off-street parking and parking enforcement, and trade waste – which will likely have taken a particular hit – equate to an average of 29% of their non-schools expenditure, compared with 7% for London boroughs and just 1% for county councils. Their business rates revenues can also fall by much more than for other types of councils before ‘safety nets’ kick in to prevent further losses.  
• Councils in relatively affluent areas, London and (to a lesser extent) the rest of the South and East of England are also more exposed due to their heavier reliance on income from sales, fees and charges. In addition, the least deprived tenth of councils rely on council tax for an average of almost 70% of their non-schools expenditure, more than twice as much as the most deprived tenth (32%). And more of their workers are in the sectors most affected by lockdown.
• Neighbouring councils, often with similar characteristics, can rely on risky revenue streams to very different extents. For example, in Tandridge in Surrey, income from sales, fees and charges from the aforementioned services equate to less than 7% of non-schools expenditure, compared with 88% in neighbouring Reigate and Banstead. Impacts of the coronavirus crisis on the overall revenues of neighbouring and/or similar councils could therefore differ starkly.
• Councils’ resilience in the face of income falls and spending increases is likely to vary significantly. Around one-in-eight councils had reserves forecast to be less than 20% of their annual non-schools expenditure before the coronavirus crisis hit, making them less able to manage a decline in revenues. 
• While, on average, councils that are more reliant on riskier revenues have higher reserves, this is far from always the case. For instance, neighbouring Manchester and Trafford are similarly reliant on risky SFCs and above-safety-net business rates revenues, but Trafford is more exposed to losses of council tax revenue and has less than half the reserves of Manchester. 
• More deprived areas have populations which are likely more vulnerable to the health and social impacts of the coronavirus crisis. Rates of mental ill health are over 1.5 times higher in the most deprived tenth than the least deprived tenth, and around twice as high in places such as Manchester (22%) and Hackney (24%) than in Wokingham (12%), the least deprived council in England. Child poverty, interactions with children’s social services and housing difficulties are also all significantly higher in more deprived parts of England. Twice as many children are on child protection plans in the most deprived areas than the least deprived areas, for example.  

Kate Ogden, a research economist at IFS and an author of the report, said:

"The fact that councils are facing unprecedented spending pressures and declines in income is not surprising. But given that COVID-19 itself is hitting more deprived communities and families the hardest, what may be surprising is that it is councils serving more affluent areas that are likely to see the biggest short-term financial hit. This is because they rely more on revenue streams – such as local taxes and sales, fees and charges – that are likely to be hit especially hard by lockdown and the wider economic effects of the crisis. Where councils serving more deprived areas look more at risk is the vulnerability of their residents to the impacts of the crisis on health and well-being given high pre-existing prevalence of mental ill health, housing difficulties, interactions with children’s services and child poverty. This is likely to push up their spending needs in to the longer term."

David Phillips, an associate director at IFS and another author of the report, said: 

"The government should bear the complex patterns of risk and resilience our report finds in mind when deciding its next steps with local government funding. Big differences in financial risk and significant variation in the reserves councils hold mean the government should also consider temporarily relaxing the rules that prevent councils from borrowing to cover day-to-day spending. If it does not, difficulty in targeting funding means it will either have to provide more funding to the sector as a whole than is necessary or step in to provide specific support for councils that are particularly struggling. Otherwise there is the risk that some councils could have to impose restrictions on all but the most essential expenditure."

The financial risk and resilience of English local authorities in the coronavirus crisis