Martin Wheatcroft – Page 33 – Advisor and author on public finances, business strategy and financial communication.

OBR: Pandemic worsens long-term outlook for public finances

20 July 2020: The Office for Budget Responsibility suggests tax rises or spending cuts of more than £60bn a year may be needed if the UK public finances are to be put onto a sustainable path.

The Office for Budget Responsibility (OBR) has reported that the public finances are unsustainable over the next 25 to 50 years, given expected levels of economic growth and pressures on public spending from more people living longer. Fiscal risks have also increased significantly with two ‘once-in-a-lifetime’ economic shocks occurring in just over a decade.

Without action to increase taxes or cut spending over the next few decades, the OBR projects that the gap between receipts and public spending before interest will widen from around 1% of GDP in 2019-20 to between 10% and 15% in 2069-70, depending on how quickly the UK recovers from the coronavirus pandemic. Public sector net debt could increase to between 320% of GDP and 520% of GDP, based on the assumptions made.

The OBR has highlighted how the coronavirus pandemic has not only worsened the immediate prospects for the UK and global economies, but ‘economic scarring’ will permanently damage the expected level of tax receipts over the next 50 years. The vulnerability of the public finances to potential future economic shocks has also increased significantly.

The OBR believes that a V-shaped economy is still possible, but this is now considered to be an upside scenario, with the OBR’s central scenario based on a much slower recovery from the pandemic. The downside scenario takes even longer for the economy to recover.

Economic activity, as measured by GDP, and tax receipts are both expected to be lower in all scenarios than in previous forecasts.

Prospects for the public finances in the current financial year have continued to deteriorate with the OBR now forecasting a fiscal deficit between 15% and 23% of GDP, with a central scenario of £372bn (19% of GDP). This reflects a total of £192bn in fiscal interventions in 2020-21 announced by the Government to date to support the UK economy through the pandemic.

The OBR projects that in its central scenario the gap between receipts and expenditure excluding interest will widen to almost 13% of GDP by 2069-70 if no actions are taken, equivalent to almost £300bn in 2019-20 terms. With much higher levels of debt, and interest rates likely to be higher in the medium to long-term, this could cause the fiscal deficit to increase to over 30% of GDP in 50 years time.

The OBR has calculated that ‘fiscal tightening’ in the order of 2.9% of GDP (£64bn a year) would be required based on a target level for public sector net debt of 75% of GDP. This is subject to a number of fiscal risks, including that no further significant changes are made to the planned profile of spending on health and social care – a key source of policy risk.

Closing this gap could require potentially very significant levels of tax increases or cuts in public spending, especially if difficult decisions, such as on how to fund social care, continue to be deferred.

Martin Wheatcroft FCA, adviser to ICAEW on public finances, commented: “The Office for Budget Responsibility has yet again assessed the public finances and concluded that they are not sustainable, even before taking account of the eye-watering levels of borrowing being added to the national debt as a consequence of the coronavirus pandemic.

Although we should expect tax cuts and spending increases in the immediate future as the Government looks to provide stimulus to the economy, the need to reduce the gap between tax receipts and public spending over the medium- to long-term means that tax rises or further cuts in public spending are likely in the years to come.

Despite this, there are actions that could be taken to improve the outlook for the public finances by developing a long-term fiscal strategy to put the public finances onto a sustainable path.”

Table 1 – OBR projections for the public finances: central scenario

CENTRAL SCENARIO	2019-20 % OF GDP	2020-21 % OF GDP	2024-25 % OF GDP	2044-45 % OF GDP	2069-70 % OF GDP
Receipts excluding interest	36.1	36.3	36.6	36.6	36.4
Expenditure excluding interest	(37.2)	(54.4)	(40.3)	(43.9)	(49.1)
Primary deficit	(1.1)	(18.1)	(3.7)	(7.3)	(12.7)
Net interest	(1.5)	(0.8)	(0.9)	(6.2)	(17.8)
Fiscal deficit	(2.6)	(18.9)	(4.6)	(13.5)	(30.5)
Public sector net debt	(88.5)	(106.6)	(102.1)	(173.7)	(418.4)

