By David Wilson and Martin Yates
06 August 2009
As the recession hits high streets across the country, the impact on local authorities’ revenue can only get worse. Councils need to take stock of the situation and keep calm under fire, argue David Wilson and Martin Yates
Throughout Bill Clinton’s first US presidential campaign, a sign in his office said simply: ‘It’s the economy, stupid!’ All of us would be advised to take heed of this message today and especially those who have responsibility for local authority finances. The question is how much are they going to be affected and in what way?
On most measures, the economic outlook is the worst that most of us will ever have experienced so it is worthwhile going through the potential impacts systematically. There are three major threats: a reduction in an authority’s income; a negative impact on the community the authority serves; and severe pressure on the quality and extent of many of the authority’s core services.
None of us in local government are strangers to pressure on resources. The table overleaf shows the breakdown of local government income sources in the past five years. It demonstrates that revenue resources have been relatively protected, although expectations of better services have also been raised during this period.
The bad news is that none of these sources will be protected as well in the future and all will come under severe pressure as a result of the recession. But the impact of a severe recession will bring much more severe problems. Not only will business income drop but business tax receipts, including corporation tax, VAT and employment taxes such as PAYE and national insurance, will fall. Central government finances will be under pressure, which will reduce its ability to support local government through central funding. The income of council tax payers will fall or even disappear due to unemployment, bankruptcy and business failure.
Recent figures bear out this gloomy picture. The country’s overall debt now stands at more than £770m, almost £150bn higher than a year ago and equivalent to almost 55% of the UK’s annual economic output – the biggest proportion in more than 30 years. Tax receipts have fallen considerably in a year. In May 2009, monthly corporation tax receipts were 27% down on the previous May; VAT revenues had fallen by 19% and income tax revenues by 11%. No wonder local authority finance directors are looking to find much greater savings than those set by the Department for Communities and Local Government.
In addition, the steadily increasing council tax collection rates of recent years are likely to decline. The current national rate of 97% might be unsustainable and some vulnerable authorities, such as inner-London boroughs, might find their rates dipping from the current average of 94.6%. This would have a significant impact on income and therefore on quality of service. Individuals are also likely to restrict their spending on other services, such as video hire from libraries, leisure centres and council car parks.
It is clear that many individuals’ financial circumstances are going to worsen but it is equally certain that seeking to make people bankrupt for non-payment of council tax will not in the long run help either the individuals concerned or the public purse.
Authorities will need to be mindful of the impact of the financial crisis on their communities, which will in turn affect some of their main services. The shortage of affordable housing is likely to increase as repossessions and homelessness rise with unemployment. This unemployment will be especially evident in the service sector, where small high-street businesses have been a big employer of vulnerable groups. The decline in business activity is likely to lead to bigger problems of crime, social disorder and vandalism as the loss of amenities in town and city centres creates its own problems for local authorities charged with regenerating already deprived areas. Regeneration plans will need to be rethought as private sector investment declines, making it much harder to find occupants for shops and other businesses.
There are two key aspects to the pressure on council services. First, demand for services will go up – and the cost and extent of local authorities’ statutory obligations to the most vulnerable and disadvantaged people are likely to increase as individuals and families are pushed into this category by the recession.
The services most likely to come under pressure are those relating to the role of the local authority as a safety net, such as housing benefit, social housing, adult social services, children’s services and public transport (since there could well be a decline in both car usage and ownership).
Secondly, as many more council services are now provided through third parties than in previous downturns, the failure of private sector service suppliers will have a greater effect on a council’s ability to maintain continuity of service at an acceptable cost.
We cannot be sure, for example, that all care homes will be able to survive the recession. Are we sure that our waste service providers are solvent? We know that we will need to be ever more vigilant about the risks to public funds – even placing monies on deposit is a big risk as a number of local authorities have found out.
As Lenin said in a rather different context: ‘What is to be done?’ While local authorities cannot do much about the overall economic outlook, they can take steps to avoiding its worst effects. The following five main points are the main ways of tackling the crisis.
Good downside planning focuses on following through the effects of foreseeable events. It is worthwhile therefore spending time on what events might turn the grim but manageable grind of a general recession into an economic nightmare for your area. Is there a big concentration of employment with one employer or in one sector, the loss of which would decimate your local economy? Is your area under particular financial stress? Are your services or your plans dependent upon one or more private sector companies that might be vulnerable?
Despite the difficult economic conditions and outlook we believe that councils are in a better position than many organisations to maintain services and financial stability.
We will beat this recession if we adhere to principles such as the five above and explain clearly to non-financial colleagues what this means in practice and what they need to do. But it’s also important to maintain a sense of humour under pressure. There are things you can do something about, there are other national and global economic effects that you can resist only to the best of your abilities.
Use the expertise of your colleagues, share the pain and, in the words of Dad’s Army’s Corporal Jones: ‘Don’t panic!’
David Wilson is a former banker, who is now the general manager of a service company in the financial sector. Martin Yates is a senior consultant at Oakleigh Consulting
06 August 2009
As the recession hits high streets across the country, the impact on local authorities’ revenue can only get worse. Councils need to take stock of the situation and keep calm under fire, argue David Wilson and Martin Yates
Throughout Bill Clinton’s first US presidential campaign, a sign in his office said simply: ‘It’s the economy, stupid!’ All of us would be advised to take heed of this message today and especially those who have responsibility for local authority finances. The question is how much are they going to be affected and in what way?
On most measures, the economic outlook is the worst that most of us will ever have experienced so it is worthwhile going through the potential impacts systematically. There are three major threats: a reduction in an authority’s income; a negative impact on the community the authority serves; and severe pressure on the quality and extent of many of the authority’s core services.
