Councils at risk of financial failure in wake of pandemic, watchdog warns

Calls for ministers to meet coronavirus-related costs ‘in full’

A number of councils are at risk of financial failure after the coronavirus pandemic delivered a £9.7bn hit to local authority finances, Whitehall’s spending watchdog has warned.

The National Audit Office (NAO) said support from the government last year had managed to avert a “system-wide” crisis.

But council finances remained a “cause for concern”, with many potentially forced to cut services yet further to balance their books, following years of austerity-related reductions.

In response the Local Government Association (LGA) called on ministers to meet the costs incurred by councils because of the pandemic in full.

The chair of the LGA, James Jamieson, said: “The government has provided a significant financial package of support so far to help, but the ongoing financial impact and unpredictability of the pandemic means this support must be kept under review.

“Public finances are undoubtedly under huge strain, but investment in our local services will be vital for our national economic and social recovery.”

The NAO said the pandemic had cost councils an extra £6.9bn last year. They are forecast to lose a further £2.8bn in lost income and revenue streams.

Ministers have so far given councils £9.1bn in support designed to offset their increased finance pressures, but there are warnings that still leaves a “funding gap” of £605m.

“Many authorities still need to take further steps to balance their 2020-21 budgets,” the NAO said. “A combination of high reported funding gaps and low reserve levels means that some authorities are at risk of financial failure.”

The watchdog has classed just over 1 per cent of councils as at “acute risk”. But almost 6 per cent are high-risk, with more than one in four, 27 per cent, at medium risk.

Local authorities are also likely to face “significant” financial pressures over the next year, with many likely to see a reduced tax base and increased service demands as the wider economy recovers from lockdown.

Gareth Davies, the head of the NAO, said: “Government’s support to local authorities during the Covid-19 pandemic has averted system-wide financial failure.

“Nonetheless, the financial position of the sector remains a concern and authorities are setting budgets for 2021-2022 with limited confidence.“Authorities’ finances have been scarred and won’t simply bounce back quickly.

“Government needs a plan to help the sector recover from the pandemic and also to address the long-standing need for financial reform in the sector.”

Meg Hillier, the chair of the Commons Public Accounts Committee, said: “Local authorities were already overstretched and now, with reserves depleted, many will have to slash service budgets to balance their books. Local authorities aren’t out of the woods yet.

“Government must enable them to continue delivering vital services in the coming years, when they will be sorely needed.”

A spokesperson from the Ministry of Housing, Communities and Local Government said: “As the NAO acknowledges, the government acted swiftly and flexibly to ensure councils continued to deliver vital services throughout the pandemic.

“Councils continue to play a critical role and we have committed over £35bn to help them support communities and local businesses during this time.”