The latest analysis from the Office for Budget Responsibility (OBR) has predicted that local authorities will have to draw down £2.3bn of reserves over the next two years, compared to previous assumptions of no drawdown.
Following chancellor Jeremy Hunt’s Autumn Statement yesterday (22 November), the OBR has updated its economic and fiscal forecast for the next five years. It stated that pressure on local authority finances and services will continue, with locally financed expenditure expected to increase from £62.2bn in 2023/24 to £75.3bn in 2028/29.
The OBR stated that as a result of the ongoing funding pressures, local authorities will draw down £1.5bn of reserves in 2023/24 and £0.8bn in 2024/25. This is compared to previous estimations in March of no drawdown in both years.
This comes as in 2022/23 local authorities drew down £2.3bn of reserves, making it the first time since 2019/20 that councils used reserves for current spending.
The government watchdog also noted that since 2010/11, local authority spending has fallen from 7.4% to 5.0% of gross domestic product (GDP), with it falling further to 4.6% of GDP in 2028/29.
“Given local authorities’ statutory duty to provide a range of services where demand is likely to continue to grow, for example, adult and child social care, pressure on local authority finances and services will continue,” the OBR said.
Growing number of s114s
The OBR also stated that since 2018, there have been eleven section 114s notices issued by local authorities, compared to the two issued since 2000. “These notices indicate that the authority’s forecast income is insufficient to meet its forecast expenditure for the next year.”
However, it stated that the direct impact of these section 114s on its forecast is “relatively small” due to the government allowing affected authorities to reallocate their capital budget towards day-to-day spending or to increase council tax rates.
The OBR also predicted that locally financed capital expenditure is expected to fall slightly in 2023/24 to £8bn and then to £7.7bn in 2028/29.
Alongside this, borrowing for capital expenditure is expected to decrease from its 2019/20 peak (£11.5bn) to £7bn in 2028/29.
“This reflects the financial pressures facing local authorities and higher interest rates on loans from the Public Works Loan Board, their principal source of financing.”
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