Written evidence submitted by Newcastle City Council [SRF 028]

 

 

I write to you in my capacity as Leader of Newcastle City Council, and enclose a technical response to your Inquiry into Local Government Finance. In this covering letter I provide some further points in response to the Committee’s terms of reference and key lines of enquiry.

What the financial challenges facing councils are as a result of the COVID-19 pandemic, including lost income and local tax losses.

When we entered this year, we had already seen a decade of cuts which nationally had amounted to £16 billion. In Newcastle alone we were already facing the loss of £305 million up to the end of the current financial year, an astonishing £2,314 per household. As a result, we were already facing the need for further significant savings.

 

The coronavirus pandemic has so far cost the council £60m through increased demand, unexpected costs, inability to achieve planned savings and loss of income. Less than half (£28.8m) has come from Government, leaving us with a huge financial challenge. In September, the council’s Cabinet approved a range of in-year actions to reduce expenditure by £32 million, and in our imminent budget consultation we are proposing to save a further £40m over the next two years.

 

The original commitment to fund in full any commitments made by local authorities fast vanished, and funding provided has tended to be in response to emergencies or political expediency. To date, Government has funded £28.8m plus an estimated £6.0m from the income compensation scheme, just over half of the financial pressure we are facing. That shortfall that the council will have to resolve should instead be going to support the incredible range of services this council provides to improve the lives of our residents, to keep them healthy and safe, and to make our city greener and cleaner. 

What the impact is of another one-year spending review and a further delay to a multi-year settlement and the Fair Funding Review.

Longer term planning improves decision making and provides for the efficient use of resources. That is impossible to do with one-year spending settlements. In the short term, the impact of another one-year spending review increases the financial pressure we are facing, as well as making it extremely challenging to effectively and collaboratively work with partners to deliver services across the wide range of local government responsibilities.

The shift from a three-year comprehensive spending review to a one-year spending review creates further uncertainty for our finances beyond the 2021-2022 financial year. While the reasons for this change are understandable, they only add to the lack of clarity and impossibility of taking a long-term view of services and finance. This means we must continue to be pragmatic and cautious in our approach to spending. 

Local authorities like Newcastle have proven themselves, again, to be an essential service. We provide, either alone or in partnership with others, many welfare-critical goods and services including housing, local services such as keeping the city clean, education, leisure and library facilities, healthcare, and childcare. Without these essential foundational services our city and our society would not function. To function, and to function effectively, local government needs a fair and sustainable financial settlement – not one-year, piecemeal settlements that do not reflect the critical role we play in keeping society running – and a greater balance between capital and revenue spending – the latter of which is preventative or has predominantly long-term benefits and is not easily captured in traditional appraisal methods. 

 

A further point which I would make is that councils like Newcastle are key to the economic success of their cities, and indeed the towns and wider regions they are sited in. Our ability to nurture the economic recovery needed post-Covid will be profoundly affected by our financial health. Partners who look to us for leadership, including in the private sector, need to have confidence that we can play the part that they expect of us. So investing in sustainable local government funding is not just about supporting the public sector, or communities, or the most vulnerable residents, it is also about supporting the private sector to play their part in recovery too.

The current financial situation of councils, how this has affected their ability to deliver services and the demand for services, including Adult Social Care.

Our financial position is extremely challenging. Newcastle is a prudent and financially very well-managed council, but even we are in the difficult position of now potentially drawing on reserves to manage our cost pressures.

Demand for services has risen throughout the pandemic, from an already high base, and our expectation is that this will continue through the remainder of this financial year and well beyond.

The position facing adult social care is particularly challenging (although in children’s social care we are also dealing with significant increases in demand). The flexibility to apply a 3% precept for adult social care is, in some ways, helpful. It will increase our income significantly. But in effect, the council and the city’s council tax-payers are being asked to take responsibility for the longstanding failure of government to deliver a sustainable approach to social care funding. Continuing to precept residents for adult social care is adding an additional burden that is regressive and disproportionate, especially in cities like Newcastle with a high proportion of properties in lower bands. 

In 2021 Government must finally grasp the nettle and, in partnership with local government and the social care system, come to a fair and sustainable funding proposition for social care.

The approach the Government should take to local government funding as part of the 2020 Spending Review and what the key features of that settlement should be.

The 2020 Spending Review was a missed opportunity to put local government funding on a more secure and sustainable footing for the longer term. Looking beyond the points already made about multi-year settlements, the key spending review decision was to reduce public service spending, other than that allocated for Covid, relative to March plans. And for areas outside of health, and defence, it looks likely that we face another period of austerity – compounding the decade of damage already done, and the impact of Covid.

For local government, it is clear that government support is being reduced, with council tax-payers locally being asked to foot more of the bill.

We need to ensure that a Local Government Finance Settlement at the height of a global pandemic is fit for purpose: recognising a need for funding certainty to put us on the road to recovery. I hope the Committee will endorse this view and hold Government to account for how they respond.