^{Source: OBR, ‘Fiscal sustainability report July 2020’. 2020-21 amounts adjusted for £50bn (2.5% of GDP) of additional fiscal interventions announced on 8 July 2020. Subsequent periods not adjusted.}

Table 2 – OBR projections for the public finances: upside and downside scenarios

DIFFERENCES FROM CENTRAL SCENARIO	2020-21 % OF GDP	2024-25 % OF GDP	2044-45 % OF GDP	2069-70 % OF GDP
Upside scenario
Primary deficit	3.6	2.1	2.2	2.3
Fiscal deficit	3.6	2.2	3.8	6.5
Public sector net debt	9.3	14.1	45.7	98.2
Downside scenario
Primary deficit	(4.3)	(2.2)	(2.3)	(2.4)
Fiscal deficit	(4.3)	(2.2)	(3.9)	(6.9)
Public sector net debt	(9.1)	(14.5)	(47.9)	(103.5)

^{Sources: OBR, ‘Fiscal sustainability report July 2020’; ICAEW calculations.
Positive differences = lower deficit or lower debt in percentage points of GDP; (negative) differences = higher deficit or higher debt.}

This article was originally published by ICAEW.

NAO reviews government support for exports

20 July 2020: National Audit Office gives a moderately positive report on government support provided to UK exporters.

The National Audit Office (NAO) has issued a report scrutinising the Department for International Trade (DIT) and UK Export Finance (UKEF) strategy for supporting British exports. These amounted to £701bn of goods and services in 2019, equivalent to 31.7% of GDP.

The UK Government’s ambition is to promote industrial growth by increasing exports from 30% to 35% of GDP, with DIT and UKEF expected to play a key part in achieving this goal. This is part of the overall ‘Global Britain’ strategy for the UK economy following the UK’s imminent departure from the European Union.

The NAO’s last report in 2013 concluded that the then ambition of increasing exports to £1tn by 2020 (which was not achieved) would require better coordination between the Foreign & Commonwealth Office and UK Trade & Investments (now part of DIT) and the setting of tough, measurable milestones. It makes the same point in this report, with better coordination required between DIT, UKEF and other government departments if the export strategy is to be achieved.

In 2018, DIT set out its initial strategy for increasing exports but the NAO says that it will need to be kept up to date to ensure long-term value for money. In particular, the strategy will need to adapt depending on the trade arrangements in place after the UK leaves the EU Single Market and Customs Union at the end of the year, as well as addressing the impact of the coronavirus pandemic on UK and global trade.

DIT is focusing on around 230,000 businesses with turnover greater than £500,000.

The NAO criticises the evidence underlying the strategy to increase exports to 35% of GDP, saying it is not clear how stretching such an ambition is, nor is the timetable in which the target is expected to be achieved clear.

The NAO is also critical of the lack of sufficient data on which of the 5.9 million businesses in the UK make exports or have the potential to become exporters. Better insights are needed, with, for example, greater understanding about emerging sectors such as renewable energy. The ability to expand exports into new areas needs to be explored.

A start has also been made by DIT on digital services to provide export support, but a full pilot service will not be in place until April 2021.

The overseas networks of DIT and UKEF staff need to work more closely together to avoid missing export opportunities. DIT has 1,400 staff overseas but not all have finance expertise or the technical skills necessary to promote export finance effectively, and while UKEF supported exports to 72 countries, 80% of the value of these exports was concentrated in just five of them.

The report also explores barriers to exporting, indicating that DIT lacks capacity to resolve all market access barriers. Access to finance can also be a barrier, despite the financial support provided by the UKEF. UKEF is developing new products and working methods to help in this respect, for example by providing greater delegated authority to five banks who can apply for some UKEF products to get immediate cover for exporters.