None of us in local government are strangers to pressure on resources. The table overleaf shows the breakdown of local government income sources in the past five years. It demonstrates that revenue resources have been relatively protected, although expectations of better services have also been raised during this period.
The bad news is that none of these sources will be protected as well in the future and all will come under severe pressure as a result of the recession. But the impact of a severe recession will bring much more severe problems. Not only will business income drop but business tax receipts, including corporation tax, VAT and employment taxes such as PAYE and national insurance, will fall. Central government finances will be under pressure, which will reduce its ability to support local government through central funding. The income of council tax payers will fall or even disappear due to unemployment, bankruptcy and business failure.
Recent figures bear out this gloomy picture. The country’s overall debt now stands at more than £770m, almost £150bn higher than a year ago and equivalent to almost 55% of the UK’s annual economic output – the biggest proportion in more than 30 years. Tax receipts have fallen considerably in a year. In May 2009, monthly corporation tax receipts were 27% down on the previous May; VAT revenues had fallen by 19% and income tax revenues by 11%. No wonder local authority finance directors are looking to find much greater savings than those set by the Department for Communities and Local Government.
In addition, the steadily increasing council tax collection rates of recent years are likely to decline. The current national rate of 97% might be unsustainable and some vulnerable authorities, such as inner-London boroughs, might find their rates dipping from the current average of 94.6%. This would have a significant impact on income and therefore on quality of service. Individuals are also likely to restrict their spending on other services, such as video hire from libraries, leisure centres and council car parks.
It is clear that many individuals’ financial circumstances are going to worsen but it is equally certain that seeking to make people bankrupt for non-payment of council tax will not in the long run help either the individuals concerned or the public purse.
Authorities will need to be mindful of the impact of the financial crisis on their communities, which will in turn affect some of their main services. The shortage of affordable housing is likely to increase as repossessions and homelessness rise with unemployment. This unemployment will be especially evident in the service sector, where small high-street businesses have been a big employer of vulnerable groups. The decline in business activity is likely to lead to bigger problems of crime, social disorder and vandalism as the loss of amenities in town and city centres creates its own problems for local authorities charged with regenerating already deprived areas. Regeneration plans will need to be rethought as private sector investment declines, making it much harder to find occupants for shops and other businesses.
There are two key aspects to the pressure on council services. First, demand for services will go up – and the cost and extent of local authorities’ statutory obligations to the most vulnerable and disadvantaged people are likely to increase as individuals and families are pushed into this category by the recession.
The services most likely to come under pressure are those relating to the role of the local authority as a safety net, such as housing benefit, social housing, adult social services, children’s services and public transport (since there could well be a decline in both car usage and ownership).
Secondly, as many more council services are now provided through third parties than in previous downturns, the failure of private sector service suppliers will have a greater effect on a council’s ability to maintain continuity of service at an acceptable cost.
We cannot be sure, for example, that all care homes will be able to survive the recession. Are we sure that our waste service providers are solvent? We know that we will need to be ever more vigilant about the risks to public funds – even placing monies on deposit is a big risk as a number of local authorities have found out.
As Lenin said in a rather different context: ‘What is to be done?’ While local authorities cannot do much about the overall economic outlook, they can take steps to avoiding its worst effects. The following five main points are the main ways of tackling the crisis.
- 1. Know how financially stressed your area is and plan for it. This will allow you to build up a reserve and develop the best case for maintaining your central government grant when it comes under pressure. Extrapolating from the past ten years of experiences in your area is unlikely to be good enough, assume the worst and add a 10% contingency.
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- 2. Start reducing your discretionary spending early to give room to keep core services going and meet your statutory obligations. If you know what your priorities are and stick rigidly to these, you can ride the storm out.
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- 3. Monitor developments in your authority’s area that might have a substantial impact on your income streams (such as plant closures). Liaise closely with the local business community, the local chamber of commerce and the Regional Government Office so you fully understand the economic and financial outlook and plan accordingly
- This will also involve watching carefully for the impact of changing spending patterns on areas that were hitherto seen as providing income streams, such as leisure services. In a downturn these can leave a dark hole in your finances especially if they come with property obligations
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- 4. Review the financial position of major external service providers regularly. You cannot wholly rely on advisers or credit agencies; you have to take ultimate responsibility. Ensure that you are not financially exposed to any that you have doubts about and that the legal department keeps on top of what the authority’s rights (and obligations) are in the event of a failure. Do not put all your eggs in one basket – try to spread risk among a number of providers.
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- 5. Set up a contingency planning function involving main stakeholders, including the leader of the council and the leader of the opposition – this should not be a party political issue. A major economic recession is just as much a civic disaster as fires and hurricanes, all the more so as there is less help to be had from elsewhere.
Good downside planning focuses on following through the effects of foreseeable events. It is worthwhile therefore spending time on what events might turn the grim but manageable grind of a general recession into an economic nightmare for your area. Is there a big concentration of employment with one employer or in one sector, the loss of which would decimate your local economy? Is your area under particular financial stress? Are your services or your plans dependent upon one or more private sector companies that might be vulnerable?
Despite the difficult economic conditions and outlook we believe that councils are in a better position than many organisations to maintain services and financial stability.
We will beat this recession if we adhere to principles such as the five above and explain clearly to non-financial colleagues what this means in practice and what they need to do. But it’s also important to maintain a sense of humour under pressure. There are things you can do something about, there are other national and global economic effects that you can resist only to the best of your abilities.
Use the expertise of your colleagues, share the pain and, in the words of Dad’s Army’s Corporal Jones: ‘Don’t panic!’
David Wilson is a former banker, who is now the general manager of a service company in the financial sector. Martin Yates is a senior consultant at Oakleigh Consulting
