Relax borrowing rules to tackle financial crisis, says think tank

Photo (cropped): Duncan C/Flickr, CC0

The Institute for Fiscal Studies says local government in England still needs an extra £2bn to see it through the pandemic. One way of dealing with financial needs, it argues, is to allow councils to borrow for day-to-day spending.

The extreme pressure on local government finances brought on by Covid-19 is far from over. New research suggests additional funding from Whitehall for English councils is far short of what they need this year. And that, the researchers say, could mean relaxing the rules for council borrowing to see them the through.

The research comes from a think tank, the Institute for Fiscal Studies (IFS), looking at council funding so far and estimates of their needs in the future. So far, central government help has added up to £5.2bn, coming in three tranches since the onset of the pandemic.

After crunching through council figures the IFS estimates councils will need an additional £2bn, or 4% of pre-crisis expenditure, if they are to see out the year. That puts the total additional funding required at £7.2bn. That is a substantial sum of extra cash, though short of some initial estimates. Back in April, just after the second tranche of extra funding had been announced, Tony Kirkham, director of resources at Newcastle City Council, estimated the total extra need could reach £10bn.

As is widely known, funding pressures stem from extra spending on items such as PPE and additional services, as well as income lost from sources such car parking, council tax receipts and business rates.

Amid ongoing speculation that many councils may be on the edge of financial collapse, the IFS says without further cash support councils with face a “difficult choice between depleting their reserves to low and, potentially, risky levels or cutting spending on important local services.”

According to Kate Ogden, an IFS research economist and c0-author of the report, uncertainty still surrounds just how much additional spending councils face. While some councils have reserves to fill the gap, this is unlikely to resolve the issue for many others. The answer, she says, may not be an extra spending spree by Whitehall.

“Uncertain and highly variable pressures across councils mean it may be difficult and costly for the government to address this problem by further increases in general grant funding alone. More targeted support should therefore be considered too,” she says.

Options

What are the options? The IFS says there are three. First, an increase in general grant funding, as mentioned, is the simplest. But using current formulas would mean giving some councils too much to ensure the hardest hit receive the sums they need.

The next approach would be targeted funding. But, the IFS says, this would require proper checks to ensure claims by councils are valid.

Lastly, there is the borrowing option. The IFS says the government could temporarily relax the rules that mean councils cannot borrow for day-to-day spending, only for capital investment.

Government could, the IFS says, choose to reimburse some of the borrowing costs. The IFS believes there are mechanisms under which councils can request to “capitalise” some day-to-day costs. That would provide a short-term fix. The IFS believes, however, that relaxation of the borrowing rules over a number of years “may allow councils to draw down more of their reserves, if necessary, this year” because they would have “additional flexibility” to borrow if further funding pressure builds in the future.

The IFS says the “flexibility” approach has been taken elsewhere in Europe. And There is some support for flexibility from other organisations. An OECD paper on local government and the pandemic says that relaxing fiscal rules could “ensure an adequate fiscal policy during times of crisis”.

The paper adds: “Despite fiscal rules’ fundamental role in ensuring fiscal sustainability, during times of crisis compliance with such rules might not be attainable or even desirable.”

The Local Government Association (LGA), one of the joint funders of the IFS research, along with the Economic and Social Research Council, wants central government to “meet” all extra cost pressures and incomes losses “in full”, though it makes no mention of borrowing.

According to the LGA’s chairman, James Jamieson: “Councils need to be able to lead their communities out of this crisis and support recovery, but they cannot do this successfully and also address pressures in social care if they are having to focus on addressing budget cuts.

“The LGA wants to continue working with government on the further measures and funding needed to protect local council services.”

Contradiction

Not all local government experts are sold on the idea of looser borrowing rules. CIPFA issued a note of warning. According to policy manager Joanne Pitt, changing the borrowing rules is a major hurdle.

“These proposals for borrowing directly contradict the existing rules which councils must follow as set out in the Prudential Code. In any event, any increase in borrowing will need to be paid for over the longer term.

“While short-term solutions may be attractive, CIPFA believes that this is the time to strengthen good financial management, not weaken it.”

Others point to alternative options. Garry Fielding, section 151 officer at North Yorkshire County Council and president of the Society of County Treasurers, says many councils fear a damaging reduction in council tax income as more people become entitled to discounts.

“Counties, in particular, are more dependent upon council tax for core funding,” he says, “and that’s why we would ask government to underpin a minimum level of funding in future years.

“Obviously we hope that this will not be needed but this would be a way for government to bring some certainty and stability without necessarily writing more cheques at this stage.

“Councils could then move forward into next year’s budget cycles with greater assurance and an ability to concentrate on what matters most—looking after their populations.”

There is still some way to go in the crisis and much for central government to consider as it heads into the local government finance settlement and the current comprehensive spending review. The IFS report may play a role in aiding the position of councils across England.

FREE monthly and weekly newsletters
Subscribe to Room151 Newsletters

Monthly Online Treasury Briefing
Sign up here with a .gov.uk email address

Room151 Webinars
Visit the Room151 channel