The report concludes that overall a good start has been made but there are massive challenges for both DIT and UKEF in the months ahead.

Commenting on the report Alison Ring, director for public sector at ICAEW, said:

“The National Audit Office has again highlighted the need for better coordination within government if greater success in exporting is to be achieved. Effective government support will be increasingly important following the UK’s departure from the EU.

More and higher quality data will be essential in developing insightful and focused policy, a recurring theme across government.”

This article was originally published by ICAEW.

ICAEW chart of the week: A square root-based recovery?

17 July 2020: Debate rages about which symbol to attribute to the shape of the economic recovery.

Chart on OBR Real GDP growth forecast. Shows huge economic hit in the first half of 2020 with potential recovery paths to Q1 2025. Upside scenario returns to previous trend by 2021, central scenario recovers but not fully, and downside is even worse.

The #icaewchartoftheweek is on the economy this week, with the Office for Budget Responsibility indicating that hopes of a sharp V-shaped recovery have receded. Instead, their central scenario is for a square root-based recovery – with economic activity recovering less quickly than originally hoped and not to the same level predicted before the pandemic took hold in the UK.

According to the OBR, quarterly GDP fell from £558bn in the fourth quarter of 2019 to £432bn before inflation in the second quarter of this year, a drop of almost 23% in the level of economic activity. Under the OBR’s central scenario GDP in real-terms is not expected to get back to where it was until the fourth quarter of 2022. At a predicted £584bn (excluding inflation) in the first quarter of 2025, GDP would be 3% lower than where it was predicted to be prior to the pandemic.

The OBR hasn’t completely ruled out a V-shaped recovery as a possibility and their upside scenario would see the economy returning to the previous trend by the second quarter of 2021. However, with job losses starting to accelerate, such a speedy return to trend seems increasingly unlikely.

The good news is that the OBR’s downside scenario, for which no symbol has yet been assigned, is not as shallow as the dreaded U-shaped recovery that some economists are worried about. In the downside scenario, economic activity recovers by the middle of 2024, unlike a U-shaped recovery that might extend into the second half of the 2020s.

In practice, the fortunes of different sectors of the economy are likely to vary, with some suggesting the recovery is more likely to be K-shaped, with some sectors stalling just as others emerge to grow back strongly following the end of the lockdown. The Government will be hoping that the fiscal interventions it has announced to support the hospitality, leisure and housing sectors in particular will help prevent the ‘full K’.

This chart of was originally published by ICAEW.

PAC slams Ministry for local commercial investment failures

13 July 2020: The Public Accounts Committee has severely criticised central government for complacency as local authorities put £7.6bn into risky commercial property investments.

In a hard-hitting report, the Public Accounts Committee (PAC) has severely criticised the Ministry of Housing, Communities and Local Government (MHCLG) for failing to properly oversee the local government prudential framework in England.

The National Audit Office (NAO) reported earlier this year on the huge rise in local authority investment going into commercial property, with £1.8bn invested in 2016-17, £2.6bn in 2017-18, £2.2bn in 2018-19 and £1bn in the first half of 2019-20. This compares with the £200m spent on commercial properties in 2015-16.

ICAEW submitted evidence to the inquiry.

Key findings and recommendations from the PAC report include:

More active oversight of the prudential framework is needed, including publicly challenging local authorities where there are concerns.
MHCLG’s failure to ensure local authorities adhere to the spirit of the framework has led to some local authorities taking on extreme levels of debt.
Requirements to set aside money each year to service debt (the Minimum Revenue Provision) should be strengthened.
Actions taken to address risky and non-compliant behaviour have been too little and too late.
A ‘soft’ approach of guidance changes has not worked, and ‘hard’ more timely and effective interventions are needed, with rigorous post-implementation reviews.
The local government prudential framework has been impaired and now requires a fundamental review.
MHCLG does not have access to the data it needs to carry out its oversight responsibilities.
External audit has a role to play, but more important is real-time scrutiny of commercial investment strategies and investment decisions.
Local governance arrangements are not robust enough, with investments not being properly transparent or subject to adequate scrutiny and challenge.

