Local councils face £605m black hole

Many UK local authorities face significant funding gaps and the financial outlook for the sector is concerning, according to a new report from the National Audit Office.

The study revealed that 25 councils who are at serious risk of going bust, and a further 337 are at a ‘high’ or ‘acute’ risk of financial failure.

The NAO said that while effective action from government has assisted local councils in surviving financially during the Covid-19 pandemic, they have forecast that it has created £6.9 billion of additional costs in 2020-21 – because of the need to deliver new services and the increased cost of delivering some existing services. There have also been fewer opportunities to deliver savings programmes.

The pandemic has also caused a forecast loss of £2.8 billion of income for local authorities in 2020-21, as a result of a reduction in their sales, fees and charges, commercial and other income streams. Authorities expect to lose £695 million alone from reduced car parking income, and £554 million income from facilities such as leisure centres, theatres and museums that they run. 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.

That all means the combined cost pressures and income losses (excluding tax losses) amount to £9.7 billion, equal to 17.6% of their total spend in the year before. And, there is a ‘funding gap’ between forecast pressures and estimated funding at the national level, with many authorities ‘under-funded’ relative to the pressures they have reported. Government has so far announced £9.1 billion in financial support to offset forecast financial pressures of £9.7 billion for 2020-21, leaving a deficit of £605 million. This net deficit results from £323 million of over-funding in 85 authorities, and £909 million in under-funding in 252 authorities.

Gareth Davies, head of the NAO said: “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.

“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.”