The chancellor claimed he had a good news story on growth and was cutting taxes. But while the economy weathered the pandemic better than expected and avoided a recession this year, the OBR has downgraded forecasts for growth. And the fact inflation is set to remain higher for longer means existing freezes on income tax and NICs thresholds will push the tax burden to a post-war high of 37.7%; the tax cuts Jeremy Hunt announced just reduce the scale of this rise.
Moreover, despite the record tax burden, the surging cost of servicing the national debt means that funding for public services is being squeezed. Indeed, the specific tax cuts announced last week will be paid for almost one-for-one by increasing the real-terms squeeze on public service spending.
What does this mean for local government? The OBR has revised up estimates of economy-wide inflation for this year and last substantially. It now forecasts the GDP deflator will have been 6.7% in 2022-23 and 6.1% in 2023-24 (compared to forecasts of 5.7% and 2.5% as recently as March). This may still understate cost rises councils have faced, but it means that on the Government’s own measure, council funding this year has been much less generous than planned.
As was common across public services, there was no top-up to reflect this. There was nothing to help with the spiralling costs of children’s services, and nothing new to support adult social care services through the coming winter.
Despite rhetoric from the chancellor on the cost of living, the Household Support Fund is still set to end in March, although a last-minute extension at the Spring Budget is still possible.
Last December’s policy statement remains the best guide to the content of the 2024 finance settlement. That pencilled in a further £1.1 bn increase in social care grants. Fairly buoyant retained business rates and a further year of 5% bill rises for many council taxpayers would together mean a rise of around £5bn in core spending power in 2024-25.
But higher inflation forecasts mean this is also less generous than expected last December. And it seems very likely that some of this year’s high inflation will feed through to councils’ costs with a lag. The really substantial 10% rise in the National Living Wage – while welcome news for workers – will add to pressure on adult social care budgets. It also leaves very little headroom between the lowest point on the NJC pay spine (£11.59) and the new NLW (£11.44), which will make the 2024 local government pay round much more challenging.
The OBR are certainly not complacent about the state of councils’ finances. Councils used £2.3bn of reserves in 2022-23, and the OBR now expects further drawdowns of £1.5 billion in 2023-24 and £0.8 billion in 2024-25 (it hadn’t expected any drawdown in the latter two years back in March).
Amid the gloom, there were some policy decisions which will cheer councils though.
The chancellor confirmed four new devolution deals, and that ‘Level 2’ devolution powers will be offered to more areas.
Councils will be able to set planning fees to recover the full costs of processing some major applications, with fees refunded if deadlines are not met. The details will need to be right to ensure councils aren’t penalised for delays outside their control (including those due to the information provided by developers).
Areas facing shortages of temporary accommodation will have welcomed confirmation of £450m for a third round of the Local Authority Housing Fund.
And the resetting of Local Housing Allowance rates to the 30th percentile of 2023 market rents (they had been frozen at 2019 levels) will make it easier for low-paid renters to find properties they can afford. This should help ease some of the immediate pressure on councils’ housing services, but is only a temporary fix, with rates then set to be re-frozen indefinitely.
The deepest cuts to public services are still pencilled in for after the next election. Day-to-day public spending is set to increase by 0.9% in real-terms on average each year from 2025-26 to 2028-29, but colleagues have estimated that – along with existing commitments on health, defence, overseas aid, schools and childcare – this implies a 3.4% real-terms cut each year for ‘unprotected’ departments in England. The cuts for budgets other than health would need to be broadly similar over the next Parliament to those seen under Osborne, but there’s less left to cut this time round, and performance is already declining across the public sector.
These spending plans may not be deliverable. Government is banking on truly heroic increases in public sector productivity, with plans to cut admin burdens on frontline police and teaching staff. It hasn’t spelt out what this productivity drive might mean for councils, but they can expect to be asked to find efficiencies.
In practice, it seems likely either taxes will have to rise further, borrowing will have to rise (risking fiscal sustainability), or the range and quality of public services provided will have to fall. Not quite what it said on the tin last week.
Kate Ogden is senior research economist at the Institute for Fiscal Studies