The PAC is particularly critical of the Ministry for taking four years between identifying that local authorities were starting to ‘borrow for yield’ to making more substantive changes to Public Loan Work Board lending rules. This was despite NAO and PAC reports highlighting the issue in 2016.

The PAC also highlights significant shortcomings in data, with MHCLG ‘flying blind’ as local authorities borrowed billions of pounds. It also doesn’t feel that lessons have been learned about capturing data on emerging and future commercial investment activities and not just about investments that have already been made.

Commenting on the report Alison Ring, Director for Public Sector at ICAEW, said: “This is a hard-hitting report from the Public Accounts Committee that severely criticises the Ministry for Housing, Communities and Local Government for complacency about the huge expansion in debt-financed commercial property investment by English local authorities over the last four years.

The PAC rightly focuses on the importance of data in carrying out central government’s oversight role, enabling better understanding and analysis of risks in local authority balance sheets. Stronger governance at a local level is also needed, with improved transparency and scrutiny needed both before, and after, investments are made.

However, it is important that any changes to the prudential framework do not prevent local authorities in making essential investments in local infrastructure and in encouraging local economic activity as the country emerges from lockdown.

Supporting the economic recovery may involve councils taking on more – rather than less – balance sheet risk, making the PAC’s recommendations about strengthening both local governance and central oversight even more critical.”

This article was originally published by ICAEW.

Universal Credit improves but attracts NAO criticism

14 July 2020: The National Audit Office has stated that vulnerable claimants struggle with Universal Credit and face financial difficulties, while administration costs are still too high.

The National Audit Office (NAO) has issued a new report on the troubled Universal Credit welfare benefit that is in the process of replacing six existing benefits. The report states that the Department for Work Pensions (DWP) should do more to support vulnerable people and others who struggle to make a claim.

With many more people on Universal Credit, the NAO reports that the number of people paid late increased from 113,000 in 2017 to 312,000 in 2019. As a proportion this was an improvement, going from 55% to 90% paid on time, but for those paid later than the scheduled five weeks the average additional delay was three weeks. Some 6% of households (105,000 new claims) waited around 11 weeks or more for full payment.

The NAO also reports that the cost of implementing Universal Credit had risen from £3.2bn to £4.6bn, not including the effect of the coronavirus pandemic. The average cost of administrating each claim has fallen to £301, but this is still higher than the DWP business case target for 2024-25 of £173 per claim.

Many of the payment delays affect vulnerable claimants and others who struggle to make a claim, especially as many are in financial difficulty before they apply. Nearly half have not been earning in the three months before claiming, while many are already in rent arrears. Claimants with more complex needs and circumstances, such as people with learning difficulties, can struggle to engage with the claims process or to provide the evidence required, leaving them at greater risk of being paid late.

Around 57% of households making a new claim obtain an advance payment, but this can lead to further financial hardship and debt when that advance is deducted from subsequent payments. The proportion is much higher for more vulnerable claimants, including the very poorest, those with disabilities or those with children with disabilities.

The NAO says that the DWP has been doing well in paying proportionately more people on time and has made improvements to its systems to address problems that were blocking large numbers of payments. However, the NAO also found that the DWP needs to better understand and address the needs of people with more complex claims.

Fraud and error are listed as “major issues” in the report, with over one in ten pounds paid through Universal Credit being incorrect. The DWP estimates that £1.7bn (9.4% of claims) was overpaid in 2019-20 and that 1.1% of claims were underpaid, the highest error rate for any benefit outside of tax credits. These errors contributed to the NAO qualifying the DWP’s 2019-20 accounts for the 32nd year running earlier this month.

The NAO’s work relates to the period before the coronavirus pandemic caused a significant jump in the number of claims for Universal Credit (over three million since the beginning of March). Dealing with vulnerable claimants will be even more critical if they are not to slip through the safety net.

