Written evidence submitted by the County Councils Network [FSS 008]

 

I am writing on behalf of the County Councils Network (CCN) with regard to the inquiry you are holding into Local Authority Financial Sustainability and the Section 114 Regime.

In responding to the terms of reference for this inquiry, CCN would like to specifically draw your attention to the submission from the Society of County Treasurers (SCT), whose membership is made up of Section 114 officers within CCN member authorities. We endorse the submission by the SCT and would ask the committee to engage extensively with the SCT given their technical expertise and knowledge in the areas the committee is investigating.

Alongside the SCT response, we would like to make some overarching points that add to the points raise in their response.

Ensuring financial stability and balancing budgets is a legal obligation of councils, but this has often been difficult to achieve because of matters beyond the control of our members. Alongside the Local Government Association (LGA), CCN has led the way in highlighting the financial challenges facing local government, and specifically county authorities. Previous inquiries by this committee have drawn extensively on the research we have published in this area, including the Independent Review of Local Government Spending Need and Funding conducted by PwC for CCN.[1]

Concern about financial stability was most recently highlighted the results of the Budget Survey that we published last November.[2] Ahead of the Spending Review and Provisional Local Government Settlement 2021/22, this showed that only one in five CCN member councils were confident they could deliver a balanced budget next year (2021/22) without ‘dramatic’ reductions to services. Looking further ahead, -four in five CCN member councils (86%) were not confident they could deliver a balanced budget from 2022/23 onwards without dramatic reductions to services. This demonstrates that the medium-term financial picture for councils remains extremely challenging.

The underlying factors leading to this lack of confidence are well document by the sector, and explored at length in CCN’s recent submission to the Treasury ahead of the Spending Review.[3] Chief amongst these were the estimated funding shortfalls resulting from a decade of funding reductions at a time of rising demand for services. Our submission to the Comprehensive Spending Review set out that our member councils face an underlying cumulative funding gap (excluding the impact of COVID-19) of £6.5bn between 2021/22 - 2024/25.

 

Alongside sustainable funding, CCN have long argued that county and unitary councils have also been disadvantaged by the distribution methodology for grant-based funding, inhabiting their ability to be financially sustainable. The Independent Review of Local Government Spending Need and Funding by PwC identified the level of ‘unmet need’ within county areas, which amounted to £1bn in 2015/16. This demonstrates that county authorities have historic spending needs that have not been recognised in funding allocations and their expenditure.[4]

 

In addition to this, 2020/21 has witnessed unprecedented financial challenges for councils as a result of the COVID-19 pandemic. Our Budget Survey showed that council tax deficits caused by the pandemic were the single biggest factor driving concerns over the ability of our councils to balance budgets next year, closely followed by continuing unplanned expenditure due to COVID-19.

 

There are a number of key steps that we think the government could take to ensure stability within the local government sector and improve the financial resilience of CCN member councils.

Firstly, looking to 2021/22, the recent Local Government Finance Settlement (LGFS) does provide some certainty by ensuring a roll-over of all existing grants for councils alongside some resources to meet the underlying pressures on council budgets that pre-dated the impact of COVID-19. Our engagement with councils indicates that the proposals will improve confidence levels in being able to set balance budgets next year, however this will not prevent councils still having to implement reductions to services..

The Government are right to recognise that COVID-19 expenditure pressures would continue into the next financial year, including ‘legacy cost’ arising from embedded pressures such as higher provider fees in social care. The £1.55bn provided allows councils to plan their budgets for the next financial year and meet additional costs. Moreover, CCN supports the introduction of the Local Tax Income Guarantee scheme.  It will provide essential support to local authorities suffering losses in tax income in 2020-21.  Whilst we would prefer full compensation for tax income losses, the 75% compensation rate is reasonable and means that the majority of the tax losses will be funded by central government rather than the local taxpayer. 

 

While these measures provide some certainty and stability for the next financial year, at the time of the provisional local government settlement it was not known that a new national lockdown would be introduced; one in which it’s likely to result in severe social and economic restrictions for the remainder of this financial year and into next, with particular implications for CCN member councils. We expect costs for the remainder of 2020/21 to rise at a steeper rate than previously estimated in December’s Delta return, potentially widening the gap between estimated costs and financial support provided by government.

