Adrian Jenkins agrees local government failed to spend all its Covid grants. But ongoing pandemic expenses mean the money will be used and funding pressures will continue.
Local government is so used to getting short-changed by central government that it cannot quite believe it when it is overfunded. There must be some mistake, we think. Don’t shout too loud or ministers will want their money back.
That is broadly the response to the Institute for Fiscal Studies’ (IFS) recent report that councils received more funding from central government for Covid-19 than it has actually spent.
Based on 2020-21 outturn data, the IFS calculates that local authority net expenditure only increased by £4.1bn more than budgeted. But that Covid-related funding was significantly higher, at £7.8bn. This implies over-funding of £3.7bn.
Monthly survey data from local authorities during 2020-21 clearly showed higher levels of expenditure than were actually incurred by authorities. The IFS speculates that authorities were only asked to report increases in expenditure associated with Covid. No doubt, Covid reduced net expenditure in some services, which authorities were not asked to report.
These findings are not entirely new. We knew that funding was exceeding spending even during 2020-21. By March 2021, forecast full-year expenditure based on the monthly survey returns was £6.9bn, giving local government an in-year surplus of around £1bn (compared to Covid funding of £7.8bn).
And central government must have been fully aware because they were monitoring expenditure every month, and the returns clearly showed this position.
Reservations about reserves
The analysis by the IFS suggests that the in-year surplus was a good deal greater than £1bn. And this is a worry for local government because the Treasury could take the view that the sector needs less funding in future. Or, that local authorities have not been entirely truthful in their reporting of Covid pressures.
But, as ever in local government finance, it is not as simple as that. Analysis of local authority accounts by LG Improve (LGi) shows that reserves increased in 2020-21 but not by as much as indicated by IFS analysis.
Interpreting local authority balance sheets in 2020-21 is difficult because of timing differences on the balance sheet (for the collection fund and for various Covid grants). So, LGi showed that although most authorities had increases in their reserves in 2020-21, much of this is caused by timing differences associated with the collection fund.
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The accounts give a more accurate and fuller picture than just looking at changes in net expenditure. For instance, they take into account local taxation losses, which have only been partly funded by the local tax income guarantee (TIG).
Losses from sales, fees and charges (SFC) have been significant but the impact on authorities is varied. Some authorities—particularly many shire districts—are reliant on SFC income. Support requires authorities to fund the first 5% of any losses, and then compensates for 75% of any further losses.
Leisure remains a real problem where the service is provided on an arms-length basis. Any SFC losses, though, will have been included in the net expenditure data analysed by the IFS.
Taking all this evidence together, it is hard to disagree with the IFS analysis for 2020-21. The net gain for local government might not have been as high as £3.7bn but it is in the billions.
Dealing with the deficit
How can local government justify this level of over-funding? The best argument is that the effects of Covid are not contained within 2020-21 alone.
There has been continued spending by local government on Covid into 2021-22, and no doubt into 2022-23 as well. Authorities are forecasting Covid-related expenditure of £4.2bn in 2021-22, against which there is only one final tranche of Covid funding (£1.55bn).
If we assume that local authority forecasts are overstated again in 2021-22, it is still reasonable to assume that there will be a deficit in the current financial year.
Some of the financial pressures that were diminished in 2020-21 (some authorities under-spent significantly on social care) will return with a vengeance in 2021-22 and 2022-23. And councils will have to manage the recovery from Covid from within the resources they have already been given.
Let’s not forget that the NHS will receive an additional £24.9bn over the next three years to “build back better”. Local government will have to make do on what is has already received.
The effect on local authority viability has been mixed. For some, the additional funding has masked structural problems and saved them from section 114 notices, at least in the short term. For others, it has made their financial situation worse. Local government remains a sector that is under chronic financial pressure.
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Councils have certainly been over-funded in 2020-21. There is no mistake about that. While the figure is unlikely to be as high as the £3.7bn calculated by the IFS, it is a very substantial figure, measured in the billions.
Fortunately, the Treasury does not seem to be minded to ask for it back. Spending review 2021 was good for local government, with a £1.6bn increase in funding. So, overfunding for Covid in 2020-21 does not appear to have adversely affected the funding that local government receives from the Treasury.
Maybe this is because the government is fully aware of the structural problems in local government (social care, austerity) and the ongoing pressures on local government recovering from the pandemic. A few billion or so overfunding for Covid won’t make much difference to these structural problems.
Adrian Jenkins leads the funding advisory service at Pixel Financial Management.
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