Does Covid-19 spell the end of austerity for UK councils?

After ten years of cuts, the pandemic may usher in a new settlement for local government.

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Over the past month, Chancellor Rishi Sunak has announced what amounts to the most radical change in the size and fiscal clout of the British state in postwar history. In addition to the £30bn of extra spending announced in the Budget on 11 March, Sunak promised £175bn in debt-financed infrastructure investment over the next five years, taking the government’s capital spend to the highest level since the 1950s.

Already the architect of the biggest boost to public borrowing in decades, six days later the Chancellor announced £330bn of state-backed loans for companies struggling amid the coronavirus pandemic. There was £20bn in tax cuts and grants to small and medium-sized enterprises (SMEs) alongside that, too. On 20 March, the 39-year-old former Goldman Sachs banker promised firms that the government would pay 80 per cent of their furloughed staff’s wages. Some have estimated the cost of that package to be £78bn. On 26 March, Sunak announced similar measures for the self-employed, costing billions more.

Putting these vast sums in their proper context, the day-to-day spending reductions across all government departments over the 2010s amounted to around £32bn per annum. That is just under 5 percent of the debts and liabilities racked up by the Conservative government in March alone. The largest part of that £32bn in savings, now dwarfed by Sunak’s stimulus measures, was absorbed by local authorities. The Ministry of Housing, Communities and Local Government lost over half of its budget, and some local councils, notably those in post-industrial northern towns and cities, lost around two thirds of their central government grants.

“There's no sense of surprise or anger,” says Adam Lent, director of the New Local Government Network, a think tank focused on local government reform. Set against the announcements of the past four weeks, the painful era of austerity looks like an unnecessary joke, he says. “This just confirms what a lot of councils have been thinking for a long time: for areas that are deemed to be a political priority money can be found... the government will go to the markets and borrow billions to fund things.” 

In fact, the government may not have to rely on money markets to finance its spending. There are whispers from former members of the Bank of England’s monetary policy committee that it should consider creating new money to buy government bonds directly, a proposal akin to the “people’s quantitative easing” proposed in Jeremy Corbyn’s first leadership campaign in 2015 (an idea that attracted ire from his rivals for the Labour leadership). The normally orthodox Financial Times has told readers that “printing money is a valid response" to Covid-19. Commentaries in the Daily Telegraph have told the PM to “embrace socialism” to “save the free market”.

The Bank of England has already agreed to Treasury demands to extend the government’s “Ways and Means Facility”, with the UK effectively becoming the first country to initiate the temporary monetary financing of government spending. For a decade, nurses, doctors and paramedics – those on the front line of the fight against coronavirus – suffered real terms pay cuts. They were told there was “no magic money tree”, but the tree now seems to have been located.

Research published in the British Medical Journal in 2017 estimated that austerity led to 120,000 “excess deaths”, a figure disputed by the government among others. But the brutal, lived reality of “fiscal consolidation” is stark: homelessness increased by over 150 per cent after austerity began in 2010. Life expectancy declined, something unprecedented in peacetime. We were told we were “all in it together”, but between 2009 and 2015, the UK’s richest 1,000 families doubled their net worth, taking their cumulative wealth to over half a trillion pounds or over 16 times the total value of the government’s annual spending cut of £32bn. 

Cost-cutting was heavily devolved. Council-run services like adult social care, children’s services, libraries, parks, social housing, planning and waste collection were stripped back in a bid to make ends meet. Many authorities were left teetering on the edge of financial ruin. Northamptonshire council a Conservative-run county effectively declared bankruptcy in 2018. Many have pointed out that the fiscal straitjacket that councils have been in for a decade has left them ill-prepared to respond to Covid-19. “Councils’ capacity is so limited now”, says Lent, “because they've had to reduce workforces so massively... So that's going to be a massive challenge.”

