Councils in England face a funding gap of almost £3 billion
Many councils are still grappling with significant challenges when setting their budgets, and trying to protect services from cutbacks because of the deep underlying and existing pressures they face.
Inflation, the National Living Wage, energy costs and increasing demand for services are all adding billions of extra costs onto councils just to keep services standing still.
New analysis by the LGA, published at our annual conference, shows councils in England face a funding gap of almost £3 billion over the next two years.
Taking into account increases in estimated core council funding, the LGA estimates that councils need a further £2 billion in 2023/24 and £900 million in 2024/25 to deliver services at their current levels in each year.
These calculations assume that all councils will increase their council tax rates in each year by the maximum allowed before a referendum is required.
If inflation fails to fall in line with the forecast at the March 2023 Budget – and instead is in line with more recent inflation projections from the Bank of England – this would add an extra £740 million in cost pressures in this financial year, and an extra £1.5 billion in 2024/25.
Our analysis of funding pressures relates solely to the funding needed to maintain services at their current levels. It does not include addressing existing underfunding in areas such as the adult social care provider market, children’s social care and homelessness, nor does it include funding to improve or expand council services.
“Competitive funds, often with short timescales, are not a strategic way to fund local services.”
Councils’ ability to mitigate the stark pressures we face are being continuously hampered by one-year funding settlements, one-off funding pots and uncertainty because of repeated delays to funding reforms.
The Government also needs to come up with a long-term plan to sufficiently fund local services.
This must include greater funding certainty for councils through multi-year settlements and more clarity on financial reform so they can plan effectively, balance competing pressures across different service areas, and maximise the impact of their spending.
Councils will need to consider options such as making cutbacks to services or using reserves to meet their legal duty to balance the books this year.
Reserves can only be spent once and we have long warned that using them to plug funding gaps is not a solution to the long-term financial pressures that councils face.
While the Government has confirmed some funding streams for councils for next year, this does not include everything: significant uncertainties remain about the level of funding they will have in 2024/25, which is hampering financial planning and their financial sustainability.
Alongside falling government funding, councils have also become locked into a system that relies heavily on competing against each other for additional government funding.
Competitive funds, often with short timescales, are not a strategic way to fund local services. Levelling Up Secretary Michael Gove’s conference announcement of plans to reform and streamline the local funding system will help, especially if this approach is replicated across all Whitehall departments.
However, we also need to simplify council funding, cut out wasteful and unnecessary bidding for resources and give councils the long-term certainty and stability they desperately need.
With this, we can meet demand pressures and get on with working to improve people’s lives in our villages, towns and cities.
‘Tough choices’ on spending for local services
National growth forecasts are growing increasingly uncertain, with the Bank of England projecting £100 billion less growth by 2026 than the Office for Budget Responsibility, the LGA’s annual conference was told.
David Phillips, Associate Director at the Institute for Fiscal Studies (IFS), speaking at a ‘Forward look on finance’ plenary session (pictured, above), said stubbornly high inflation, slow growth and rising interest rates have negatively impacted the public finances.
As a result, whoever forms the next government faces “tough choices” on spending for local services.
Assuming NHS spending grows in line with recent averages, schools spending remains flat, and defence and childcare spending grows as expected, the IFS estimates that all other unprotected government departments would need to find £18 billion of cuts.
Kate Ogden, IFS Senior Research Economist (pictured, below), said councils had some certainty in their finances in the next few years – for example, with council tax levels already confirmed, alongside increases in adult social care grants.
However, uncertainty remains around the timings of the ‘extended producer responsibility’ packaging reforms – due in 2024/25, but widely expected to be delayed further.
Political parties will also need to provide clarity on their plans for key local government funding reforms, such as the fair funding review, when they publish their election manifestos.
After 2024/25, Ms Ogden predicted a “tighter funding settlement” for councils if pessimistic economic forecasts come to pass, with even more reliance on council tax rises.
Section 114s ‘a sign of control’
A council issuing a section 114 notice when it is struggling to balance its budget is a “sign of control, not failure”.
That was the view of Rob Whiteman, Chief Executive of the Chartered Institute of Public Finance and Accountancy (CIPFA), at a fringe session at the LGA’s annual conference in Bournemouth.
Councils unable to finance their budgets must issue a section 114 notice, which restricts all new spending except for on protecting vulnerable people, statutory services and pre-existing commitments.
They are the last resort for local authorities in financial difficulty, but, in the past three years, an increasing number have had to issue them – including, most recently, Woking, Thurrock and Slough.
Mr Whiteman told the session he was concerned by the number of section 114 notices, and that recent commercial and investment decisions by the likes of Woking and Thurrock risked “damaging the whole sector”, and could lead to greater national controls.
But he added: “A section 114 notice is a sign of control where there’s corporate support to issue it. The best way to avoid a section 114 notice is to have a corporate culture and will to issue it if necessary.”
Also speaking at the CIPFA fringe, on ‘Learning the lessons of 114s’, was Brendan Arnold, Woking’s recently appointed Interim Finance Director.
Mr Arnold warned that “there are probably more councils out there” that will end up with section 114 notices, but that it has been a “key step” on the road to financial recovery for Woking.
Councillors and officers are united by their determination to move forward and make improvements, he said, adding: “It’s easy to demonise councils in this position. It isn’t a badge of shame – it’s a means of finding the solution.”
Mr Arnold also pointed out that Woking has not had an auditor’s opinion on its accounts since 2018/19. Had that happened, the “size and value” of Woking’s borrowing would have been “significantly smaller”.
Mr Whiteman also said the Public Works Loans Board, which lent Woking huge sums in relation to its annual budget, had questions to answer about why it did not query the level of borrowing.