Council finance teams are accustomed to pulling rabbits from hats, but negotiating the current economic turmoil may be beyond even their magic touch.
Inflation has already hit double figures and with some predictions foreseeing it hitting 18% next year, every authority in the land will be affected.
‘The impact on different councils could be quite different both in terms of scale and timing of impacts,’ said David Phillips, head of local government finance at the Institute for Fiscal Studies (IFS).
In terms of costs, authorities locked into energy contracts will initially be shielded against steep price hikes, and similarly service providers may have to shoulder some cost increases of running outsourced services.
‘Councils that raise significant sums from sales, fees and charges will face tricky trade-offs,’ Mr Phillips added.
‘On the one hand, increasing them in line with inflation would raise significantly more with inflation higher. On the other hand, might they want to hold prices down to help local residents?’
These considerations are particularly acute for lower-tier authorities, said Tracy Bingham, the District Councils’ Network’s finance policy officer and chief finance officer at Oadby & Wigston BC – one of the smallest authorities in the UK.
‘Because we are so small, we have the issue of scale – big swings in inflation can mean impacts can be quite scary,’ she said.
Districts have to contend with fuel price hikes for their fleets of refuse vehicles and the costs of running energy-intensive leisure centres still suffering the impact of pandemic lockdowns.
‘They were really damaged by Covid and I don’t think they recovered,’ Ms Bingham added.
‘For most district councils, spending is not in line with funding. Service pressures are starting to come through now.
‘We are already financially challenged. Inflation has brought that to our doorstep now.’
Inflation also has knock-on impacts for higher-tier authorities, leading to calls for higher pay increases and heightened demand for support services.
President of the Society of County Treasurers, Chris Tambini, told The MJ: ‘Inflation is having a massive impact on county council budgets this year and this is only expected to worsen next year.
‘This year’s pay offer alone will result in an extra unbudgeted cost of between £5m and £10m for a typical county council.
‘We know that as household budgets for the poorest become stretched this often results in increased demand for social care services as families are put under stress. This extra demand is going to be very difficult to manage.’
Anthony Payne, first vice president of ADEPT (Association of Directors of Environment, Economy, Planning and Transport) has seen highways maintenance contracts increase by 10% to 15%.
‘We have got significant non-controllable costs affecting our budgets, they’ve come along and hit us like a train. It’s not because of poor financial management by councils, it has come out of left-field.
‘I don’t know how authorities are going to deal with these pressures while delivering services.’
Mr Payne, who is also director of place at Plymouth City Council, said inflation was also putting capital projects at risk, citing one large authority that now has a £100m budget gap across four of its planned schemes.
‘They just haven’t got the capacity to cover that amount,’ he said.
‘The price has gone up so high, the council wouldn’t have the money available to bridge the gap. All the councils I’m close to are reviewing their pipeline.’
The impact is already being borne out in council budgets, with projected overspends running to eight-figure sums.
The Chartered Institute of Public Finance and Accountancy’s (CIPFA) head of policy, Kirsty Stanners, said: ‘Inflation is already having a huge impact on the entire public sector and is likely to get worse before it gets better.
‘Budgets will not stretch as far as they did only six months ago. Local authorities across the UK will need to consider every decision even more carefully to make it through these uncertain times.’
She added that a CIPFA survey found 68% of local authorities were planning to readjust their savings plan.
‘A decade of austerity has led to huge reductions in local government budgets. The sheer scale of the inflationary impact on these organisations, on top of austerity and concerns that the additional funding for adult social care reform will fall far short, mean that this will be a bleak time for many councils.’
Indeed, the scale of the challenge eclipses even that posed by the onset of austerity a decade ago, with Mr Tambini saying ‘it feels like it is going to be far tougher than the austerity years’.
IFS senior research economist, Ben Zaranko, said: ‘Local authorities were relatively flush with cash in 2010 and managed to make sizeable cuts, for a time, without having too big an effect on services.
‘This time could be harder to deal with – even if the scale of any cuts is much smaller.’
Mr Payne added: ‘We knew there was going to be a sustained period of reduced funding. These things take time and are part of a strategic plan. We can’t prepare for it in such a short period of time.’
John Hart, leader of Devon CC, which faces a £40m budget gap this year, has warned councils ‘will go bust’. So what is the answer?
Durham CC and Manchester and Sunderland city councils are among those to have demanded more central Government funding for the sector.
Stoke-on-Trent City Council’s leader Abi Brown has appealed for a Government grant to plug its £12m budget gap on the basis it was a special case due to its low-wage economy.
West Dunbartonshire Council has also warned of cuts to services unless it receives support from Holyrood to bridge an estimated £14m gap.
Mr Tambini said: ‘Without extra funding next year there will inevitably be service cuts to balance budgets.
‘We need to push Government to index link our funding either to CPI or the growth in average income.’
But Ms Stanners said it was ‘unlikely’ that the sector will see any significant funding increases from the new Prime Minister.
The IFS’ latest calculation puts councils’ core spending power growth at 1.6% per year on average until 2024-25. To restore it to the 3% promised in the Spending Review would cost an extra £1.2bn this year.
Luton BC is to lobby the Government to be put in the same class as London boroughs for funding purposes as it grapples with a £10m overspend, while officers at Bradford City Council anticipate a fair funding review would help them to tackle its medium-term inflation pressures.
However, this will hinge on the agenda of the next local government secretary.
Ms Bingham said the DCN is continuing to ask for more flexibilities to help themselves, chief among them the lifting of current restrictions on council tax rises, freedom to set their own planning and licensing fees, and the retention of the New Homes Bonus in the short-term.
Ms Stanners said there was ‘no single magic answer’ and ‘a combination of approaches will be needed to weather this storm’.
‘To deal with the scale of the problem, public bodies need to take an organisation-wide approach to decision-making and reassess their budgets and spending in the first instance to better protect themselves from inflationary pressures.’
