Councils will need further financial support
*Thoughts and opinions represented in this article don’t represent my opinions of the finances of the council I’m a member of in particular. Just Councils in general. Figures used are for a fictional council*
The new Coronavirus is affecting all aspects of life, not least councils. Councils are at the heart of the effort to halt the spread of Coronavirus and give support to the vulnerable. This comes at a cost.
It cannot simply stop operating, sends its staff off on furlough and claim Government support. Councils will have to shut some of its core services such as parks, sports centres and theatres but the majority of services have to keep rolling on. It is good that local government remains resilient, but we cannot pretend its business as usual.
Councils derive most of their income through council tax. You can produce a very simple council tax revenue forecast through the following equation:
Here the tax base is just the amount of council tax payers and the tax rate is the band D tax value. So an example tax revenue would be 100,000*£2000=£200m.
Obviously this isn’t an exact number but its close enough to reality for it to be an acceptable value. In order to keep the tax revenue increasing over time you need to be increasing both. It increases the tax base through allowing more homes to be built in its boundaries, a target normally given by the government (here we assume 1000 homes a year) and by increasing the tax rate yearly normally by 2% or £5. So over a normal 20 year time period you might expect to see something like the below happening.
The current Covid-19 situation is almost definitely going to cause a recession. This will mean less new housing demand and less new supply of housing. We can introduce this to the model. We say that today (year 4) there is no change in housing, then in year 5 housing continues to increase at 1000 homes pa. This could be called the “V” shaped recovery. We could also use a differerent approach in which there is a gradual return to house building. This is the “nike swoosh” shaped recovery. Council tax goes up as normal in both cases.
The results, and resulting deficits are shown here:
The main takeaway is that year to year you get a deficit of just under 1% in the first scenario and a deficit of between 1.7% and 1.45% in the second (relative to the non-covid scenario).
This alone is not a problem in the long term, if the spending is lower than or equal to the revenue (or financed through borrowing). It will likely mean a lower provision of services than what may have been possible before. But in the short term, trying to finance a surpise fall in income will not be easy.
You can also introduce emergency council tax support to those who are on low incomes. There will always be some who need support, but here these people are an extra increase. You can use two similar scenarios where there is a one period increase or an increase which falls gradually.
Here we see larger cumulative deficits and these deficits as a percentage of the no impact income spike at 5.92%. This is much harder to deal with for local authorities. Thankfully the government’s £500m Hardship fund will help solve some of this problem, I’m not sure whether it will be enough.
Besides tax revenue, service revenues will also collapse. Councils take in income from car parking charges for example. These will essentially run to zero. Where councils own property, they likely won’t be collecting rent from them, so these assets become non-performing. So across all parts of the balance sheet there will be further pressure. This is before you’ve even thought about the funds the council has in financial assets, many of which will have lost value through the last few months after markets crashed.
The Government has increased funding for Councils. This was announced earlier in the year before the scale of the crisis had been quite realised. It then allocated further funding for care. This is of course very good at coping with the initial problems, but as of yet doesn’t affirm support for the future.
It may bring in a new era of council financing. Recently the UK Municipal Bonds Agency launched its first bond, £350m of floating rate notes due 2025 guaranteed by Lancashire County Council.
America is no stranger to muni bonds, with a market worth $3.8trn there is appetite in markets for these fundraising tools. Sweden also has a developed municipal bond market, which is given the highest possible credit rating by S&P/Moodys.
Both of these countries have a far different approach to each other and the UK regarding Local Government, but it does prove that there are other ways of doing it.
Local Government will have to be a strong voice when asking for more funding. Communities cannot go through another period of austerity, there is barely anything left to cut. If the Government fails them, they should be more willing to explore other innovative methods of funding.
