Richard Derecki: The grim reality of London boroughs’ finances is becoming clearer

Richard Derecki: The grim reality of London boroughs’ finances is becoming clearer

As London’s councils move into the recovery stage of their response to the coronavirus pandemic, the grim reality of the financial pressures they now face is becoming clear. Without a significant bailout from central government, the years of austerity-led cuts will continue long into the future and boroughs will struggle to support their local economies and communities. 

Across the capital – and much of the rest of England – boroughs are now setting out the budgetary implications of the Covid-19 crisis on their income and expenditure. Their leaders had hoped central government would stand behind them for all expenditure incurred and income lost during the crisis, but the message from communities secretary Robert Jenrick has changed from “we stand shoulder to shoulder with local government…to make sure they are supported so they can continue to support their communities through this challenging time” to a rather more bleak assertion that “we wouldn’t want anyone to labour under a false impression that what they [councils] are doing will be guaranteed funded by central government”. Councils can feel the rug being pulled from under their feet. 

They are facing financial pressures across a number of fronts. Their assessments are, in general, being based on an assumed three month lockdown followed by a three month recovery period, which might be optimistic. The current assessed gross cost to councils is made up of two elements: lost or reduced income and specific expenditure pressures. Councils believe the income pressures are probably going to be greater in magnitude than expenditure costs, with income falling away immediately while expenditure pressures are playing out over a longer time frame. 

Major concerns include the impact on business rate and council tax collection rates, the loss of income from fees and charges (particularly parking charges) and  from leisure centres, planning fees and commercial rents. On the expenditure side, councils are going through each department’s spending lines to see where Covid is having an impact. Additional expenditures have been needed to set up community hubs to support the vulnerable across adult and children’s social care, those who are homeless, PPE costs, increased costs for mortuaries, cemeteries and coroner costs to name but a few. 

The gross impact is eye-watering: Hillingdon estimates £14 million in lost revenue and £15 million in extra expenditure; Wandsworth calculates loss in income of up to £24 million and up to £16 million in additional expenditure; Kensington & Chelsea (RBKC) thinks it will face some £33 million in revenue losses and £11 million in extra expenditure.

The true pressure on council budgets is, however, even greater than the estimates of the immediate impact of Covid. Many boroughs are also making assessments of the financial consequences for them of likely long-term local economic impacts in their areas. Hackney, for example, estimates that the total full year provisional funding pressure could be around £70 million, before accounting for central government support; for Camden the figure could be over £80 million.

In response to the crisis, national government has announced two packages of emergency funding for local government, at the end of March and in mid-April, each worth £1.6 billion across all local authorities in England. Of these tranches, London’s shares were £254 million and £245 million respectively, which meant on average each London council getting around £8 million and £7 million, with individual allocations varying according to the formula used.  

There have been other pots of money made available which are ring-fenced for specific purposes, including a £500 million national hardship fund to help reduce Council Tax bills, business grants and business rates relief, and some promised help to support care homes.  Councils are also hoping the government will make some provision for income they have lost across their own housing stock through residential rent areas for example, but there has as yet been no announcement of this. 

Directors of finance are pulling all these figures together to try and make some initial assessment of the net full year financial gap they will face. Estimates vary, but they are in the tens of millions of pounds: Harrow could be facing a £20 million-plus shortfall and Enfield over £40 million. Reflecting the general mood Hounslow Council noted that, “Government income is not covering Covid-19 related costs. Ad hoc emergency funding from central government is not enough to offset the major costs and loss of income the council will incur as it responds to the Covid-19 pandemic. Our on-going recovery…needs a different, sustainable funding model.”

Furthermore, councils were already planning to deliver savings in order to reach medium-term financial targets to balance budgets. Bromley, for example, was looking for savings of £9.2 million in 2020-21, rising to £23 million per annum by 2023-24, RBKC was looking for savings of £17 million in 2021-22 and a further £8 million the year after. The stark reality is, as noted in Bromley’s Covid recovery report to its executive, “If these savings are not fully delivered the budget gap increases by a corresponding amount and alternative savings would have to be delivered, in addition to savings yet to be identified to balance the budget for 2021-22 and future years”.

To close immediate budget gaps many boroughs will have to draw on their reserves. Those with sizeable ones, such as Hillingdon with £37.5 million at present, should be able to plug the gap for this year, though no council will want to run its reserves down to zero. However, others will find this impossible. Lewisham’s the outstanding financial gap is currently estimated at £20.2 million, which is slightly more than all the unallocated reserves the council holds. Likewise for Kingston, where the level of the general fund balance as at March 2020 provides “insufficient cover for the additional costs in the immediate short-term and would leave the council exposed to significant future financial risk”. 

The stark reality is reflected in Greenwich’s financial report that if “the government does not provide the additional funding [beyond that already allocated] it follows that the council would need to consider the extent to which it stops expenditure on non-essential work across both the revenue and capital budgets…[and] review the cost of all non-essential services to assess what savings could be made…”

Unless there is some bold thinking going on at the Ministry of Housing, Communities and Local Government and Her Majesty’s Treasury to find ways to bring some long-term sustainability to their finances, the ability of councils in London, as elsewhere, to help local businesses and communities lead a grass-roots recovery will be severely limited and the salami slicing of funding to so-called non-essential services will continue. 

Richard Derecki is an economist and governance expert who has worked for the 10 Downing Street strategy unit and the Greater London Authority. Follow Richard on Twitter.

OnLondon.co.uk is committed to providing the best possible coverage of London’s politics, development, social issues and culture. It depends on donations from readers. Individual sums or regular monthly contributions are very welcome indeed. Click here to donate via PayPal or contact davehillonlondon@gmail.com. Thank you.

  

Categories: Analysis

Leave a Reply

Your email address will not be published.