Stormy waters ahead

By Mark Conrad | 08 January 2024

As fireworks exploded across the UK to welcome 2024, many pundits observed that politics and public policy will be dominated by the similarly glitzy bombast of a General Election.

But while the national vote will draw media attention, at sub-national level 2024 will be about the more immediate task of crisis financial management. Despite December’s (just) above-inflation provisional finance settlement averaging increases of 6.5%, levelling up secretary Michael Gove couldn’t produce the more generous offer needed to mitigate the soaring cost of social care, children’s services and homelessness. When councils factored in the planned 9.8% increase in National Living Wage – designed to ease recruitment and retention issues – some immediately emerged worse off.

Consequently, several experts warned more councils will issue section 114 notices. After Gove announced his £64bn finance package in late December, Havering LBC warned it is close to issuing a dreaded s114 due to a lingering deficit of £12m this year. Bradford MBC stands on the precipice, too. Both are simply victims of the sector’s tough financial climate.

This has been local government’s landscape for some time. While whole-economy inflation is finally falling, the cost of compulsory or key service provision continues to soar while new, often unfunded, demand rises. It means December’s average 6.5% increase in councils’ budgets is a cut per service recipient across many authorities.

As Cllr Stephen Houghton, Barnsley MBC leader and chair of the Special Interest Group of Municipal Authorities (Sigoma), told The MJ, the annual settlement didn’t just fall short of what is needed to galvanise the sector, it was also ‘flat’, meaning every authority – including better off areas – receive broadly the same spending power increase. It is barely redistributive or linked to need.

‘The problem for us is twofold. First, there’s not enough money in the system. But secondly, the distribution of funding and income is uneven across the sector. Wealthy places have got as much out of the settlement as poorer places with high needs and high demands,’ Houghton explained. It is a warning echoed by the respected Institute for Fiscal Studies (IFS).

In discussions with The MJ this week, three major groups of councils – counties, districts and large urban metropolitans – outlined concerns about what they face this year unless they squeeze further cash from Gove during the provisional settlement consultation period: an unlikely outcome.

County councils

James Maker, director of policy and communications at the County Councils’ Network (CCN), warned that, even after the provisional settlement, ‘the biggest financial issues facing our member councils will mirror those they have experienced in the last 12 months’.

Specifically, counties face across-the-board inflation now baked into budgets and provider costs, as well as soaring demand for children’s services – particularly care placements – and home-to-school transport (HTST).

‘These account for almost three-quarters of our member councils’ projected overspends of almost £650m this year, and these pressures show no sign of abating in 2024,’ Maker explained.

Alongside this, counties face an ‘exponential’ rise in demand for the wider special educational needs and disability (SEND) services fuelling HTST costs, he added.

‘Faced with these pressures, and if there is no extra funding at the final local government settlement, the key challenge for many councils next year will be to deliver a balanced budget without draconian cuts to local services and unsustainable use of reserves,’ Maker warned.

During the settlement consultation period, counties are demanding ministers review their offer for 2024-25, to help councils ‘get over the hill and down the other side for one year’ – beyond the General Election. After that, the CCN said, its members need longer-term sustainable funding from any new Government.

Perhaps more importantly, Maker said, future settlements must be accompanied by a dose of realism about what councils can afford to deliver. For counties, that means reforms to tackle the ‘unsustainable’ rise in SEND demand and address the ‘broken’ residential market in children’s social care – including caps on spiralling placement charges levied by private providers and possible means-testing of HTST eligibility.

Urban municipalities

Urban centres continue to struggle to meet soaring demand on care, and have been hit hard by fresh demand on homelessness and housing services – including resettling record numbers of asylum applicants.

After the addition of Middlesbrough Council in December, Sigoma represents 48 of England’s largest urban centres and 25% of all council funding. But after years of austerity, including government direct grant reductions of 45% since 2010-11, there is a feeling that few obvious budget cuts remain. What comes next, after a likely exhausting of reserves, could become an existential threat to non-statutory services – and cuts to statutory provision.

