As the immediate management of COVID-19 starts to subside, it is time for councils to lift their eyes to the potentially even greater challenges ahead. The initial signs are not promising; county authorities face a severe financial challenge that, if not addressed urgently, could see significant numbers unable to deliver a balanced budget within the next two years.

When the County Councils Network (CCN) asked us to analyse the MHCLG's delta returns for April and May for 39 county authorities, it was a good opportunity to consolidate what was known and try to look ahead to understand the financial outlook. These authorities have unique characteristics within local government which is reflected in the financial impact being reported. They have a particular reliance on council tax over other sources of funding and a greater proportion of service expenditure focused on social care, compared to other local authorities; both areas which are likely to be hit hardest by the COVID-19 pandemic.

Our initial task was to collate the delta returns data, provide benchmarking analysis and to facilitate discussions between county authorities through workshops. We wanted to help county authorities better understand the approach to delta returns being taken by their peers, promote consistency, but also start to develop a picture of the financial challenges to come.

It is early days to truly understand the medium to long term financial impact of COVID-19 and many councils are still coming to terms with the short-term implications. However, there was a perceptible increase in consistency and depth of analysis between the April and May returns and the first and second round of workshops.

The local response to COVID-19 and the indirect effect of the lockdown has resulted in significant additional unplanned cost pressures and lost income for county authorities. County authorities were already managing significant funding shortfalls and now, some existing savings plans will no longer be possible to deliver due to the increased demand on council resources.

The results of the workshops along with the delta returns were used to produce a high level forecast of the financial outlook over the next five years, which were consolidated into our latest report. The analysis showed:

1. Based on full year financial data from the Delta returns and excluding council tax and business rates, an additional 2020/21 deficit of £752m is forecast across the 39 county authorities (just under £20m per county authority) - government funding to date has not been sufficient to close this gap which takes into account the additional emergency funding provided to county authorities.
2. Significant losses to council tax and business rates income, and ongoing COVID-19 related cost pressures, particularly in social care, are predicted to cause large deficits in the collection fund that will impact 2021/22 budgets. The scale of this is uncertain but is projected to be in the region of £1.79bn in 2021/22 (£46m per county authority).
3. Further scenarios, based on extrapolating the April data from the Delta returns, indicate the full year impact could be as high as £1.9bn in 2020/21 and £2.6bn in 2021/22. County authorities expect there to be a significant impact on local tax revenues and, taking service cost inflation into account, a gradual economic recovery may not be sufficient to close the resulting funding gap within the next five years.

The projected funding shortfalls emerging in 2020/21 and 2021/22 would be beyond the ability of a significant number of county authorities to manage with their existing resources, even if measures were taken to reduce costs. In this context, our analysis also found that total aggregated unallocated general fund reserves for county authorities could be fully depleted by 2021/22, with a significant number of councils unable to deliver a balanced budget in 2020/21 or set one for 2021/22.

If the initial predictions set out above fall anywhere close to the actual financial outturn, the logical conclusion is that without further funding support and additional flexibilities from central government a significant number of councils will be forced to reduce service and provider costs and, as a last resort, issue a Section 114 notice in the current year, as they will be unable to meet the statutory duty to deliver a balanced budget in 2020/21 or 2021/22.

Tom Foster is associate director, Public Services Advisory, at Grant Thornton UK LLP

No council should go bust due to efforts to combat coronavirus