An Independent Review of the Local Government Finance Settlement Laura Fallon

The Institute for Fiscal Studies (IFS) were hard at work in the run to Christmas and published an independent assessment of the latest Local Government Finance Settlement in England on 21st December. It can be read in full here. Some of its findings could be summarised as ‘government funding is not as generous as it looks’ and ‘is based on unrealistically optimistic scenarios’ – things that have certainly been heard before in the context of government funding projections! On a positive note, they do expect broadly adequate funding for the coming year providing that vaccinations and a way out of the pandemic goes to plan. The picture further on than that is a bit less rosy.

‘Core’ funding (not including extra money for Covid) is set to increase by £2.2 billion or 4.5% next year. However only £0.3 billion of this is coming from government with the rest assumed to be coming from council tax rises. This extra amount will only be raised if all councils increase council tax by the full amount allowed without a referendum (some no doubt will not) and if the increase in the amount of council tax paid is in line with projections made prior to the pandemic. The second point is by anyone’s judgement an exercise in voodoo economics and is definitely not going to happen: inevitable rises in unemployment and poverty brought about by the pandemic will mean many more people will be entitled to council tax relief. To compensate for this the government has set aside £670 million as part of its ‘Covid-19’ package (funding specifically to cover extra Covid-19 related costs) but this is being double counted by being included here and in ‘Core’ funding that will not actually materialise.

It is estimated that the additional costs to councils due to Covid in this financial year will amount to around £8.9 billion (£6.1 billion in extra costs and £2.8 billion in the loss of income). Councils are being provided with an additional £3 billion next year although £670 million of this is double counted (as above) and £762 million is for compensation for lower council tax collection in this year that should be spread over the next three years. The IFS judge that a ‘middling’ scenario in terms of improvements in the pandemic will amount to extra costs to councils next year of around £1.4 billion meaning the extra funding should cover it. A ‘upper worse case’ scenario however puts costs at £2.3 billion which stretches the current budget somewhat. That said the government also have a £21 billion Covid-19 reserve which can hopefully be plundered if necessary.

On a more positive note, the levelling up agenda does seem to be supported by the funding settlement. Whilst there continues to be a greater reliance on council tax rather than central government funding for all councils there is recognition that this will disproportionately hit councils in more deprived areas who will always struggle to raise as much from council tax as wealthy areas. Grants have been distributed in such as way that this effect is equalised with broadly the same change in core funding for both the most and least deprived.

The current funding settlement only covers the next year so the picture after this is of course far more uncertain. The IFS judgement is however that things will be very challenging as councils grapple with the difficult issues they faced already combined with a continuing pandemic hangover. They judge that an aging population, increases in the National Living Wage, more adults with learning difficulties and increasing numbers of children in care will continue to cost money. Even if the pandemic is all over by March 2022 economic scarring, increases in mental and physical health problems (either as a direct result of Covid-19 and its associated lockdowns or of the ensuing poverty these created) and an increased need to safeguard the vulnerable are likely to drive an increased demand for council services and create further financial stresses.