Finance experts have called on the Government to temporarily relax rules that prevent councils borrowing to cover day-to-day spending as they deal with the coronavirus crisis.

The latest report from the Institute for Fiscal Studies (IFS) has revealed that, while deprived areas have been badly hit by the virus due to an increase in demand on services, more affluent areas are also struggling due to the sudden drop in income.

Councils have said they need a further £3.2bn in funding to support them through the crisis, on top of the £3.2bn they have received so far, but the IFS warns it will be difficult to target funding effectively.

IFS associate director, David Phillips, said: ‘Big differences in financial risk and significant variation in the reserves councils hold mean the Government should also consider temporarily relaxing the rules that prevent councils from borrowing to cover day-to-day spending.

‘If it does not, difficulty in targeting funding means it will either have to provide more funding to the sector as a whole than is necessary or step in to provide specific support for councils that are particularly struggling. ‘Otherwise there is the risk that some councils could have to impose restrictions on all but the most essential expenditure.’

The report found variation in the financial resilience of authorities, even in neighbouring councils. It said:

• In the short term, income is likely to likely to be more affected than spending
• More affluent areas and district councils are more dependent on income
• Deprived communities are harder hit by demand pressures
• The income of neighbouring and similar authorities can vary widely and they will be impacted differently
• Council reserves also vary, with one in eight holding less than 20% of their annual non-schools budget
• More deprived areas have populations which are likely to be more vulnerable to health and social impacts

The Chartered Institute of Public Finance and Accountancy’s local government policy manager, Joanne Pitt, said the IFS report highlighted the complexity of council funding.   

‘We need to acknowledge that every council will experience the financial impact of this pandemic differently and this will filter down to the communities that they serve,’ she said.

‘The report makes an important point in identifying the future service demand increases that will occur as a result of COVID-19. Councils should not be left unsupported to deal with the hidden cost of this pandemic.’

Local Government Association finance spokesperson, Cllr Richard Watts, said: ’We are pleased that the Government has indicated it is working on a comprehensive plan to address the ongoing financial challenges councils face this financial year as they lead communities through the pandemic. We urge the Government to bring forward details of this plan as soon as possible.’