Written evidence submitted by the Local Government Association [SRF 001]

             

 


 

 

1.      About the Local Government Association

 

1.1.  The Local Government Association (LGA) is the national voice of local government. We are a politically-led, cross-party membership organisation, representing councils from England and Wales.

 

1.2.  Our role is to support, promote and improve local government, and raise national awareness of the work of councils. Our ultimate ambition is to support councils to deliver local solutions to national problems

 

2.      Summary

 

2.1.       Councils have shown leadership and supported their communities during the COVID-19 pandemic. Local authorities and their essential workforce worked hard to protect the most vulnerable within our communities. The Spending Review should recognise this work by ensuring a settlement for local government that enables councils to continue in this vital role and deals with the financial challenges ahead.

 

2.2.       Councils are under significant financial pressure due to the immediate financial impact caused by the extra costs, loss of income and cash flow pressures arising from COVID-19. Savings plans and transformation efforts have been put on hold, further exacerbating this unprecedented impact. Taking into account the grant support received so far, and assuming that the income guarantee scheme parameters will compensate councils for around £1 billion of lost non-tax income, there is still an unfunded overall pressure of £1.1 billion in 2020/21 that councils will be forced to absorb. Given the continued impact of the pandemic, this could grow to be in the region of £2.0 billion.

 

2.3.       Councils need a stable financial foundation to build on in order to deliver on their and national government’s priorities. We are calling on the Government to provide an additional £8.7 billion in core funding in 2021/22, made up of the £4 billion funding gap to sustain 2019/20 service levels (already assuming annual inflationary increases to grants and 2 per cent annual council tax increases), £1.8 billion to deal with other quantifiable pressures to stabilise the sector and £2.9 billion of other core funding requirements to help councils improve their core service offer.

 

2.4.       The lateness of the one-year Spending Review, scheduled for 25 November, is itself an additional source of uncertainty already created by the ongoing impact of the pandemic. We estimate that over 95 per cent of councils’ 2020/21 core spending power is subject to one source of uncertainty or another ahead of 2021/22.

 

2.5.       It is therefore imperative for the Government to think creatively about how to provide more certainty to councils in the absence of a multi-year Spending Review. One way of doing so would be for the Government to commit, explicitly and in principle, to 2021/22 funding being a real-terms floor beyond which funding will not be reduced in this Parliament for any individual council.

 

2.6.       We are calling on the Government to resume the Fair Funding Review, but with a guarantee that the transitional mechanisms will not only ensure that no councils experience a loss of income but should also protect councils from reductions from the path laid out by the funding floor as above, so that they can plan with confidence. The same call for transition mechanisms applies to any business rates reset, should one go ahead.

 

2.7.       In our submission to the inquiry we have sought to answer the Committee’s terms of reference by setting out our analysis of:

 

2.7.1.      The impact of COVID-19 on council finances

2.7.2.      The Spending Review 2020

2.7.3.      Adult Social Care

2.7.4.      The impact on financial planning

2.7.5.      The Fair Funding Review and Business Rates Retention

 

3.      Impact of COVID-19 on council finances

 

3.1         Prior to the pandemic, councils had already dealt with a £15 billion reduction to core government funding between 2010 and 2020. While a significant part of this challenge has been met through efficiencies and transforming services, councils still had to ration services such as cultural services, economic development, libraries and others to ensure they could continue to protect vulnerable children, for example.

 

3.2         The 2019/20 financial year has seen councils reduce their unringfenced reserves by nearly £500 million, further showing the financial pressure councils were under even prior to COVID-19.

 

3.3         This year (2020/21), councils are also dealing with the sharp end of the immediate financial impact caused by the extra costs, loss of income and cash flow pressures arising from COVID-19. Savings plans and transformation efforts have been put on hold, further exacerbating this unprecedented impact.

 

3.4         The latest information available to the LGA from the Government’s COVID-19 financial information surveys suggests that:

 

    1. Between March and September 2020, councils incurred £3.6 billion of cost pressures and suffered losses of £2.2 billion in non-tax income (£5.7 billion total).