Commenting on the report Alison Ring, director for public sector at ICAEW, said:

“The NAO report highlights how challenging implementing Universal Credit has been and how many vulnerable claimants are struggling financially. It complements the DWP on improvements to date but reports that late payments are still a significant issue – as are fraud and error.

Although the DWP appears to be making better progress in rolling out Universal Credit than before, it is still not expected to be fully implemented for several years to come. It remains a complex welfare benefit and more thought should be given to its design and how it could be improved to reduce delays, reduce the need for advance payments and reduce the likelihood of error and fraud.

The NAO also highlights the challenges that DWP is currently experiencing, with over three Universal Credit claims since the beginning of March.”

This article was originally published by ICAEW.

ICAEW chart of the week: Fiscal interventions

10 July 2020: Fiscal interventions reach £190bn as the Chancellor Rishi Sunak pours even more money into the economy in an attempt to keep it from stalling.

Components of £190bn in fiscal interventions - as set out in text below.

The Chancellor’s summer statement is the subject of this week’s #icaewchartoftheweek, with the £30bn ‘plan for jobs’ being the latest in a series of fiscal interventions in response to the coronavirus pandemic.

The measures announced included £9bn for a £1,000 job retention bonus for furloughed workers, £4bn for work placements and boosting work searching, skills training and apprenticeships, a £5bn boost for the hospitality and leisure industries in the form of a cut in VAT and discounts on eating out, and £12bn in economic stimulus. The latter includes over £5bn on infrastructure projects (as announced by the Prime Minister last week), £3bn to make homes energy-efficient and £4bn for a temporary cut in SDLT on housing sales under £500,000.

This brings the total amount of fiscal interventions to £190bn or around 9% of GDP, once an extra £33bn in spending on health and other public services is incorporated. This was also ‘announced’ yesterday, albeit by means of a small footnote buried inside one of the accompanying documents!

As a consequence, the fiscal interventions can be broadly split between £77bn being spent on supporting household incomes (£54bn on the furlough scheme, £15bn on the self-employed income support scheme and £8bn on universal credit), £30bn to support businesses (£13bn in business rates and other tax reliefs and £17bn in grants and other support), £53bn for public services and other (£39bn on health and social care and £14bn on public services and other spending), and £30bn in economic stimulus through the ‘plan for jobs’.

Businesses have also benefited from support with their cashflows through the deferral of £50bn in tax payments and £73bn of loans and guarantees.

This is not the end of the story for fiscal interventions. Not only are there are a number of sectors such as local government, universities, and manufacturing where rescue packages may be needed, but the Chancellor made clear that this announcement only covered the second of a three-phase response.

The third phase – rebuilding the economy – will be set out later in the year. How much additional money will be involved is anyone’s guess.

This article was originally published by ICAEW.

Further fiscal interventions focused on post-furlough future

9 July 2020: Chancellor announces £30bn in new measures to support, protect and create jobs, bringing total fiscal interventions to £190bn.

The Chancellor used his summer statement speech to set out a phased approach to the UK Government’s response to the coronavirus pandemic.

The first phase – the existing measures already taken during the pandemic – was about the protection of the economy during lockdown, while the second phase – the subject of yesterday’s announcement – is about jobs. The third phase – to be announced later in the year – will be about rebuilding the economy and investing for the future.

As anticipated, the summer statement promised substantial sums to support the economy as it emerges from lockdown, with the Plan for Jobs including £30bn in additional funding measures to support, protect and create jobs through economic stimulus.

£9.4bn – Job Retention Bonus: £1,000 for keeping furloughed staff on until January
£2.1bn – Kickstart work placements for those aged 16-24
£1.6bn – boosting work searching, skills and apprenticeships
£4.1bn – temporary cut in VAT on hospitality, accommodation and attractions
£0.5bn – discounts on eating out
£5.6bn – infrastructure investment announced by the Prime Minister last week
£1.1bn – public sector and social housing decarbonisation
£2.0bn – grants to make private homes more energy-efficient
£3.8bn – six-month cut in stamp duty to stimulate the housing market

This takes total fiscal interventions announced by the government to around £190bn, including the £1.3bn for cultural institutions announced a few days ago.

