LAI0013

Written evidence submitted by County Councils Network (CNN)

1. I am writing in my capacity as the Chair of the County Councils Network (CCN). CCN represents 36 county and county unitary authorities in England, working on behalf of the largest councils in England. Our councillors collectively represent 26 million residents across 86% of England’s landmass, and deliver high-quality services that matter the most to local communities.

2. I understand that as part of your evidence session on Local Authority Commercial Investments you will be taking the opportunity to question Ministry of Housing, Communities & Local Government (MHCLG) officials about the impact of Covid-19 on local authority finances. I thought it would be helpful if I updated you on the scale of the specific financial challenges facing CCN member councils as a consequence of COVID-19.

3. As your Committee may be aware, in April MHCLG launched a data collection exercise to capture on an on-going basis the costs and financial liabilities faced by local authorities as a result of the COVID-19 pandemic. The first ‘DELTA’ returns were completed in April, with the second data capture for May expected to be launched in the coming days. April’s returns were used to inform the Government’s decision to provide councils with an additional £1.6bn on 18th April, while also informing the subsequent decision on how to distribute these resources between councils, announced on 28th April.

4. Using DELTA returns for April, and wider on-going research by the CCN on the financial implications of COVID-19, we believe that there are four key challenges to local authority finances resulting from Covid-19:

1. Cost pressures – based on the data provided to MHCLG, our member councils initially estimate they will incur additional cost pressures of £1.3bn across all services. Over 70% of additional COVID-19 cost pressures for CCN member councils are within social care, covering areas such as: purchasing personal protective equipment (PPE); extra staffing and arrangements to support discharge from hospitals; purchase of extra places from the independent care sector; and premia paid to the independent care sector for the COVID-19 costs they incur. It should be noted that all of these will be contractual arrangements and spend will take place over the period of the contract not up front although we are paying most suppliers in advance on a monthly basis.

2. Lost income from non-tax-based revenues – in 25 of CCN’s 36 member council areas, the majority of fee paying services, such as car parking and leisure services, are operated by district councils. Nonetheless, loss of non-tax-based income streams still represents a significant financial burden for all our member councils. Based on initial estimates contained in the DELTA returns, our members estimate lost income from fees, charges, commercial and other income of £617m.

3. Loss of council tax and business rates income – lost income from business closures and from individuals unable to pay council tax is potentially the biggest financial liability facing CCN member councils. As the lowest funded type of authority, our member councils are disproportionately reliant on council tax as a source of our income and therefore are most exposed to a significant drop in payment rates.

3.1       Any estimates at this stage on the potential loss of income from council tax and business rates will be dependent on a range of assumptions regarding the rate of non-payment of council tax due to economic hardship and the impact of the lockdown on economic activity and business survival rates. This will need to be monitored on a monthly basis based on data from billing authorities. For this reason, DELTA returns will not currently provide a full picture on the potential financial liabilities coming as a result of non-payment of council tax and business rates. This is particularly the case for county councils, with 13 county councils unable to provide an estimate in the April returns.

3.2       However, based on initial analysis on the potential scale of lost income in 2020/21 resulting from a 20% reduction in council tax payments and a 10% reduction in retained rates, CCN member councils could face a shortfall of £2.4bn in these funding streams.[1]

3.3       There will be both a short and medium-term impact on council budgets from a reduction in income from council tax and business rates on this potential scale. In the short-term, non-payment of council tax could reduce the income of our unitary members, resulting in severe cashflow challenges. In two-tier local authority areas, where district councils are billing authorities, a drop-in collection rates could result in district councils not passing on precept payments to upper-tier councils, again resulting in short-term cashflow challenges. Over the course of 2020/21, and into 2021/22, significant non-payment of council tax and a reduction in retained business rates would present fundamental challenges for the financial sustainability of all councils.

4. Lost savings and existing budget shortfalls – any assessment of the financial impact of COVID-19 on the sustainability of council finances must recognise pre-existing funding shortfalls and the subsequent impact of the crisis to deliver savings programmes.

4.1       As part of their budget setting process for 2020/21, councils would have set out the savings programmes they would need to enact to ensure that their finances balance across the year. Independent research carried out by PwC and Pixel Financial Management for CCN suggests that for the 2020/21 financial year, CCN members already had a projected shortfall in funding of £1.8bn. We believe that councils’ ability to enact the savings programmes needed to balance the projected shortfall of £1.8bn will be hampered by their focus on responding to COVID-19, with the result that councils will either face further financial difficulties or will need to cut services.

5. To date, the Government have provided £3.2bn in emergency additional funding for local government. Alongside this, they have announced further ‘cashflow’ measures by bringing forward the payment of social care grants for upper-tier councils, totalling £850m and the deferral of payments for the central share of business rates, totalling £2.6bn.

6. CCN has strongly welcomed these announcements by the Government. The share of the additional funding distributed to CCN members – amounting to some £1.167bn - will help counties respond to the challenges of battling COVID-19 and its impact on our communities, while continuing to deliver essential services our residents rely on at this challenging time.

7. However, it still leaves our councils facing an immediate funding shortfall of at least £617m from service pressures and lost income from fees, charges and other streams – a figure that will rise over the duration of the outbreak. Moreover, our councils have the largest financial liability from potential lost income from non-payment of council tax and business rates.

8. Government have committed to keep our resources under review and will continue to monitor expenditure and financial liabilities through further DELTA data collections. CCN welcome this and are actively supporting the department in gathering a detailed understanding of on-going financial challenges.

9. However, it is becoming increasingly clear that one-off injections of resources and unspecified further commitments does not provide the necessary guarantees and reassurances required to prevent some councils under severe financial challenge having to issue a section 114 notice - which would suspend all non-essential expenditure.

10. In announcing the allocation of the second tranche of funding, Ministers outlined that district councils had received a higher share of the funding to compensate their lost income and prevent financial instability for these councils. Having provided one part of the sector with support in meeting lost income, it now incumbent on the government to provide similar support to all councils.

11. Without further support and financial guarantees, it’s inevitable that the resources in shire counties made available to life-critical social care services will be reduced, resulting in extremely difficult choices facing our member councils. Most importantly, some may feel that they have no choice but to suspend all non-essential expenditure through the issuing of a section 114 notice. This would hamper our national efforts to defeat the Coronavirus and prepare for the role in the economic recovery that businesses and the wider community would expect councils to play.

12. We hope that this will be helpful to you and your committee as you consider this issue in your evidence session with MHCLG officials. Please do not hesitate to contact me if there is any further information we can urgently provide you with.

May 2020