Inflation, rising energy costs, potential pay awards, increasing demand for services and Treasury turmoil are leading to significant overspends in local authorities’ budgets.
Over the last week, Birmingham City Council, Peterborough City Council and Durham County Council have all indicated that they face overspends significantly higher than previous predictions.
Cllr James Jamieson, Chairman of the Local Government Association, told Room151: “The dramatic increase in inflation has undermined councils’ budgets. Alongside increases to the National Living Wage and higher energy costs, this has added at least £2.4bn in extra costs onto the budgets councils set in March this year.”
Birmingham City Council has forecast a new budget gap of £80m for 2023/24, which has significantly increased since a previous prediction in February 2022 of £33m. The overspend for the authority is also expected to rise to £146.5m in 2026/27.
Rebecca Hellard, Birmingham City Council’s director of finance, outlined that the authority’s updated overspend is calculated in light of the recent economic volatility provoked by the chancellors’ mini-budget in September, which could prolong the rise in inflation.
The dramatic increase in inflation has undermined councils’ budgets. Alongside increases to the National Living Wage and higher energy costs, this has added at least £2.4bn in extra costs onto the budgets councils set in March.
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‘Most challenging’ period
Hellard said in a report: “As stated in the Financial Plan in February 2022, 2022/23 is ‘…one of the most challenging periods in public sector finance’.”
“It is likely that the (Bank of England’s Monetary Policy Committee’s) rate will be increased further, with the recent announcements by government on tax cuts expected to prolong the period that higher inflation will remain in the economy.”
Similar to Birmingham, Peterborough City Council originally predicted a £9.5m budget gap in July 2022, but due to high inflation and an increase in pay awards the authority has now estimated a £21.7m budget gap for 2022/23.
This follows a pay offer in July by the National Employers for Local Government Services, which offered council employees a flat-rate pay increase of £1,925 equating to a pay rise of more than 10% for those on the lowest pay points.
A report by Cecilie Booth, Peterborough City Council’s executive director of resources and s151 officer, said: “The council, like many others, built the 2022/23 budget on the assumption the pay award would be circa 2%. If this offer is agreed, it will create an ongoing £2m budget pressure.”
This comes as new research by the Institute for Fiscal Studies has found that a 5% pay award across local government would “roughly” cost councils £1.7bn.
In addition, rising energy and fuel costs are biting away at Durham County Council’s budget. The authority has set out a requirement to identify additional savings of more than £52m between 2023/24 and 2026/27 to balance its budget. More than 70% of the savings figure (£37m) will need to be achieved during the next financial year (2023/24).
It is clear that the government needs to come up with a long-term plan to manage this crisis. Inflation is not going to come down overnight; reserves can only be spent once; a local service cannot be cut twice.
Volatile energy prices
Cllr Richard Bell, deputy leader and portfolio holder for finance, said in a report: “Over the last six months, however, mainly because of the conflict in Ukraine, (energy) prices have been extremely volatile and have increased significantly.”
Bell also highlighted that the government’s package of measures to cap energy costs for households and businesses is not enough. This is because the support to business is only for the initial six months and “is not expected to help offset the £9m of budget growth that is required in 2023/24”.
Other reasons for the council’s overspend include interest rate rises, inflation, pressure from increased demands in children’s social care and continued uncertainty about future government funding.
Jamieson added: “While recent announcements on the energy cap and national insurance rise are helpful, these only go a small way to bridge the gap. Councils are now having to try and find ways to meet these costs this year and limit the damage to the local services that so many people rely upon.”
Jamieson detailed that many local authorities were having to use reserves to plug funding gaps, stop capital projects or make cutbacks to services to balance their books.
“However, with local government facing a funding gap of £3.4bn in 2023/24 and £4.5bn in 2024/25, it is clear that the government needs to come up with a long-term plan to manage this crisis. Inflation is not going to come down overnight; reserves can only be spent once; a local service cannot be cut twice,” he continued.
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