Covid has 'complicated' levelling-up agenda, IFS study finds

Pandemic has created new unemployment hotspots and extra pressures for local-authority services
Manchester (above) and Birmingham saw some of the biggest increases in unemployment of 4.3% and 4.4% outside London. Photo: Dave Thompson/PA

By Jim Dunton

05 Feb 2021

Financial fallout from the coronavirus pandemic has added new dimensions to the UK's economic geography that will further complicate the government's levelling-up agenda, according to a new data crunch from the Institute for Fiscal Studies.

The research institute said that while Covid-19 has hit employment and incomes across the UK, data from tax and benefit records, household and business surveys and the Money Dashboard app show the impact has not been spread evenly.

It added that households’ ability to pay major bills such as council tax have also been put under additional pressure, with local authorities now expecting to collect £1.3bn less in council tax during 2020-21 than they forecasted before the pandemic. 

The IFS said the fact that ministers have agreed to cover just 75% of the shortfall means that authorities will face tough choices about whether to cut means-tested support offered to residents, such as discounts on services,  or whether to cut services themselves.

Back in November, the IFS said there was "no systematic relationship" between left-behind areas targeted by the government's levelling-up ambitions and parts of the country worst hit by the economic impact of Covid-19. In December, the IPPR North think tank said England's north-south divide appeared to be widening and that there was little evidence the levelling-up agenda was materialising.

Today's report said Greater London has seen larger-than-average impacts on both its labour market and councils’ tax collections over the past 12 months, while the share of workers furloughed in the capital has also been high.

But the report noted that Yorkshire and the Humber, Scotland, the West Midlands, the North West, the North East, Wales and Northern Ireland all have lower proportions of people in employment than the capital. 

It said the share of the working-age population claiming unemployment-related benefits has increased more in councils covering cities than those covering largely rural areas between February and December last year. The increase was also larger in the most-deprived fifth of areas than the least-deprived fifth. 

The IFS said Manchester City Council and Birmingham City Council have seen increases in unemployment of 4.3% and 4.4% respectively, among the largest hikes outside of the capital, where unemploment rose by 4.7%.

Report co-author David Phillips, an associate director at the IFS, said the evidence suggests that the biggest labour-market impacts of Covid-19 have been in London and the UK's other major cities, potentially reflecting changes in commuting, shopping and tourism.

“Of course, prior to the crisis, there were concerns that London was pulling away from the rest of the country in terms of wealth and opportunities," he said.

"And it remains the case that the areas with the lowest employment, wages and skills are concentrated in the cities of the north and Midlands, former industrial towns, and isolated rural and coastal areas. 

"This means the Covid-19 crisis has not overturned the economic geography underlying the levelling-up agenda. But it has complicated it, with a particularly big increase in unemployment – likely concentrated among the young and lower earners – in the capital.”

IFS research economist Kate Ogden, another co-author of the report, said local authorities' ability to continue providing their current offer of services would be compromised in the long term if ministers did not commit to new  support measures.

"Households’ financial difficulties mean councils expect to collect £1.3bn less council tax in 2020–21 than they forecast before the Covid-19 crisis," she said.

"The government has agreed to cover 75% of this shortfall, and to provide £670m to help fund means-tested discounts in 2021–22. 

"However, if this support is then withdrawn, those councils seeing the biggest long-term impacts of the crisis on employment and household incomes may face particularly difficult trade-offs between cutting this means-tested tested support or cutting funding for at least some other services in 2022–23 and beyond.”

The IFS said that while council tax revenues have fallen by 1.2% in the most-deprived fifth of English councils in the first half of 2020–21, they have grown by 2.4% in the least-deprived fifth – although by less than had been expected.

It noted that less-deprived councils rely much more on council-tax revenues for overall funding, meaning the impact on councils' overall funding levels is expected to be much more similar across the board.

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