In the last two annual surveys of northern councillors conducted by Spotlight, over three quarters of Conservative respondents said the funds they received from central government were inadequate. Predictably, the proportion of Labour and other councillors who agreed was even higher.

While austerity has left the public realm in a parlous state, local councils are hoping that the pandemic will usher in a new model for local government financing. If the age of austerity is to end, then it needs to end for town halls as well as Whitehall. Sunak’s last Budget included £500m in extra support for local authorities a paltry sum when compared with the level of cuts over the past ten years. Liverpool City Council alone has lost £444m. But some commentary has focused on the potential now for a paradigm shift in models of public services provision, local governance, and the relationship between citizen and state. Editorials in the Local Government Chronicle have called for “a new social contract”, and asserted hopefully that “from darkness comes light”.

As recently as last month many councils continued to implement far-reaching, Westminster-imposed cuts as they set budgets for the new financial year. Clearly the new age of Keynesian stimulus and the “end of austerity” announced by then-chancellor Sajid Javid had yet to trickle down. Now councils have been promised “whatever funding is needed” to make sure they can meet service needs throughout the pandemic. A £3.4bn payment to compensate for loss of business rates has been brought forward by Housing Secretary Robert Jenrick, while the Department for Business, Energy and Industrial Strategy is reportedly preparing to hand councils £13bn to support business grants. Rules on local authority spending have been temporarily relaxed, effectively allowing councils to run deficits without facing bankruptcy.

After years of the local state’s retreat, now government is urging local authorities to step forward and administer the coronavirus relief effort. Two weeks ago, on 27 March, they were told it was “imperative” that rough sleepers and the homeless were housed “by the end of the week”, although no funding to support the measures was allocated and few councils have been able to meet the target.

While the Chancellor has done away with economic orthodoxy and fiscal conservatism at the national level, local government is still under financial stress. Many councils do not have the immediate liquidity needed to deal with the fallout from Covid-19. The crisis is quickly transforming the role of government in profound and unexpected ways, but local authorities, lacking resources after ten years of belt tightening, need more money fast.

There's no slack in councils any more,” says Lent. Birmingham City Council has asked the Treasury for short-term loans to solve its cash flow problem. Council leader Ian Ward told Sunak that the extra Covid-19 funds allocated to Birmingham City have already been spent twice over.

“Across the country, councils are leading efforts to support local communities through the coronavirus crisis,” says James Jamieson, a Conservative councillor and chair of the Local Government Association. “Councils will step up to this challenge, but it will stretch them to the maximum.”

In addition to dealing with the greatly increased burden on normal services, many authorities are taking a proactive approach to the outbreak. Southwark has boosted its emergency support scheme for those who have experienced a sudden loss or reduction in income. Wakefield has stepped in to support food banks. Sheffield has launched an online service in which vulnerable residents can request help with collecting shopping or medication. And dozens of councils are helping organise the armies of volunteers to help the most vulnerable and isolated. 

“It is positive that the government has moved quickly to offer financial help to councils,” Jamieson says, but they will need far more support in the coming weeks.

Under the guise of “living within our means” and protecting our credit rating, for a decade the government pursued a fiscal policy that the UN’s special rapporteur on extreme poverty described as a “systematic immiseration of a significant part of the British population”. Local government was at the forefront of this, charged with administering the slow loosening of the country’s social safety net.

Covid-19 has made obvious what the New Statesman has judged to be the case for many years: that austerity was not a financial necessity, but rather a political choice made by ideological adherents to small-state, free-market conservatism. Coronavirus has killed that model, and revealed the necessity of well-funded public services and the welfare state. But it’s not yet clear what new alternative could emerge.

I've seen the predictions about this becoming a sea-change in how government operates and finances things,” says Lent, “but it’s too early to tell… I saw lots of predictions in 2008 about how this was going to be a new era of the big state… and a new era of international cooperation as well. The precise opposite came to pass. It's political debates and political narratives that will determine the future of local government.”

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