Local councils face a Covid-19 cash crisis – and it’s about to get ugly

The Local Government Association says £6bn is needed just to keep the show on the road as its members prepare emergency budgets after years of neglect, writes James Moore

Northamptonshire County Council had commissioners sent in after a huge overspend emerged (PA)

Local government finance is a bit like a sore tooth. It’s something people typically choose to ignore until they wake up one morning and find themselves in so much pain that they need a shot of morphine and a swift trip to see an emergency dentist for a surgical procedure.

Council taxpayers might be about to find out just how painful that surgery is going to be. Local authorities were in a precarious financial position before the novel coronavirus landed on these shores.

According to the Local Government Association (LGA), the extra Covid-19 costs and losses of income incurred by councils in March, April and May, amounted to £3.2bn in England. This has been covered by two tranches of emergency funding provided by central government. But they could require as much as £6bn more to cover the costs of coping with the coronavirus pandemic through the course of the current financial year.

Almost two thirds of that additional funding is needed to cover lost tax income, from council tax and business rates, and from sales, fees and charges. When the town centre is shut, you’re not making any money from, say, car parks. Leisure centres are closed, but they have to be maintained, and there are no entry fees. And it goes on like that.

Councils are required to balance their budgets every year, but according to the BBC at least five English councils have warned they may meet the criteria to issue a section 114 notice, which basically amounts to their declaring bankruptcy. It also highlighted a shortfall at Highland Council in Scotland equivalent to £411 for every resident.

The LGA simply says that “many” councils will have to take measures in anticipation of future funding shortfalls. This could mean in-year cuts to vital local services that are supporting communities through the crisis and thus assisting with the national effort to beat a deadly disease.

If the notices are issued things could quickly get messy. Imagine multiple situations like the one that occurred at Northamptonshire County Council, which had commissioners sent in to oversee it after a huge budget shortfall emerged. Cuts, jobs losses and council tax hikes followed.

Debt campaigner Joel Benjamin, who was a leading figure in the exhaustive Citizens Audit of Newham Council, which looked into its disastrous involvement with controversial Lobo loans, says councils have borne the brunt of ten years of cutbacks. They have been left hollowed out.

Some experimented with instruments like Lobos, a complex form of debt financing that initially looked cheap but gave the lender the option to fix the interest rate at levels of their choosing further down the line, investments and commercial ventures, to plug the gap. But councils are not well equipped to run commercial entities, play the markets, or go toe to toe with city bankers. It shouldn’t, therefore, come as a surprise that some of them tripped up.

Their current problems are exacerbated, Benjamin says, from their never knowing until start of the year how much cash they will receive from central government, meaning they can’t effectively budget for the long term.

“Covid has exposed the inadequacies of the UK’s governance model where politicians in Westminster think they can dictate what is best to Liverpool, Glasgow and Cardiff, without any grasp of on the ground realities,” he says, and it’s hard not to sympathise with that viewpoint.

Benjamin criticises what he sees as the Tory government’s “ideological hatred” of local government, and its preference for a command and control model run out of Whitehall.

I imagine that James Jamieson, the Tory chairman of the LGA, would dispute the last point. But Jamieson nonetheless has an uncompromising message for the Westminster government: “Councils have led local communities across the country through the coronavirus crisis. They are working all day and night to protect the most vulnerable, support local businesses and try and keep normal services running.

“As a result, they continue to face increased cost and demand pressures as a result of Covid-19 at the same time as seeing a significant drop in income that they rely on to fund services. This is unsustainable.”

So, yes, that toothache. It’s about to flare up. Local government has an abscess. Maybe it needs the bins standing uncollected, or the local swimming pool closing down for good, or the end of the library service or, well, take your pick to wake people up to what’s going on..

There will inevitably be something councils provide that you value and rely upon, and that’s suffered years of economic neglect, even if you don’t know it. Covid-19 means you soon will. The pigeons are coming home to roost.