UK local authorities are set to be hardest hit financially by the coronavirus among the five largest European economies says a report from Moody’s Investors Services.

The research estimates a shortfall of €77bn for local and regional government across the UK, Germany, France, Spain and Italy, with Spain and the UK facing the highest fiscal pressures. The report says: ‘Spanish regions and UK local authorities face relatively high spending pressures, moderate expected lost revenues and weak pre-pandemic fiscal performance.

It adds: ‘As UK local authorities' pre-crisis fiscal performance was relatively weak, they will face challenging decisions regarding spending cuts or the use of reserve balances to balance budgets this fiscal year.’

The UK is also hit by regional income inequalities with higher death rates in deprived areas, the Moody’s report saying ‘We also expect the pandemic to exert more fiscal pressure on poorer [councils] and exacerbate income inequalities. This is particularly acute in the UK where local authorities have significant responsibilities for social protection expenditure and income inequality between sub-national areas is high.’

It adds: ‘The UK mortality rates from the coronavirus are strongly correlated with area-based deprivation. Poorer areas have recorded much higher mortality rates – the age-standardised mortality rate for coronavirus from March to May 2020 in the most deprived areas was more than double the mortality rate in the least deprived areas (128.3 versus 58.8 deaths per 100,000 population).’

European regional governments with health responsibilities are also worse affected though UK councils are exposed because of their social care functions, adds the report. Across a sample of 24 countries with severe coronavirus outbreaks, 47% of deaths from the virus to June were care home residents.