16th December 2020
Local Government Financial Sustainability, Economic Recovery and COVID-19
Solace Business Partner Grant Thornton UK LLP held a roundtable with a group of Solace members to discuss financial sustainability and economic recovery in the context of COVID-19. The roundtable was held in mid-December, following the Spending Review announcement, but prior to the provisional financial settlement for 2021/22 being confirmed. The discussion is summarised here, with county, district, unitary and metropolitan councils represented at the round table.
Local government has managed ten years of austerity well, but the onset of COVID-19 has had a significant financial impact on even the most well-managed councils. The various tranches of government funding have helped to mitigate the position, but the pandemic has had a considerable impact on financial planning for 2020/21 and beyond. Grant Thornton’s latest financial forecasts for English local government, based on our Financial Foresight tool, indicate there remains a funding gap next financial year of between £0.3bn and £1.6bn, depending on factors such as the severity and length of the economic recovery.
The November Spending Review was broadly seen as having been helpful for local government, in the context that advance expectations had been low, and with further detail required on the allocations to individual councils. Local politicians are now working through the difficult decisions that need to be made to set next year’s budget; considering what savings need to be made and whether to utilise the full council tax increases available, whilst trying to limit the use of one-off reserves to plug the gap. These decisions are being made in the context of the economic impact of COVID-19 on local taxpayers, and with many mindful of local elections next May.
Setting a balanced budget for 2021/22 remains challenging. It is particularly difficult given the assumptions that are having to be made at a time of unprecedented uncertainty, including the level of income expected from sales, fees and charges, commercial property income, and collection fund deficits. There are also challenges in forecasting the demand for some services, such as children’s social care, mental health and homelessness.
The volatility and uncertainty of the medium to long term planning horizon places unprecedented risks and challenges on councils. They are having to plan with a lack of certainty on government funding post March 2022 and the, as yet unknown, long term impacts of the pandemic and the economic impacts of a no-trade Brexit deal. The group discussed the importance of senior leadership teams undertaking scenario planning (reasonable best case through to reasonable worst case) to help manage this uncertainty and to feed into modelling the medium-term financial plan. They also discussed the need for the government to provide a multi-annual financial settlement next year to help mitigate this uncertainty.
There was some reflection that local government should not lose sight of the opportunities that do exist. There are positive signs that private sector operators remain committed to pre-pandemic town centre developments, and there remains a planning pipeline for new developments, in particular for housing and logistics. However, it was accepted that such opportunities will differ by place. Whilst there was recognition that councils are looking at rationalising their office accommodation footprints as a consequence of digitally enabled working and customer contact, there was caution on the impact this will have on the local economy and on residents access to services.
When discussing the challenge of balancing short-term cost reduction and longer-term transformation, it was noted that most councils had been delivering transformation long before COVID-19 and for some councils diminishing returns are setting in, with limited further options for reshaping services. A distinction was made between internal transformation (for example layers and spans, and back office redesign) and external transformation (where impacts are more directly felt by local residents and businesses). In the context of economic recovery, external transformation was seen as a priority, and area-based government funding, such as the Towns Fund, Shared Prosperity Fund and the new Levelling Up Fund being seen as important catalysts, where this can be accessed.
Councils have a key place shaping role in supporting businesses and communities as they recover from the social and economic impacts of the pandemic. The strength of collaboration between councils, the local community, the voluntary sector and wider public sector was highlighted as a positive outcome from the pandemic, with councils now looking at how this learning and the social infrastructure created can be sustained and further developed. Councils also have a role to play in understanding the size and make up of local businesses, and the impact that the pandemic may have on their activity. They will need to use their place shaping role, for example, by working with local education providers and LEPs on future skills requirements for their area.
The discussion concluded with reflections on how the pandemic has exposed the property-based funding of local public services as not being fit for purpose. It was suggested that there was a need for the sector to enter into dialogue with government over alternative funding systems. There was, though, an acceptance that local government should plan over the medium-term on the basis that the current funding system is unlikely to be changing any time soon.
Grant Thornton UK LLP