Councils’ finances performed more strongly than expected

The IFS has said that councils’ finances held up much better during the first year of the coronavirus pandemic, 2020–21, than previously thought.

In a new report, funded by the Economic and Social Research Council, IFS researchers say that the findings have important implications for local government funding policy in the coming year, and for how the government should respond if councils face another extreme adverse shock in future.

In the latest available survey – from April 2021 – councils reported that the pandemic had increased their net spending on non-education services during 2020–21 by approximately £7.8 billion. However, official expenditure and income data published last month suggest that net spending increased by only £4.1 billion more than we would have expected in the absence of the pandemic – a much smaller, although still sizeable, increase.

This link between survey-based estimates and the funding provided to local government also means that overall English councils received billions more in funding than their net expenditure actually increased by. Thus while some councils had to draw down their reserves and seven had to ask for special temporary borrowing powers from the government in 2020–21, councils as a whole were able to pay substantially more into their reserves last year than had been anticipated prior to the pandemic.

The report also looks at how the financial impact of the pandemic varied across services. Relative to what may have been expected in the absence of the pandemic, central and other services (+£1.3 billion), adult social care services (+£0.9 billion) and highways and transport (+£0.8 billion) saw the biggest increases in net expenditure – although in the last case this was the result of a fall in the contribution of parking income to costs.

Kate Ogden, a Research Economist at IFS, said: “The fact councils as a whole were able to build up reserves in 2020–21 means that the sector’s financial position was not quite as precarious going into this year as is sometimes claimed. And it means the government’s decision not to meet this year’s reported financial pressures in full is not unreasonable.

“But this approach may not work for all councils – some have been particularly hard hit and faced real financial difficulties. And the government shouldn’t be too sanguine about the longer-run picture for council funding. As our previous work has shown, with rising demands and costs for adults’ and children’s social care in particular, councils will struggle to raise enough themselves via council tax in the coming years, especially in poorer parts of the country.”