 

    1. For the full financial year, they project £5.4 billion in cost pressures and £2.8 billion in non-tax income losses (£8.2 billion total).

 

    1. Taking into account grant support received so far, and assuming that the income guarantee scheme parameters will compensate councils for around £1 billion of lost non-tax income, that still leaves an unfunded overall pressure of £1.1 billion in 2020/21 that councils will be forced to absorb.

 

    1. There is still significant uncertainty about future pressures related to the pandemic and the requirement to impose restrictionsThe Government has announced a second set of national restrictions until 2 December, after which we may revert to the localised and regional tiered restrictions.

 

    1. The returns submitted in September projected pressures for the six months from October 2020 to March 2021 to only be worth 32 per cent of pressures for the six months between April and September 2020. If the proportion of costs and non-tax income losses between the first half of the financial year and the second half of the financial year turns out to be closer to, say, 67 per cent due to the continued impact of the pandemic, the unfunded gap will be in the region of £2.0 billion.

 

    1. This means that costs and income losses must continue to be closely monitored and fully compensated.

 

3.5         It is also increasingly likely that the impacts on cost and non-tax income will roll over into 2021/22. Therefore it is vital that the Government provides a cast-iron guarantee that the financial challenge facing councils as a result of COVID-19 will be met in full. This includes where support is needed on an on-going basis which is not time limited.

 

3.6         All of this excludes the impact of 2020/21 local taxation losses which will hit council and central government budgets from 2021/22 onwards, worth £3.1 billion to the public purse as a whole. The Government has committed to announcing how those losses will be shared between central and local government at the Spending Review.

 

4.      Spending Review 2020

 

4.1         Councils are ambitious for our communities and as always stand ready to offer local solutions to the national challenges we face. This includes continuing to deliver for our communities during these unprecedented times, while also boosting local efforts to revive and rebuild the economy. To do this they require the correct powers, sustainable funding and enhanced financial flexibilities.

 

4.2         The economic impact of Covid-19 is having a big effect on public finances – both for the Exchequer through national taxation and local government through local tax income, fees and charges.

 

4.3         The best possible efforts of councils to spark local recovery will not bear fruit without sufficient funding and a sustainable local government finance system to underpin them. Councils need confidence in the financial system to be able to act, and this is particularly important if councils are expected to be innovative and invest in local solutions.

 

4.4         To deal with the impact of the pandemic, councils had to reconfigure how they deliver services and do this at pace. Several temporary services and structures have been introduced, such as:

 

    1. Support hubs, especially with respect to shielding the vulnerable;
    2. Local resilience fora;
    3. Measures for businesses as well as residents struggling to pay council tax;
    4. Other specific local services.

 

4.5         Other pre-existing services have either seen an increase in the cost base that will be very difficult (and not necessarily desirable) to drive down, or are expected to see a ‘bounce-back’ once the pandemic is over. For example:

 

    1. Councils have rightly provided adult social care providers with support to help meet additional COVID-19 costs. However, even when the pandemic is over, care providers will be struggling – they already were before COVID-19 – and there is a concern that increased care home vacancies will mean some providers will struggle to stay sustainable on the current income rates. All this implies that councils will find it very difficult not to make the ‘temporary’ cost uplifts permanent and might need to go further to sustain a functioning market.

 

    1. Homelessness support will be expected to operate at the increased intense level. The efforts to get 90 per cent of homeless people into accommodation has been a big success but it comes at a large cost and the pressure will be on to keep homeless people supported in accommodation once COVID-19 passes.

 

    1. There is anecdotal evidence that demand for children’s social care has reduced during the pandemic. This means that, regretfully, a spike of pent-up demand for support to vulnerable children is likely in the ‘new normal’, especially with the evidence that domestic violence is sadly on the rise.

 

4.6         , The IFS has independently reviewed the future funding outlook for councils prior to the Spending Review, including ‘business as usual’ pressures, cost impacts of the pandemic that might be permanent and the potential long-term impact of the economic changes on local income, such as local taxes, sales, fees and charges.

