Extra finance promised by the government receives a broad welcome

Sponsored article: Fraser Mackay of Barclays examines the financial pressures which continue to pose challenges for council treasurers in 2021. 

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

On top of the financial impact of Covid-19, authorities are still 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 covid crisis.

At the same time, councils are 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 is a recent example.

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Core spending power

Against this backdrop, the November spending review has been broadly welcomed by local authorities, and there’s a general concensus 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 adminsitrations of Scotland, Wales and Northern Ireland will receive a £4.7bn increase in 2021-22, consisting of £2.4bn, £1.3bn and £900m respectively.

Investment boost

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.

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 campaigned 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 Bonds Agency.

Further support

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%.

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

If you would like to know more about how we can help, please contact me and I will you put you in contact with one our team of specialist Relationship Directors.

Fraser MacKay is head of government, Barclays Corporate.
Email: fraser.mackay@barclays.com

*https://hansard.parliament.uk/Commons/2020-12-07/debates/20120741000010/SpendingReviewLocalGovernmentFinance

Photo (cropped): HM Treasury, Flickr