Unemployment and benefit claims up, council tax receipts down in London and England’s poorest regions

The COVID-19 crisis has hit employment and incomes across the UK, which in turn has affected some households’ ability to pay major bills such as council tax. As a result, councils expect to collect £1.3 billion less council tax in 2020–21 than they forecast before the COVID-19 crisis. The government has agreed to cover just 75% of this shortfall.

Drawing on data from tax and benefit records, household and business surveys and the Money Dashboard app, a new IFS report shows that these impacts have been uneven geographically.

The number of Londoners on employers’ payrolls fell by almost double the UK average between February and December 2020. Part of this likely reflects higher numbers of people leaving London, including immigrants returning to their home countries.

However, the share of working-age Londoners on unemployment-related benefits has increased by 4.7 percentage points, which is almost 1.5 times the UK average increase. The West Midlands and North West regions have also seen above-average increases – while Northern Ireland has seen the smallest increase (2.5 percentage points).

Despite this, pre-crisis differences mean employment rates are still lower than the capital in Yorkshire and the Humber, Scotland, the West Midlands, the North West, Wales, the North East and Northern Ireland.

In the first half of the 2020–21 financial year, the amount of council tax collected fell by 1.4% in London, 1.3% in the North East of England and 0.2% in the North West of England. In contrast, the amount collected increased in other regions, with the largest increases in the South East (up 1.2%) and South West (up 1.7%).

These increases were still substantially smaller than was expected prior to the COVID-19 crisis, while the fact that councils in these southern regions rely more on council tax means that the shortfalls in revenues will be similar to those in the north of England.

This is particularly unhelpful for councils, who are seeing spending also being stretched by COVID-19. Many services are seeing increased demand, and other services are becoming more complex and expensive to deliver.

Increases in benefit claims and falls in council tax collections have also been larger in other urban and more deprived parts of England. The share of the working-age population claiming unemployment-related benefits has increased more in councils covering the most deprived fifth of areas than the least deprived fifth.

Council tax revenues fell by 1.2% in the most deprived fifth of English councils in the first half of 2020–21, but grew by 2.4% in the least deprived fifth.

Councils’ forecasts for the full year suggest a similar pattern, with the most deprived fifth expecting to see a shortfall relative to pre-COVID forecasts of 5.4% compared with 2.9% for the least deprived fifth. This is explained by both higher claims for means-tested discounts and higher rates of payment failure.

However, as less deprived councils rely much more on these revenues for overall funding, the impacts on overall funding levels are expected to be much more similar: 2.5% in the most deprived and 2.3% in the least deprived.

David Phillips, an Associate Director at the IFS, said:

“The COVID-19 crisis has hit the whole of the UK hard, but a range of evidence suggests that London and other major cities have seen particularly big labour market impacts, 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. 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.”