New analysis from leading business and financial adviser Grant Thornton UK LLP has found that, if the upcoming Spending Review just provides a ‘rollover’ of funding levels from this year for 2021/22, up to 51% of English councils could be at risk of financial failure by the following year. To prevent this, additional funding is required, including further COVID-19 funding support.
Using the firm’s Financial Foresight modelling tool, which analyses councils’ long-term baseline financial forecast, a council is defined as ‘at risk’ if their usable reserve levels are at, or below, 5% of net revenue expenditure. The forecast models the impact that a ‘rollover’ funding scenario - where councils receive the same government funding levels in 2021/22 as they received in 2020/21 - would have on the local government sector.*
London boroughs and metropolitan districts are found to be the most exposed in this scenario, with 72% of both councils found to be at risk by 2022/23.
Unitary councils and district councils are the two next most vulnerable, with 55% and 46% at risk of financial failure by 2022/23 respectively. This is followed by county councils, with 30% also found to be at risk in this scenario.
However, the position does change over time. If government funding levels do not increase, a greater proportion (81%) of county councils are set to be at risk by 2027/28, which is higher than all other council types, apart from London boroughs (97%).**
The analysis also found that, without an increase in funding, a ‘rollover’ funding scenario would increase the current forecasted funding gap of £2.7 billion in the local government sector this year, to £5.6 billion in 2021/22.
Commenting on the findings, Phillip Woolley, head of public services consulting, Grant Thornton UK LLP, said:
“Public finances are facing historically significant challenges, and our analysis shows just how close many councils are to breaking point. It’s critical that further funding is provided to the sector and we hope that the Chancellor recognises the importance of local government in the forthcoming Spending Review. The Review provides the government with an opportunity to create some financial headroom for increasingly under pressure councils next year; ensuring that the ongoing impacts of COVID-19 are adequately funded, along with the demand pressures facing services such as social care.
“The impact of the pandemic on the social care sector has been significant. Whilst we continue to wait for the promised Green Paper to set out a longer-term solution for how adult social care is funded, as well as the recently announced review into children’s social care, the Spending Review needs to ensure that the base budget is increased - to reflect both the impact of rising demand and increasing complexity of needs - rather than a continuation of the council tax precept.
“More generally, the government should use the delays in the Fair Funding Review and Business Rates Retention Review, to reconsider their scope and consider fundamentally changing how the sector is funded in a post-COVID-19 environment. Simplifying the fragmented number of revenue grants, the competitive nature of some areas of grant funding, providing greater flexibility on the council tax referendum and focusing on greater fiscal devolution to the sector, would help to provide local government with the long term sustainability that is missing, but very much needed. Providing councils with the power to better control their own income levels would also help to reduce the sector’s reliance on central funding. These changes would also seem to acknowledge and recognise the significant contribution made by local government so far in addressing the ongoing impact of the pandemic.”
*The Financial Foresight model is based on the latest Revenue Outturn data for local government published by Ministry of Housing, Communities & Local Government (MHCLG) and updated to reflect subsequent changes, such as funding settlements, and COVID-19 support funding. We have projected these historic trends forward using various national projections, such as households from MHCLG, and population projections, from the Office for National Statistics (ONS). We have then made detailed assumptions for each area of council service expenditure and income, including the impact of COVID-19 from the delta returns submitted each month by councils to MHCLG, and our in-depth understanding of the financial mechanics of the sector, and these have been stress tested by multiple local authority finance directors and other senior sector stakeholders. This combination of data has enabled us to understand the growth in expenditure on demand-led services, other spending and income pressures, and the impact on reserve levels over the next ten years, on the assumption government funding levels do not change, and councils take no further action to address the position.
** This change is due to the reduction over time in the average level of reserves available to each council to mitigate financial risk over this period.