Covid pushes councils towards bankruptcy
The Government’s spending watchdog has warned that twenty-five councils are at risk of going bust due to a £10bn hole in local authority finances resulting from Covid-19.
The National Audit Office said that a cluster of 337 councils in the UK are at “high” or “acute” risk of financial failure as they struggle to meet the legal requirement to balance their budgets. Coronavirus has cost them £2.8bn in lost income from council tax, fees and charges, and added an extra £6.9bn in spending in the current financial year, creating a £9.7bn imbalance in their finances. The crisis facing council finances was underlined by the NAO’s finding that three-quarters of authorities faced a funding gap following the virus.
The NAO said local government has still been left with a funding gap of £605m and its finances have been scarred by the pandemic, despite the Government stepping in with a £9.1bn emergency package. As of February, Whitehall has provided financial bailouts, or “capitalisation directions”, for four councils totalling £50.5m, and Nottingham City Council and Croydon Council in south London are also likely to need support. The watchdog said that Ministers are in talks with a small number of additional councils over exceptional funding, but to avoid potentially damaging speculation, refused to share information with the NAO as to which.
Approximately 30 per cent of councils are braced for a gap bigger than 5pc of their spending last year. Spending in areas such as social care and track and trace has surged, while the cost of delivering services such as waste collection is higher due to social distancing guidance, the watchdog said. Income from car parking and council-run leisure centres has plunged after most travels were made illegal.
The head of the NAO, Gareth Davies, said the Government’s rescue had “averted system-wide financial failure” for local authorities, but added: “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. The Government needs a plan to help the sector recover from the pandemic and also to address the long-standing need for financial reform in the sector.” The report stressed that rebuilding finances would be “a medium to long-term process”.
Only one in five councils told the NAO that their finances would return to pre-pandemic levels in the next two financial years, and more than half of respondents said they would need to build up reserves in the next two to three years, with only 16 per cent confident of being able to do so. Chairman of the Commons public accounts committee, Meg Hillier, said: “Local authorities were already overstretched. Now, many will have to slash service budgets to balance their books.” More than 90 per cent of authorities are planning cuts to services to make up the gap this year, and in a blow to many taxpayers, the majority of households across the UK will be hit with 5 per cent council tax rises, the maximum rise allowed without a referendum.