Houghton explained: ‘We are at the point now where the financial viability of the sector is at risk, with many local authorities indicating the financial pressure they face. There is simply not enough funding in the pot to cover the increases in demand-led pressures we are seeing.’

‘For municipal authorities, the challenges are especially significant – they have seen the biggest cuts and have the greatest need. The IFS found that changes to funding formulas over the last 13 years mean more deprived areas – predominantly municipal authorities – are relatively underfunded relative to need. The current Prime Minister has made no secret of how he re-designed funding formulas to facilitate this.’

That final point, of course, led to accusations the Government’s much-heralded 2019 General Election slogan of ‘levelling up’ Britain ended with little more than post-election lip service – a claim rejected by Whitehall.

Sigoma has called this year for an ‘un-ringfencing’ of social care grants to help councils – allowing funding to be spent where the demand is, whether that be children’s or adult services. Urban municipalities also want greater financial certainty, for example multi-year settlements and clarity on future funding reforms.

District councils

Cllr Elizabeth Dennis is leader of North Herts Council and finance spokesperson at the District Councils’ Network (DCN). As she explained following the provisional settlement, non-statutory services across districts – urban and rural – also face existential challenges.

As with major cities, districts face soaring bills for temporary accommodation. Yet the costs they can claim back from the Government for nightly accommodation are heavily capped.

‘This is a significant financial pressure for many councils and risks pushing some into financial distress,’ Dennis warns.

Where councils need to use bed and breakfast sites or hotels to alleviate homelessness, they are currently only able to claim back up to the one-bedroom rate that applied to Local Housing Allowance in 2011: around £109 per week. That is far short of the cost of nightly accommodation, and causes significant shortfalls or raids on other budgets.

Dennis explained one south east-based district can claim just 14% of its entire temporary accommodation spending and must find the rest.

As a DCN briefing explains, the subsidy is ‘outdated’, based on ‘the assumption that there is sufficient temporary accommodation’ available –and that councils don’t need to rely on bed and breakfast sites and hotels. But as Cllr Dennis warned, with demand as it is right now, neither assumption could be further from the truth. In June 2023, 47% of households in temporary accommodation across DCN council areas were in nightly accommodation.

Councils face a similar situation with self-contained accommodation.

Increases in LHA rates from April 2024 will help and prevent some residents from going into temporary accommodation. However, it will not cut the cost of households already in temporary sites. ‘We need subsidy rates updated to LHA rates in 2023, alongside an expansion of the Local Authority Housing Fund to allow all councils to invest in temporary accommodation to keep residents out of hotels,’ Dennis warns.

Beyond housing, districts have warned that their discretionary offerings are also under serious threat.

As Dennis explains: ‘We’re left with a range of unpalatable choices about which services we must cut. DCN’s research shows that culture, community support, parks and leisure are the most vulnerable service areas. But in reality nothing is safe.’

Not even the current arrangements for statutory services. Last summer, the DCN reported a third of districts believe they will need to make cuts to waste services. A recent briefing suggests ‘with the increase in demand for council services since then, this situation is likely to have intensified’.

Will 2025 be worse?

All of this is a stark warning about 2024. But hard finances will not end this year.

The IFS’s post-provisional statement said: ‘We would hazard that the worst could be yet to come. The next Spending Review period could be a much tougher one for local government. Day-to-day funding for public services is due to increase by just 1% above economy-wide inflation in each of the years between 2025-26 and 2028-29.

‘[But] funding for other services in England may need to be cut by an average of more than 3% per year in real terms…it is from 2025 onwards that councils and the Department for Levelling Up, Housing and Communities are likely to face the stormiest waters.’

Ouch! Happy New Year.

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Finance SIGOMA County Councils Network Housing District Councils Network General Election S114 SEND Michael Gove DLUHC