Councils in affluent areas facing ‘biggest short-term financial hit’

THE nation’s most affluent areas could be the hardest hit by the coronavirus pandemic, a think tank has suggested, because they are most dependent on business rates and council tax.

In a report published by the Institute for Fiscal Studies (IFS), researchers indicate that the locally-generated incomes of councils are more likely to be affected than their spending due to the crisis.

As a result, councils in more wealthy areas of the country could face the biggest short-term financial hit as a result of the coronavirus pandemic, it has been suggested.

Kate Ogden, IFS research economist and an author of the report, said: “The fact that councils are facing unprecedented spending pressures and declines in income is not surprising.

“But given that Covid-19 itself is hitting more deprived communities and families the hardest, what may be surprising to some is that it is councils serving more affluent areas that are likely to see the biggest short-term financial hit.

“This is because they rely more on revenue streams – such as local taxes, sales, fees and charges – that are likely to be hit especially hard by the lockdown measures and the wider economic effects of the crisis.

“Councils serving more deprived areas look more at risk due to the vulnerability of their residents.

“This is because of the impact of the crisis on health and wellbeing given high pre-existing prevalence of mental ill health, housing difficulties, interactions with children’s services and child poverty.

“This is likely to push up their spending needs into the longer term.”

Researchers also outlined that income from local taxes – such as council tax and business rates – and especially sales, fees, charges and commercial activities will all be hit by the economic effects of the lockdown and social distancing measures.

Therefore, with councils in more affluent areas tending to be more dependent on those income streams, they could be harder hit by the coronavirus crisis, the report concludes.

An additional £3.2 billion of general-purpose funding has been set out by the Government for English councils to help support them through the coronavirus crisis, with the IFS estimating that this will increase their budgets by just over 5 per cent on average.

However, researchers suggest that the Government should consider relaxing the rules which prevent councils from borrowing to cover their day-today spending.

David Phillips, an associate director at IFS, who also helped author the report, said: “The Government should bear the complex patterns of risk and resilience our report finds in mind when deciding its next steps with local government funding. Big differences in financial risk and significant variation in the reserves councils hold mean the Government should also consider temporarily relaxing the rules that prevent councils from borrowing to cover day-to-day spending.

“If it does not, difficulty in targeting funding means it will either have to provide more funding to the sector as a whole than is necessary or step in to provide specific support for councils that are particularly struggling.

“Otherwise there is the risk that some councils could have to impose restrictions on all but the most essential expenditure.”