 

The Government states in the consultation on COVID-19 funding and support for 2021/22 that councils should ‘plan on the basis of not receiving any additional funding’ beyond that announced at the Spending Review.

 

However, CCN continue to maintain that the government should meet all costs incurred as a result of the pandemic, and in light of the latest lockdown, Government will need to be prepared to provide further grant funding to support member councils in the final three months of this financial year. It will also need to reconsider whether the £1.55bn is sufficient to meet costs during the first quarter of 2021/22 and higher legacy costs caused by the latest wave of the pandemic.

 

In considering further funding for the current financial year, and also planning for costs incurred in 2021/22, Government will need to carefully consider the fairest approach to distribution that reflects current rates of infections and thus increased council costs.

 

Moreover, the government has set out how it aims to ensure that councils are compensated for local business rates and council tax income, but given the high level of reliance of CCN members on council tax as a source of income, this will need to be kept properly under review to ensure that lost-income schemes operate as intended; with our response to the Provisional Settlement 2021/22 outlining that the compensation scheme for lost council tax could potentially be less generous than first anticipated.

 

Secondly, it is critical that this year’s provisional local government settlement is the last one-year settlement. While the immediate course of the pandemic remains uncertain over the first quarter of 2021, including the financial implications for councils, the roll out of mass vaccinations should enable long-term planning by the Treasury and a full three-year spending review to take place.

The Spending Review must seek to address the aforementioned underlying funding pressures facing councils through a long-term funding envelope which genuinely meets the financial pressures on councils. Although this year’s settlement has improved the confidence of our councils in balancing Budgets, as highlighted above, 86% of our member councils at the time of latest survey were not confident they would be able to so in the absence of dramatic reductions in 2022/23.

CCN are currently in the process of updating our spending need and funding gap projections with PriceWaterhouseCoopers (PwC) to inform the Spending Review. We would also point out that resolving the financial challenges facing councils will be closely linked to proposals on the future funding of adult social care, which the government have committed to publish later this year. CCN is undertaking a dedicated programme of work to support the development of these proposals,[5] and we urge the government to engage in forthcoming reports by Newton Europe and Demos on the reform as they develop these critical proposals.

In the longer-term, we would draw the attention of the committee to the fact that CCN councils are the lowest funded councils and have long argued that the current way of distributing resources is out of date and unfair.

CCN and its members have long called for the completion of the Review of Relative Needs and Resources. The final stages of the FRR development and implementation by MHCLG has now been subject to two significant delays, firstly as part of the Spending Round in 2019, and again in April 2020. In both instances, CCN has expressed its disappointment, but the provision of only a one-year settlement, and subsequent scale of the coronavirus impact on council finances, meant delays to the reforms were necessary.

The Review of Relative Needs and Resources has made considerable progress under previous administrations, with CCN responding to the consultation in 2019, setting out our support for the direction of travel. An immense amount of work has gone into ensuring this much-needed reform progressed, with all councils agreeing that the current method of funding councils is wholly out of date.

 

However, as we come out the other side of this Covid-19 crisis, CCN believe that the government must again renew their commitment to proceed with the review at pace. Our member councils remain united on the need for the government to ensure resources are distributed fairly between councils, which recognises the historical under-funding of our member councils, higher costs of delivering services in rural areas and enable fairer council tax levels across the country.

 

Equally important is wider reforms to local government finance. Councils should be able to be given greater freedom to determine their own financial response to financial challenges. CCN have for a number of years called for the council tax referendum threshold to be abolished, or at the very least raised above the current rate of 1.99%. We would also welcome a full range of fiscal devolution measures that will widen the options open to councils and also give them greater freedom to influence economic activity in their areas. This need to be accompanied by reform of the New Homes Bonus and consideration of alternative funding arrangements to the proposals to extend business rates retention.

 

Please do let us know if there is any further information that you would find helpful with this inquiry.

 

 

January 2021

 

 

 


[1] http://www.countycouncilsnetwork.org.uk/download/2262/

[2] http://www.countycouncilsnetwork.org.uk/download/3252/

[3] http://www.countycouncilsnetwork.org.uk/download/3248/

[4]PwC (2019) - Independent Review of Local Government Spending Need and Funding (Technical Report)

[5] https://www.countycouncilsnetwork.org.uk/new-paper-outlines-counties-four-main-themes-to-guide-social-care-reform/