When combined with lower tax revenues, this is expected to result in a fiscal deficit in 2020-21 in excess of £300bn. A better estimate should be available next week from the Office for Budget Responsibility when it updates its short and long-term forecasts.

The amounts above do not include tax deferrals and business loans and guarantees, which have now reached a total of £123bn.

It is as yet unclear whether there will be any statements about the planned third phase on rebuilding the economy before the Budget and spending review later in the autumn when plans for 2021-22 and beyond will be set out in more detail.

There was significant disappointment in some quarters that the National Infrastructure Strategy, originally scheduled to be published in March, has still not been published.

For those trying to track the fiscal position this year, this is unlikely to be the last fiscal announcement that will move the dial. The government has indicated that further funding is likely to be made available later in the year to local government on top of the £2bn package announced last week. Rescue packages may also be needed for vulnerable sectors such as universities.

This article was originally published by ICAEW.

NAO qualifies DWP accounts for 32nd year running

6 July 2020: The National Audit Office reports that overpayments from fraud and error reached their highest ever estimated rate in 2019-20. COVID-19-driven claims since March are likely to increase this even further.

The Department of Work & Pensions (DWP) published its annual report and financial statements for the year ended 31 March 2020, containing a qualified audit opinion for the 32nd year running due to the material level of fraud and error in benefit expenditure.

The audit report from the independent National Audit Office (NAO) contains a clean opinion on the truth and fairness of DWP’s financial statements for 2019-20. However, the Comptroller & Auditor General Gareth Davies (the head of the NAO) has qualified the second part of his audit opinion with respect to overpayments attributable to fraud, error where payments have not been made for the purposes intended by Parliament, and for overpayments and underpayments that do not conform to the relevant authorities.

Excluding the state pension, where the level of fraud and error is relatively low, the estimated level of benefit overpayments increased to an estimated £4.5bn (4.8%) in 2019-20 from £3.7bn (4.4%) in the previous financial year. Underpayments were estimated to amount to £1.9bn or 2.0% of the relevant benefit expenditure.

The NAO reports that overpayments of Universal Credit increased from 8.7% to 9.4%, which is the highest recorded rate for any benefit other than tax credits. It says the most common cause of fraud and error is incorrectly reported income (leading to £1.4bn of overpayments and £0.35bn of underpayments), followed by incorrectly reported savings (at a value of £0.9bn).

NAO head Gareth Davies issued a press release commenting on his concern that the level of error and fraud in benefit payments has risen again – and highlighting the likelihood of even higher levels as a consequence of relaxed controls at the DWP during the coronavirus pandemic.

Commenting on the report Alison Ring, director for public sector at ICAEW, said: “Although the National Audit Office is quite right to stress how important it is that the DWP does more to reduce the incidence of fraud and error, it is likely that the increase seen in 2019-20 is primarily as a consequence of the further rolling out of Universal Credit, a complex welfare benefit which is inherently prone to error and more vulnerable to fraud than many other benefits.

“As well as investing more in tackling individual cases of fraud and error, the DWP may want to give further thought to the design of Universal Credit and how it could be improved to reduce the likelihood of error and fraud in the first place.

“The relaxation of controls over benefit payments during the coronavirus pandemic has helped get financial support to claimants in quite often severe financial difficulty, but that has come with the prospect of much higher levels of fraud and error in the current financial year. Reducing the levels of both over- and under-payments will be a big challenge for the DWP, especially if there is further large surge in claims as the furlough scheme comes to an end in the next few months”.

The Department for Work & Pensions Annual Report & Accounts 2019-20 and the associated NAO press release are publicly available.

This article was originally published by ICAEW.