 

4.7         As part of its analysis, the IFS estimates that councils face cost pressures of over £5 billion by 2021/22 in comparison to the 2019/20 starting point. This includes £1.3 billion of ongoing COVID-19 cost pressures and income losses in 2021/22:

 

    1. Adult Social Care COVID-19 future spending pressure of £533 million
    2. Public Health COVID-19 future spending pressure of £148 million
    3. Future non-tax income losses due to COVID-19 of £634 million

 

4.8         When considering these cost pressures and other ‘business as usual’ pressures set out in their report, in particular the fragility of the adult social care provider market, this could lead to a funding gap of £4 billion in 2021/22, even if council tax increases by 2 per cent and grants increase in line with inflation.

 

4.9         The IFS is also clear that we are still in a period of great uncertainty, with no allowance made for longer-lasting cost impacts of COVID-19 to councils. The IFS’s upper estimates of all the pressures outlined above as well as challenges of recovering self-raised income suggest that the funding gap could end up being as high as £6.7 billion next year.

 

4.10     The funding gap is calculated on the basis of maintaining the current service levels and quality and only accounts for ‘business as usual’ cost pressures.

 

4.11     There are several other risks to councils’ financial stability which need to be addressed through additional funding. This includes pre-existing financial shortfalls in concessionary fares funding700 million), persistent overspends in children’s social care (£900 million) and homelessness budgets (£150 million) as well as identified future new burdens (over £30 million)..

 

4.12     Councils are ambitious to do more than simply manage restoring local finances and services. As vital as it is to restore the public finances, we also have a positive vision for renewal. There are several quantifiable pressures and issues that need to be solved to improve outcomes for local citizens which would also have to be funded through additional core funding. This includes, but is not limited to, reinstating early intervention grant and reforming adult social care pay.

 

4.13     To deliver on the Government’s priorities and ambitions, councils have to build on a stable foundation. In the Spending Review, we are calling on the Government to provide an additional £8.7 billion in core funding in 2021/22, made up of:

 

    1. the £4.0 billion funding gap to sustain 2019/20 service levels (already assuming annual inflationary increases to grants and 2 per cent annual council tax increases),
    2. £1.8 billion to deal with other quantifiable pressures to stabilise the sector and
    3. £2.9 billion of other core funding requirements to help councils improve their core service offer.

 

4.14     These figures are broken down in the table in the Appendix. This is in addition to instances where specific revenue and capital funding would be required, such as public health funding.

 

5.      Adult social care

 

5.1         Social care, and crucially its value to people and wider society, is visible to all like never before. Daily media coverage has shown the public the extraordinary lengths the care workforce has gone to in keeping our loved ones safe and well, often sacrificing time with their own families to do so and always wary of the risks they are exposed to. Politicians from all parties have paid tribute to the workforce and the Government has stated that, as a nation, we are indebted to their selfless dedication.

 

5.2         Even before the pandemic, adult social care was under significant financial pressure.

 

    1. The squeeze on council budgets has resulted in some adult social care providers being in a perilous state. The IFS has estimated that the pressure on the provider market, resulting from councils paying less than a sustainable rate on commissioned services, is worth £1.34 billion on the basis of most recent data. Over time, if unaddressed this can grow to as high as £1.7 billion due to demand and inflation pressures. This is in line with our previous analysis.

 

    1. LGA analysis before the pandemic showed that adult social care costs were projected to increase by £1.3 billion each year from 2019/20 to 2024/25 simply to maintain 2019/20 levels of access and quality, but factoring in demand and inflationary pressures, such as the NLW. This included demand pressures for both older and younger adult cohorts. IFS analysis suggests a £1 billion estimate for annual cost pressures in adult social care.

 

    1. Councils received 1.91 million requests for support from new clients in 2018/19, up from 1.84 million requests in 2017/18. Age UK estimates that there are 1.4 million older people who do not receive the help they need.

 

5.3         The legacy of COVID-19 for social care – and most importantly the people who use social care services – must therefore be a reset, not simply a restart. This impetus should spur our thinking around long-term reform of care and support, which we have always said should be built on cross-party cooperation.