 

Yours sincerely

 

Cllr Nick Forbes,

Leader of Newcastle City Council

 

Inquiry into local government finance as part 2020-21 Spending Review

Newcastle City Council is pleased to attach Newcastle City Council’s submission to the Local Government Finance and SR Inquiry.  We have also attached our submission to the 2020/21 spending review for information.

  1. T.O.R. What the financial challenges facing councils are as a result of the COVID-19 pandemic, including lost income and local tax losses.

1.1.   The pandemic has demonstrated the critical importance of local government to support not only the most vulnerable in society but ensuring that partners across local areas can respond effectively and efficiently in times of crisis.  As a local authority, we have not only quickly reviewed and focused our services to support those most in need, but the Council has acted as a convenor and broker for partners to do the same.  No other institution can play this role to this effect.

1.2.   The Council has been instrumental across the city in responding to the pandemic and supporting those in the city whose need is greatest.  Councils are able to do this more effectively than other parts of government due to the knowledge of their local areas examples due to the pandemic include getting grants out to business shielding the vulnerable, getting PPE to where it’s needed most, getting homeless people off the streets and into accommodation, keeping schools open and getting the elderly out of hospital and into care. However, we have had to do so from an already challenging position as a result of the cumulative impact of year on year reductions in local government funding which have constrained our capacity and capability

1.3.   However, local authorities are under extreme financial pressure as a result of the pandemicIn giving oral evidence at the spending review and local government finance inquiry Cllr James Jamieson, Chairman of the Local Government Association (LGA) highlighted that whilst Local Government were thankful for the £6 billion funding for pressures and £1 billion in income losses provided to cope with the pandemic Councils are still £1 billion short of where they would have been had Covid-19 not happenedCouncils have had to invest funding upfront, on the commitment that Government will fully recompense Councils in the futureHowever, the shortfall could be even greater than the estimated £1 billion as this figure was based on returns from September before the 2nd Covid-19 wave when assumptions were likely to show an easing of pressures which is now likely to be far from the reality being faced by Councils.

1.4.   As per the latest return to MHCLG we have estimated an impact on the council’s finances in the region of £60.6m excluding the additional expenditure to be funded from a range of specific grants provided by the Government (e.g. infection control funding). At this point, we have received just £28.8m of Government funding and have estimated a further £6.0m from the income guarantee scheme.  There has been increased costs in adult and children’s social care, highways and transport, and environmental & regulatory particularly due to additional death management activity. These have been estimated at £8.6m, and there will be a shortfall against budget savings agreed to be achieved this financial year of a further £10.5m. There has also been loss of income from charges and fees resulting from services being suspended, or demand diminishing during the lockdown. One example being the loss of income from car parking and spaces used to widen streets. The council has estimated reductions in income from business rates of £4.8m, from council tax of £10.6m, and sales fees and charges of £26.2m - that is a total estimated loss of £41.6m in 2020-21.

1.5.   All councils, but more so for councils in areas of high deprivation went into the crisis from a low funding base following austerity, increasing demand and pressures and a lower income raising capacity. The impacts of Covid-19 are likely to worsen over the winter period, we are already in a month-long lockdown across England amid growing concern about infection rates and then Brexit could further compound job losses in the New Year.   Many services will have permanent increased costs and will receive less income due to changes in working styles and use of office accommodation and changes in shopping habits – loss of parking income being one example with less commuters and shoppers in towns and cities, car parking bays used to widen streets to cope with social distancing.  There will also be increased social care costs due to the increased use of PPE, increased staff pay and more complex level of service delivery.  Councils will have lower tax bases due to less business rates and council tax being collected in light of Covid-19 which will need to be reflected in the overall quantum.

1.6.   Alongside this, the concentrations of business in cities like ours has meant that the negative impact of the pandemic has worsened the negative economic effect but, it is places like ours that make recovery and growth in the future imperativeCities like ours will be unable to fully support the recovery of our city and surrounding areas unless the financial crisis in local government is resolved.   It is imperative that Councils are put on a sustainable longer-term financial footing to support cities to not only deliver essential services but to support recovery, growth and deliver on the governments and local agendas.

1.7.   Whilst this is a significant ask of Government it is a very necessary oneLocal Government’s funding settlement must be on par with other essential services such as the NHS, it needs to be financially sustainableCouncils must have the tools and capacity to do the job that will be required in shaping the social and economic recovery to come and direct funding to support these efforts is essential. There needs to be a fair and sustainable cash injection of local government funding for essential service delivery and to deal with increasing unfunded pressures, alongside certainty of longer-term funding, rather than reactive windfall funding. 

  1. T.O.R.  What the impact is of another one-year spending review and a further delay to a multi-year settlement and the Fair Funding Review.

2.1.   Longer Term funding settlements support medium- and longer-term planning for Councils.  The CIPFA Financial Management code will be implemented in April 2021 and will require Councils to implement this level of planning.  It is recognised that longer term planning improves decision making and provides for the efficient use of resources.  However, one-year spending reviews and local government finance settlements make it difficult to plan for the medium and longer term.

