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Lessons and issues for sub-national government finances post-COVID

Briefing note

This briefing note discusses the impacts of and lessons from the COVID-19 crisis for sub-national government finances, as well as the fiscal roles of and relationships between national, devolved and local government.  

For devolved government, the key issues identified are:

  • Ad-hoc changes to funding arrangements have enabled devolved governments to respond effectively to the COVID-19 crisis, and their fiscal frameworks provide significant insurance against revenue losses. However, such insurance can act as an incentive to take more stringent measures than if the full revenue costs are being borne, which may increase the likelihood of disageements over strategy with the UK government (which bears more of the losses). On the other hand, the insurance provided is incomplete, and the devolved governments could see permanent falls in their relative funding levels of the crisis has bigger long-term negative impacts on their economies than England’s. 
  • The crisis has illustrated potential shortcomings with rules around borrowing, and funding allocations via the Barnett formula. Alongside disparities in people’s assessment of devolved and UK government performance during the COVID-19 crisis, this may have made upcoming review of the Scottish fiscal framework even more politically contentious. 
  • Responding to these concerns by, for example, increasing the borrowing powers available to the devolved governments could lead to unfairness to England though. This is because the absence of any specifically English (or regional) governments means there is effectively no spending or borrowing that is England-only: any borrowing by the UK government helps pay for public spending across the UK. Reform of the devolved governments’ funding rules could (and should) therefore prompt a renewed focus on the governance and powers of England. 

For local government in England, the key issues identified are:

  • Increases in spending and reductions in income are likely to persist at least in part. The crisis will therefore exacerbate an already challenging fiscal outlook for councils, whose existing revenue streams are unlikely to keep pace with the rising demand for and cost of service provision. 
  • There will likely be an increase in both the need for and difficulties associated with reform of the local government funding system. Impacts on overall funding needs and on the relative needs of different parts of the country make funding reform even more important. But the inevitable redistribution of funding is likely to be even more contentious if resources are tighter, and previous plans for to further shift from grant-funding to reliance on business rates may need to be reconsidered. 
  • There is potential to catalyse an overdue debate on the role of local and national government in a range of policy issues (including traditional service provision, economic development and crisis management), as well as the extent to which priority is placed on local discretion versus national standards. Lessons may also be learned on coordination and delineation of responsibilities. 
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