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November Spending Review: a much-needed boost for Local Authorities

Local Authorities under financial pressure

The financial pressures facing local authorities this year continue to pose challenges for council treasurers.

Like many organisations up and down the country, local authorities are feeling the strain of the Covid-19 crisis. Councils are coping with staff shortages, changing work patterns, and other pandemic-related operational issues, alongside increased demand for adult social care and children’s services exacerbated by the crisis.

Though the launch of the UK’s Covid-19 vaccination programme promises a more positive and stable future, it won’t immunise these councils from the funding pains resulting from the pandemic.

At the same time, they’re under financial pressure to fund and deliver indirect but essential services like digital transformation, national and local objectives around sustainability and the environment, and distribute government grants to local businesses.

Last summer, the LGA estimated local authorities faced a funding gap of £7.4bn and there’s certainly been no shortage of headlines about financially struggling authorities issuing or threatening to issue Section 114 notices – the London Borough of Croydon was the most recent example.

Portrait of Fraser Mackay, Head of Government and Local Authorities

Fraser Mackay
Head of Government and Local Authorities

Core spending power

Against this backdrop, the November Spending Review has been broadly welcomed by local authorities, and there’s a general consensus that councils will live to fight another year, although solutions for some longer-term challenges have, given the exceptional circumstances, been deferred for now.

The government says the Spending Review, which included an extra £300m in grant money for social care and a further £254m to combat homelessness, delivered a potential 4.5% boost to the ‘core spending power’ of local authorities, equivalent to £2.2bn.

The LGA estimates that a significant proportion of that uplift will come from raising council tax by up to 5% and social care precepts by 3%.

Additionally, the devolved administrations of Scotland, Wales and Northern Ireland will receive a £4.7bn increase in 2021/22, consisting of £2.4bn, £1.3bn and £900m respectively.

Infrastructure uplift

There is also the promise of a £100bn cash injection for infrastructure projects at regional level, covering housing, roads and green energy backed by the new UK Shared Prosperity Fund that will replace EU regional assistance programmes.

The £4bn “levelling up fund” for local authorities in England plus a further £800m for Scotland, Wales and Northern Ireland, will support the development and regeneration of local economies by investing in infrastructure projects including road schemes, bus lanes, station upgrades and community facilities.

Managed by the Treasury and the MHCLG, the fund includes £600m earmarked for local schemes in England, with councils bidding for up to £20m for specific, “shovel ready” projects.

The launch of the new UK Infrastructure Bank in the Chancellor’s recent budget is also a welcome addition to further support this agenda.

Lower cost loans

Authorities can borrow more cheaply again, thanks to the 100bps cut in the PWLB loan rate announced in November 2020 – something councils and the LGA had been campaigning hard for.

However, loans cannot be used to buy assets primarily intended to produce yield. This applies on a “whole plan” basis, covering any investments held primarily for yield anywhere in an authority’s capital plans. Consequently, councils may find it difficult to continue to borrow from the Board to support service delivery or refinance existing debt. This may lead more Councils to consider funding through the Bond Market, possibly via the Municipal Bond Agency.

Business transformation

Given the government’s stated ambitions around the green agenda, which have recently shifted up a gear, it’s possible that councils proactively pursuing environmental and sustainability-focused projects may be able to attract additional financial support to help deliver them, either from central coffers or other external green funding sources.

It has also become clear that implementing transformative digitisation, by utilising AI and other technologies to automate workflows, processes and customer interactions, is going to be strategically crucial for cutting costs.

For example, Jonathan Sharp, director of business transformation specialist Britannic Technologies, argues that by using AI-based ‘conversational solutions’ to interact with the public, local authorities can reduce their ‘cost to serve’ by as much as 95% compared to other communication methods such as telephone calls, emails or live webchat.

While digital transformation requires up-front investment, it should not be seen as a cost centre but as a ‘value centre’ for saving money, enabling more effective use of resources and, ultimately, generating income.

The welcome additional central government financial support should go some way to helping struggling local authorities.

For our part, we recognise and appreciate the ongoing financial pressures and challenges that councils face in balancing their budgets as we move through the uncharted waters of 2021, and we are here to offer our support, advice and guidance wherever we can.

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