The impact of COVID-19 and the measures necessary to bring it under control have been the final straw for many UK councils. In June, 173 councils have participated in a BBC investigation into their financials. 148 of those councils expect to have a budget shortfall by the end of the year and some are already talking about declaring bankruptcy.

Why are we in this situation? And what can be done to make it better?

How bad is it?

The government have invested a total of £3.2bn to local councils to help them cope with COVID-19. Here are the top ten local councils with the highest estimated shortfalls, worked out after this government money has been factored into the equation.

  • Liverpool: £58.6m
  • Leeds: £60.6m
  • Camden: £69m
  • Hackney: £71m
  • Aberdeen: £82m
  • Edinburgh: £83.8m
  • Highlands: £96.9m
  • Manchester: £133
  • Essex: £171m
  • Birmingham: £212m

Barnet, Leeds, Tameside, Trafford and Wiltshire have all revealed that they will need to file a section 114 notice (like bankruptcy) if they don’t receive some urgent central government funds.

Why is there so much of a shortfall in so many areas of the UK?

It’s simple maths. Their costs have gone up and their income had gone down. Simultaneously, without any warning and by a substantial amount.

Councils have had to pay for PPE, extra adult care staff to avoid cross contamination between sites, sheltering homeless people and emergency payments to families that are suddenly without income.

Their income has been slashed by losing business rates, giving council tax ‘holidays’ and the closure of things like leisure centres. Tourism is a major source of income for much of the UK and our councils earn their slice of that through things like parking fees, selling marine fuel and docking fees. Some of our larger cities also make money from dividends from their stake in airports. For example, Manchester has lost £130 million as part-owner of Manchester Airports Group.

What is a section 114?

Every local council has a legal responsibility to balance its books. A section 114 is declared when that is not possible. This is a very rare occurrence. The last time was in February 2018 when Northamptonshire County Council found itself in financial deficit. But that was 20 years since the last section 114 issue.

What was the government’s response?

At the time Sir Keir Starmer, Labour Leader, told Laura Kuenssberg: “At the beginning of the pandemic, councils had to do lots of things to support their communities, whether that was provision of food, of services, care centres, bringing homeless people in, really important stuff. And they were told by the government ‘we will stand by you – we’ll support you – you get on and do what you need to do’. So they did.” Now councils are,”…facing bankruptcy, or cutting back services, which is the last thing anybody needs, and the government has got to recognise this”.

The head of the Ministry of Housing, Communities and Local Government is Jeremy Pocklington. And recently told MPs that the government didn’t know there was this “imminent risk” of issuing section 114 notices.

Simon Clarke, Minister for Local Government in England said: “We are working on a comprehensive plan to ensure councils’ financial sustainability over the financial year ahead – we will continue to work closely with them to ensure they are managing their costs and we have a collective understanding of the costs they are facing.”

A spokesperson for the Scottish Government had more detail to offer: “To date, Scotland’s councils have received £405 million in advanced payments this financial year, and by the end of July this will have risen to £455 million. This funding, which included weekly advanced payments to councils until parliamentary approval was secured, will help prevent local authorities experiencing cash flow. Councils received an additional £150 million in May, £255 million in June, and will receive £50 million in July.” They also said they are “pressing the UK government for urgent additional funding and flexibility for our partners in local government.”

And since then?

On the 16th July, Robert Jenrick, Local Government Secretary, announced £500million extra support going to local councils in England. He said: “Councils are playing a vital role in our national fight against coronavirus, providing a lifeline for so many and supporting communities at a time when they need it most. That’s why we are giving them an extra £500 million – taking our total additional funding provided to £4.3 billion – and today I am setting out how this will be allocated to councils fairly based on the pressures they have told us they are facing. This comes on top of the co-payment scheme announced last week that will compensate councils for irrecoverable income losses from sales, fees and charges.”

The co-payment scheme is based on a formula: the council absorbs the first 5% of the lost income, then the rest of the loss is compensated by the government at a rate of 75p in the £1. In other words, for every pound lost the government compensate local government 75p. This is after the first 5% of the loss has been deducted from the amount.

HMRC have also said that local authorities will be able to spread out their tax deficit payments over three years, instead of the usual one year. Hopefully this give them some breathing space and help with cashflow.

Given that the pandemic is not over and we can’t accurately predict its course, we’ll have to wait and see if local councils will need any further government support. At least this is a step in the right direction and will hopefully keep those section 114s at bay.