ICAEW chart of the week: UK population in lockdown

3 July 2020: Only a fraction of the population was working at their normal workplace during the Great Lockdown, but what will happen as businesses start to re-open and the furlough scheme becomes less generous?

UK population 67m: workforce 34m (working at workplace 9m, working from home 10m, furloughed 12m, unemployed 3m); outside workforce: children & students 16m, retired 12m, other inactive 5m.

The #icaewchartoftheweek takes a look at the workforce this week, illustrating how the lockdown has transformed the world of work over the last three months.

Our (admittedly) back of the envelope calculations based on ONS and HM Treasury data suggest that only around 9m of the 34m strong workforce have been working normally at their ordinary places of work during the lockdown, with somewhere in the region of 10m working remotely. In addition, just under 12m workers have been furloughed, comprising 9.3m employees on the coronavirus job retention scheme (CJRS) and 2.6m self-employed on the self-employed income support scheme (SEISS).

Unemployment, which was around 1.2m back in February, has jumped to an extrapolated estimate of around 2.7m by the end of June and is likely to grow still further as the furlough scheme becomes less generous from 1 July. The ONS’s experimental claimant count metric, which includes a wider group of workers needing financial support from the state, had reached 2.8m by the end of May and is expected to have exceeded 3m by the end of June.

The overall workforce of 34m excludes the 33m ‘economically inactive’ half of the population, comprising 16m children and students, 12m retirees and 5m other inactive individuals. The 2.1m students over the age of 16 included in this category excludes around 1m or so students with part-time work or who were looking for work prior to the lockdown who are included in the workforce numbers, while retirees include around 1.2m below the age of 65 who have taken early retirement. Other inactive individuals between the ages of 16 and 64 include 1.8m homemakers, 2.3m disabled or ill, and 1.1m not working for other reasons.

These numbers are a moving target as more workers will start to return to their normal workplaces over the next few weeks as the economy starts to re-open, even if many continue to work from home where they can. More worryingly, unemployment is likely to rise significantly with the furlough scheme requiring an employer contribution from July onwards and when it comes to an end in October.

This #icaewchartoftheweek was originally published by ICAEW.

New funding package for English local authorities

2 July 2020: Secretary of State Robert Jenrick has announced a new £2bn package for English councils to replace lost income and cover spending pressures.

The government has announced additional funding for local authorities in England to help alleviate the financial pressures they are under. This follows on from our previous article on council funding pressures, which reported that total lost income and additional expenditure could amount to £9.4bn by next March.

The funding package announced today comprises £500m to cover incremental expenditures being incurred by councils – adding to the £3.2bn already provided – together with a reimbursement scheme covering up to 71% of lost income from sales, fees and charges.

The reimbursement scheme kicks in where losses are more than 5% of a council’s planned income from sales, fees and charges. The government will cover 75% of the lost income above 5%, meaning that councils will need to cover around 29% of the shortfall from their own resources. Depending on the final details, councils could receive somewhere in the order of £1.5bn and £2bn to replace lost income.

The Ministry of Housing, Communities & Local Government (MHCLG) also announced that councils would be able to phase repayments of council tax and business rates deficits over three years rather than one, reducing cashflow pressures on councils. However, the apportionment of irrecoverable council taxes and business rates will not be decided until the Spending Review in the autumn.

This announcement should significantly reduce the risk of councils needing to issue s114 ‘bankruptcy’ notices – for the next few months at least.

Commenting on the announcement Alison Ring, ICAEW Public Sector Director, said: “Although the new funding won’t cover all the expenditure and lost income councils have suffered due to coronavirus, it should be enough to help most get through the rest of the summer, and the prospects of some having to declare themselves bankrupt with s114 notices should recede for now.

However, we’re concerned that councils will still have to cut back spending to cover the lost income from areas such as car parking, leisure centres, planning fees and other charges that are not being covered by central government. This has the potential to damage local economies just as they are trying to recover.”

This article was originally published by ICAEW.