2.2.   Delivering excellent services with diminishing budgets requires extensive planning to codesign new approaches with partners and residents, test and consult, and then commission effectively. Councils are beginning this process now for savings which are likely to be needed in 2022/2023. Capital projects generally also have at least a 2-year lead in time to enable effective design and procurement and can often be essential to delivery of revenue savings.

2.3.  Uncertainty around the quantum and nature of the local government settlement for 2020/21 onwards makes effective long-term planning more challenging. One-off funding announced only a few months before the start of a financial year in which it must be used has less impact than longer term planned funding. Financially responsible councils and their auditors will not rely on such one-off funding being provided in subsequent years and will therefore plan service savings as needed. Delayed and ad hoc settlements therefore hinder budget planning and can in some cases lead to cuts that might have been avoided if the same funding had been announced further ahead. Whilst additional funding for pressures is welcome, the certainty of longer term planned funding would avoid unnecessary service cuts being made because of the lack of certainty of funding levels from future settlements.

2.4.   Without the certainty of funding, Councils will be forced to make some very difficult and unpalatable decisions to cut services, spending on prevention support, or avoid investment that can save money elsewhere in the public sector.   If funding levels are known in advance, then these funding cuts or investment decisions could be avoided.   It is a false economy to cut prevention and absolutely the right thing to do to deliver that service – i.e. fixing roads or provide youth and family support -  but Councils may have no choice if it’s not statutory and Councils can’t guarantee there will be funding to deliver the service then it may have to be cut in order to balance the budget. 

2.5.                                                                                               Some might argue that reserves should be used, but reserves are a finite resource not a permanent solution to ongoing budget shortfalls.  Over the period of austerity Councils reserves have reduced considerably: in 2010 Liverpool had reserves of £170m and now has only £16m.  Rob Whiteman CEO of CIPFA highlighted at the SR and LGF Inquiry that it is a concern if Councils draw onto reserves too fully and that reserves should be reflective of the level of risk and at times of high risk should be increased.   Also, many reserves are earmarked for capital schemes and so can’t be used for other purposes. Some Councils have already used available reserves in this year to invest upfront in the pandemic so for next year and the medium term this is not going to be an option. 

2.6.   Councils can only borrow for Capital purposes and not to fund revenue costs unless there is a special capitalisation order given by government as a one-off measure.  We understand that some Councils may be in discussions with MHCLG in regard to this but again it is not a permanent solution for dealing with the ongoing effects of the pandemic.  In concluding on this subject Mr Whiteman said that the Sector needs to be properly funded and the sector needs the right resource base.

  1. T.O.R. The current financial situation of councils, how this has affected their ability to deliver services and the demand for services, including Adult Social Care.

3.1.   Councils have lost almost £15 billion in central government funding over the last decade, have had to deal with the impact of Covid-19, increasing demand and cost pressures whilst transforming service delivery. It has been made clear with the challenges facing Councils in setting balanced budgets that the current established funding levels for local government is simply inadequate, despite recent settlement improvements. This is particularly true of adult and children’s social care with rising demand and unprecedented cost pressures.   Before the pandemic in 2019 the LGA predicted an overall funding gap of £3 billion by 2020 rising to £8 billion by 2025 – this figure could now be higher.

3.2.   We have had additional costs of PPE, increased staff pay in social care and more complex levels of service delivery but we are also receiving significantly lower levels of income from fees and charges, business rates income and less council tax being collected as more residents claim support.

3.3.   We have highlighted the difficulty in funding preventative and non-statutory spend due to the level of cuts faced by local government over the last 9 years and the current and future funding gap forecast by the LGA and further evidenced by the National Audit Office.  This means there is little funding left for preventative services and some councils having difficulty providing the statutory minimum level of service leaving little scope to deliver further cuts.  Yet councils are still being faced with having to find further cuts when they have higher demand for statutory services and increasing costs, even before the impact of the COVID-19.

3.4.   Any further cuts in funding or cash flat settlements across the CSR period will result in services becoming unsustainable and likely to put local councils at real risk of financial failure and issuing section 114 notices putting vulnerable people at risk. This will be further exacerbated if Councils aren’t fully funded for the additional costs in relation to the COVID-19 pandemic. A sustainable settlement is needed, alongside other freedoms will help to support Councils in the short/medium term.

Key service and financial impacts include:

  1. T.O.R. The approach the Government should take to local government funding as part of the 2020 Spending Review and what the key features of that settlement should be.

4.1.   Whilst additional funding to support Local Government during the pandemic has been welcomed there is still more that needs to be done to fund the ongoing costs of Covid-19, to provide local government with a solid foundation for recovery and enable councils to continue to deliver essential services for our communities.  We have highlighted the key features of future settlements that would help to achieve this below.

Key features of the settlement

 

 

November 2020