Local authorities under ‘serious financial pressure’ due to the pandemic, NAO warns

The National Audit Office (NAO) has released a new report warning that local authorities providing vital services for children and adults are under “serious financial pressure” as a result of the pandemic.

The statistics body finds that while effective action from government has assisted local authorities in surviving financially during the COVID-19 pandemic, many authorities face significant funding gaps and the financial outlook for the sector is “concerning”.

Throughout the pandemic, local authorities have reported combined cost pressures and income losses (excluding tax losses) of £9.7 billion, equal to 17.6% of their total spend in the year before, the NAO says.

Local authorities forecast that the pandemic will create £6.9 billion of additional costs in 2020-2021 because of the need to deliver new services and the increased cost of delivering some existing services.

The pandemic has also made it more difficult to deliver savings programmes, the NAO said.

Changes to lifestyles in the pandemic have caused a forecast loss of £2.8 billion of income for local authorities in 2020-21, including an expected loss of nearly £700m in car parking income.

Further losses of £1.3 billion in council tax and £1.6 billion in business rates are expected but will not affect budgets until 2021-2022.

The sector needs to be able to absorb these pressures, the NAO says, as “system-wide financial failure would undermine the delivery of public services that many vulnerable people rely on”.

The Ministry for Housing, Communities and Local Government (MHCLG) has so far announced £7.9 billion in grant funding to address the pressures facing the sector. Despite this, 75% of local authorities have a reported gap between their financial pressures and the NAO’s estimate of financial support from government.

In some case these gaps are substantial; 30% of authorities have reported funding gaps equivalent to more than 5% of their spending last year.

One quarter (26%) of single tier and county councils – local authorities with social care responsibilities – that responded to the NAO survey said they were forecasting a year-end material overspend relative to their budget, meaning a council believes the overspend is going to influence future decision or actions.

In most cases these authorities said they plan to use their reserves to balance their books, the NAO says. Overall, 46% of single tier and county councils had either used their reserves, or planned to, in response to COVID-19 pressures in 2020-21.

A combination of high funding gaps and low reserve levels means that some local authorities are at risk of financial failure.

In November 2020, Croydon Council issued a ban on new spending under a Section 114 notice –when a council cannot achieve a balanced budget – following Northamptonshire County Council finding itself in similar financial trouble in 2018.

A Government ‘Rapid Review’ of Croydon Council’s finances in November 2020 found that their Children’s Services and Adults’ Services were already overspent by £16.5m and £30m respectively, even before Government intervention.

Local authorities will continue to be under serious financial pressure in 2021-22and are setting their budgets with significant uncertainty, which the NAO says risks poor value for money.

Overall, 94% of single tier and county councils who responded to the survey said they expected to reduce services in 2021-2022.

Examples, provided by local authorities, of what services could be impacted included reviews of adult social care and special educational needs packages.

“Government’s support to local authorities during the COVID-19 pandemic has averted system-wide financial failure. Nonetheless, the financial position of the sector remains a concern and authorities are setting budgets for 2021-2022 with limited confidence,” said Gareth Davies, head of the NAO.

“Authorities’ finances have been scarred and won’t simply bounce back quickly. Government needs a plan to help the sector recover from the pandemic and also to address the longstanding need for financial reform in the sector.”