Benefit claims up and council tax revenues down most in London and deprived parts of England, shows new IFS report

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.

Greater London has seen larger-than-average impacts, both in terms of the labour market and councils’ tax collections:

• The number of Londoners on employers’ payrolls fell by almost double (5.5%) the UK average (2.9%) between February and December 2020.
• • Part of this likely reflects higher numbers of people leaving London, including immigrants returning to their home countries.
  • But it has also led to larger increases in unemployment. For example, the share of working-age Londoners on unemployment-related benefits has increased by 4.7 percentage points, almost 1.5 times the UK average increase (3.2 percentage points). The West Midlands and North West regions have also seen above-average increases – 3.4 percentage points in both instances – 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 (75%) in Yorkshire and the Humber, Scotland, the West Midlands, the North West (all 74%), Wales (72%), the North East and Northern Ireland (both 71%).

• The share of workers furloughed has been consistently high in the capital.
• • In October, prior to England’s second national lockdown, 10.0% of eligible employees living in London were furloughed, compared with between 6.3% (in the North East) and 7.5% (in the North West) in the other regions of England.
  • In November, during the second lockdown, 14.9% of Londoners were furloughed, while figures for other regions ranged from 11.2% in the North East of England to 12.7% in the South West of England (the region that saw the largest increase in use of the furlough scheme as a result of the second lockdown).

• 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%). However, these increases were still substantially smaller than was expected prior to the COVID-19 crisis. And the fact that councils in these southern regions rely more on council tax means that, relative to their overall funding, the shortfalls in revenues will be similar to those in the north of England.

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 cities (3.6 percentage points) than in councils covering largely rural areas (2.3 percentage points). The increase has also been larger in councils covering the most deprived fifth of areas (3.7 percentage points) than the least deprived fifth (2.4 percentage points).
• • For example, Manchester city council and Birmingham city council areas – both highly urban and highly deprived – have seen among the largest increases in unemployment (up 4.3 and 4.4 percentage points, respectively) outside London.

• 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.

Somewhat surprisingly, unemployment-related benefit claims have gone up by less in areas where a high share of jobs are in sectors that have been subject to the tightest restrictions and falls in demand – such as non-essential retail, hospitality, arts and entertainment, and transport services.

• This may reflect the fact that these areas are often relatively affluent and workers may therefore be ineligible for means-tested benefits or may commute from neighbouring, more deprived, areas.
• There are exceptions to this pattern, with unemployment-related benefit claims being particularly high in a number of council areas close to major airports including Hounslow and Slough (Heathrow), Crawley (Gatwick) and Luton. And use of the furlough scheme has been particularly high in a number of areas reliant on tourism – including South Lakeland (where 22% of employees were furloughed in November), Eden (18%), Blackpool (17%), Torbay (17%) and Scarborough (17%).

David Phillips, an Associate Director at IFS and a co-author of the report, 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.”

Kate Ogden, a Research Economist at IFS and another co-author of the report, said:

“Households’ financial difficulties mean 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 75% of this shortfall, and to provide £670 million 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 support or cutting funding for at least some other services in 2022–23 and beyond.”