 

5.4         We are committed to working with Government and all parts of the social care world – particularly those with lived experience – on a way forward that is informed by the many valuable lessons from the pandemic on the role and value of social care in all our lives.

 

5.5         The Spending Review provides a crucial opportunity to begin that process. It must act on three main fronts:

 

    1. provide funding to shore up social care ahead of winter and the second wave of the virus, continuing this in 2021/22;

 

    1. provide additional funding for the medium term to help address the long-standing challenges that have faced social care, many of which have been exacerbated by the pandemic; and

 

    1. use the above funding as a ‘down-payment on reform’ and to pave the way for changes that will finally put the funding of social care on a sustainable footing for the long-term.

 

5.6         The Government has already announced an extra £300 million for the NHS to help prepare for upcoming winter pressures. It is vital that adult social care is also supported. The extension of the Infection Control Fund through winter with an additional £546 million and the Government’s commitment to supply care homes with PPE at no cost are very welcome but do not provide resources to increase capacity to deliver care at home though the winter.

 

5.7         Moreover, the challenges facing adult social care in the short-term extend beyond infection control. It is essential that funding at this critical time is therefore kept under close review.

 

5.8         Councils’ track record on delivery is a strong starting point for assuring the Government that any additional investment in social care will be well used. We recognise and accept that significant increases in funding, such as those we are calling for, would likely require even greater assurance that funding was being used in the right way. Additionally, the experience of the pandemic has highlighted some of the challenges involved in securing effective national oversight of what is an inherently local public service.

 

5.9         The LGA is committed to working with the Government to consider how best to develop a clearer national ‘line of sight’ that still remains compatible with the principles of localism and sector-led improvement. The Care Act achieves this in legislative terms, providing a national legal framework for care and support that is locally delivered and expressed. Now is the time to develop a comparable arrangement for oversight.

 

6.      Impact on financial planning certainty

 

6.1.       The best value use of public resources can only be achieved if councils are able to plan and are placed on a sustainable long-term financial footing.

 

6.2.       With another one-year Spending Review taking place in late November, councils will have had to go through four years of short-term budget setting exercises from 2018 all the way to 2021.

 

6.3.       The lateness of the one-year Spending Review, scheduled for 25 November 2020, is itself an additional source of uncertainty. We estimate that over 95 per cent of councils’ 2020/21 core spending power is subject to one source of uncertainty or another ahead of 2021/22.

 

6.4.       This year the Spending Review will take place nearly two months later than the 2019 Spending Round did last year. The following questions all still need answering at the time of writing, meaning councils are undertaking budget setting with even less knowledge than in 2019:

 

    1. How much in government grant will councils receive, both collectively and individually? The only grant income within core spending power that is not subject to any uncertainty is the £1 billion adult social care support grant as it was a pre-Election manifesto commitment.

 

    1. With impacts of the pandemic now highly likely to affect the 2021/22 financial year, will councils continue to be compensated for ongoing COVID-19 impacts on their costs and income, such as fees and charges?

 

    1. How much of the 2020/21 local tax losses will central government absorb, protecting councils from this having an impact on their funding in 2021/22 and future years?

 

    1. What flexibilities will councils have over council tax? What will be the referendum principle?

 

    1. Will there be a business rates reset in 2021/22? If so, on what basis will funding be reassessed? Will there be transitional protections for councils that see their income reduce as a result?

 

    1. Will 100 per cent business rates retention pilots continue in 2021/22 now that further business rates retention reform is suspended?

 

    1. Following the announcement that new homes bonus will be replaced and a promise of a consultation which has not yet been published, will there be another round of new homes bonus allocations? Will the legacy payments be continued for a further year? Will the thresholds used to award the bonus be changed?

 

6.5.       This forced short term planning does not allow councils to make meaningful and sustainable decisions, even before considering the impact of the pandemic. For example, councils might make service cuts which would otherwise not be necessary if they had better information. The risks connected to the long-term impact of COVID-19 on local income make this even more challenging.

