Just three months ago, the government was focused on levelling up the UK economy and reducing the inequalities between places. Then Covid-19 arrived and disrupted all existing plans. This crisis has exposed the existing financial problems faced by local government and deepened them. As a result, local authorities are starting to make very difficult decisions about reductions to services that are already at a limit after a decade of austerity. Deprived authorities in particular will be hit hardest as they will be faced with higher expenditure and lower income.
The government needs to lend its full support during this crisis, before decisions can be made about the longer-term funding of local government and how it will level-up.
This short working paper seeks to set out how government efforts to respond to the financial pressures caused by Covid-19 could undermine the levelling up agenda and, looking ahead, how the government can address this.
- The government is yet to give their full financial support to councils for the substantial income losses and cost increases as a result of the Covid-19 crisis.
- According to the Local Government Association (LGA), an additional £6bn is likely to be needed this year by councils. This is beyond the £3.2bn in non-ringfenced funding provided to date for the first three months of the crisis.
- CPP analysis of local government unallocated reserves on the eve of the crisis shows that, despite emergency non-ringfenced Covid-19 funding, 131 upper tier councils (of 151 in England) do not have sufficient funds to make up for projected increased costs and reduced income due to Covid-19. This includes 18 (of the 19) upper tier authorities which significantly feature former Red Wall constituencies. Councils require unallocated reserves as a buffer against ongoing financial headwinds.
- Without full financial support to councils in response to Covid-19, deprived local authorities will be hit hardest. The relative cost of financing the gap in funding per person will be higher in more deprived places whilst the ability of local government to raise additional funds through council tax and business rates will be particularly limited. This is against a backdrop of falling council tax and business rate revenues and constraints in the ability of local areas to raise taxes through the local tax base or borrowing.
- This will compound the effects of a decade of austerity. According to the Institute for Fiscal Studies (IFS), over the past decade, deprived local authorities saw the highest level of service reduction, exactly in the places where council services, including social care, public health, children’s services and support for vulnerable families, are needed most. 
As a result, CPP is calling for:
- The government to recommit to giving its full financial support to councils for Covid-19 losses before it can return to the levelling up agenda. Following a decade of hollowed budgets, historic inequalities in funding and lack of financial flexibility, councils are currently financially unable to respond adequately to the current crisis.
- The government to ensure deprivation and need are the default criteria for the distribution of any further funds to protect the most deprived communities.
- Local government to be recognised as central to the levelling up agenda. Looking ahead, once Covid-19 costs have been met, central government should use the HM Treasury Green Book review, Shared Prosperity Fund distribution, Stronger Towns Fund and Fair Funding Review to mainstream levelling up into government decision making and give local areas the opportunity to drive inclusive recoveries in their areas.
 The 151 'upper tier' local authorities in England referred to in this report comprise 33 London boroughs, 36 metropolitan boroughs, 56 unitary authorities and 26 shire counties
 A former Red Wall local authority is defined as one in which at least a third of its population also live within a former Red Wall constituency, that is, one which the Conservatives won from Labour in the 2019 election in the Midlands or North of England. This definition includes the following upper tier authorities: Blackpool, Bolton, Bury, County Durham, Cumbria, Darlington, Derby, Kirklees, North East Lincolnshire, North Lincolnshire, Nottinghamshire, Redcar and Cleveland, Rochdale, Rotherham, Sandwell, Stockton-on-Tees, Stoke-on-Trent, Warrington and Wolverhampton. Darlington is the only former Red Wall local authority assessed as having sufficient funding.
 Institute for Fiscal Studies (2020) The Fair Funding Review: is a fair assessment of councils' spending needs feasible? Available at: https://www.ifs.org.uk/uploads/publications/comms/R148.pdf