 

6.6.       A three-year Spending Review presented an opportunity to draw a line under short-term budgeting and to allow councils to set reliable medium-term financial strategies, but this opportunity has now been missed. A full three-year local government finance settlement is not possible without a full three-year Spending Review allocation of local government funding.

 

6.7.       It is therefore imperative for the Government to be innovative and find a new approach that will provide more certainty to councils in the absence of a multi-year Spending Review. One way of doing so would be for the Government to commit, explicitly and in principle, to 2021/22 funding being a real-terms floor beyond which funding will not be reduced in this Parliament for any individual council. This should encompass general grant funding, specific grants such as the public health grant and also provide an in-principle decision about council tax flexibilities for the rest of the Parliament, too.

 

7.      Fair funding review and business rates retention

 

7.1.       In addition to the uncertainties covered above, the 2021/22 financial year was meant to see the culmination of the Fair Funding Review, the move to 75 per cent business rates retention and the business rates revaluation all being implemented from next April. All of these have now been postponed – the revaluation will be introduced from 2023 and the other reforms have no specific time frame.

 

7.2.       The impact of the pandemic has not changed the reality that the way general government grants are distributed between councils remains complex, opaque and out of date. It is not possible to succinctly explain why the funding allocations for different councils are, what they are. However, it is also clear that any review of distribution arrangements puts a multi-year local government finance settlement at risk, with an impact on certainty.

 

7.3.       We are calling on the Government to resume the Fair Funding Review, but with a guarantee that the transitional mechanisms will not only ensure that no councils experience a loss of income, but should also protect councils from reductions from the path laid out by the funding floor as above, so that they can plan with confidence. The same provision should apply to any business rates reset.

 

7.4.       Councils had to revisit and revise many of their services to react to the impact of the pandemic and it is yet to be seen how permanent some of those shifts are. This means that, when the Fair Funding Review is relaunched, the Government needs to review progress made to date to ensure that it is still fit for purpose, or flexible enough to deal with any such shifts in council service models. One example could be the council tax adjustment (especially the council tax support and collection rate elements).

 

7.5.       Councils’ confidence in business rates as a reliable income source with a future has reduced. The taxbase is currently eroded and council income is propped up by section 31 grants which would fall away at the next reset. In fact, if COVID-19 reliefs become permanent, business rates retention shares would have to go up significantly just to keep the same level of income with local government, without any roll-in of grants.

 

7.6.       While a call for evidence has just closed, the Government’s fundamental business rates review is in its infancy. The next revaluation of business rates will also be highly controversial regardless of when it happens, which will add to the angst surrounding the tax. To aid certainty, the LGA is calling on the Government to  revisit 75 per cent local retention of business rates, if appropriate, after the business rates review concludes.

 

 


Appendix – additional council core funding requirement for 2021/22

 

Element

2021/22 (£m)

IFS - central additional ‘business as usual’ cost pressures estimate, including ongoing impact of COVID-19 to costs, fees and charges

5,210

IFS – central adult social care provider market pressure estimate

1,540

IFS – income growth estimates (includes 2 per cent annual increases in council tax and increases in grants in line with CPI inflation, dampened by ongoing tax losses due to COVID-19)

(2,768)

Funding gap to retain 2019/20 service levels (in addition to inflation increases to core grant and 2 per cent council tax increases)

3,982

Other underlying pressures and quantifiable new burdens that require appropriate funding

Pre-existing persistent children’s social care overspend (2018/19 overspend, uprated for demand and inflation using IFS assumptions)

903

Pre-existing persistent homelessness overspend (2018/19 overspend, uprated for demand and inflation using IFS assumptions)

150

Meeting the shortfall in concessionary fares funding

700

Building Safety Bill new burdens

22

Mental Health Act – new burdens

10

Total other underlying pressures and quantifiable new burdens

1,785

Other quantifiable core funding requirements to help councils improve and recover services:

Reinstating early intervention funding to 2010/11 levels

1,700

Reforming adult social care pay to match NHS

1,000

Restoring the Social Fund to 2013/14 funding levels

176

Local digital infrastructure champions

30

Total quantifiable core funding requirements to help councils improve and recover services

2,906

Total

8,673

 

 

 

November 2020