In year overspends and the ‘battle to balance budgets’

Up and down the country’s finance departments are issuing stark warnings about their ability to balance budgets. Kirsty Weakley reports

Budget-setting season feels like a distant memory. Since February England have won a major football tournament, the UK has been asked to host Eurovision, there have been two prime ministers (with three leveling up secretaries), and inflation has spiraled to levels not seen for decades.

It is this last point that is causing finance departments in local authorities the biggest headache as they prepare for a difficult winter. Inflation, currently around 10%, is significantly higher than the 3% most expected when budgets were set.

Over the summer and early autumn several councils, including those with a reputation for managing their finances well, issued warnings about projected budget gaps. In some areas this is already having an impact on services, while others have warned that more cuts are on the cards unless the government comes through with some extra support.

With the new prime minister Liz Truss, and a fiscal event, or ‘mini budget’, scheduled for Friday, the sector has been urging her to address financial challenges.

The sums involved are eye watering. Earlier this year the Local Government Association warned that energy bills, wage pressures and inflation could together lead to £2.4bn in extra costs for the sector this year.

In a letter congratulating Ms. Truss on her appointment as prime minister, senior representatives of the LGA warned her that without addressing “this significant funding gap” councils faced a “battle to balance budgets”.

Furthermore, the letter – co-signed by LGA chairman James Jamieson (Con) and the leaders of all four political groups at the LGA – highlighted particular challenges for adult social care budgets and urged the new prime minister to direct more funding this way.

Joanne Pitt, policy adviser at the Chartered Institute of Public Finance and Accountancy, told LGC, that rising energy bills and issues with social care were the two big financial crunchpoints, where cost pressures have arisen “not through any fault” of the councils.

She said that any government help for individuals would also be welcome because it would mean that “there is a little bit less pressure in the system”.

“Any additional funds need to reflect, I think the seriousness of the financial pressures being felt by local authorities at the moment,” she said.

Yesterday the government unveiled a package that will support councils with their energy bills for at least the next six months. The sector said this support was welcome but warned that the biggest pressure on budgets was pay increases and more support was needed.

Coventry. ‘There’s more variables out there than there’s ever been’

Earlier this summer Coventry City Council warned that after the first quarter of the financial year it was now forecasting an overspend of £9.5m, against a budget of £237.4m for this year.

Richard Brown (Lab), cabinet member responsible for finance, told LGC that after a decade of cuts this means there will be “tough choices” ahead, as it struggles to balance this year’s budget and plan ahead for next year.

Cllr Brown describes Coventry as a “pretty lean” council. “We robustly manage every pound that we spend.”

However, this year and next year will be among the “toughest” for the council because there are “more variables out there than there has ever been”.

Alongside inflation, the council has seen a sustained surge in demand for children’s social care services and has struggled to recruit skilled staff.

Together the spending on adult and children social care services accounts for around two thirds of Coventry’s budget and comprises of services it must deliver by law, meaning the council is restricted when it comes to cutting costs.

Like many councils Coventry is struggling to fill vacancies leading to increased reliance on agency staff.

Paul Jennings, finance manager at Coventry, said: “This is one that’s affecting the whole economy, but some labor shortages, [mean]it’s really tough to get people in.”

For areas such as children’s social care, this leaves councils forced to go down the agency route because “you can only afford to run with a certain level of vacancy”.

Leicestershire. Looking at where to cut services

This week Leicestershire CC revealed that it had started looking at what it could cut from next year to deal with a growing budget gap.

The county expects an overspend of £8m this year and predicts the shortfall could reach £140m in four years’ time if action is not taken, something its leader Nick Rushton (Con) described as “frightening” in a briefing to journalists.

Leicestershire has set out a number of potential service cuts for future years ahead of a cabinet meeting this Friday.

This could include reducing packages of support for adults with social care needs or children and young people with special educational needs and disabilities, only carrying out emergency road repairs and ceasing to subsidize local bus routes.

Cllr Rushton admitted that some of these cuts would be “terrifying to enact”.

Declan Keegan, assistant director of strategic finance, emphasized that councils have “very limited control over our income”.

In light of, new inflationary pressures, Mr. Keegan added. “If we want to balance that budget, which we absolutely have got to do, something has got to change. And the scale that we’re talking about is just not going to be feasible by efficiencies.”

Without additional funding from Whitehall, “local government has got to fundamentally do less in terms of the services that it can offer,” he added.

Plymouth. “We will leave no stone unturned”

In August Plymouth City Council declared that it expected an overspend of £13.5m this year, against an initial budget of just under £200m. By September this had risen to £14.8m, but savings of £6.1m had been identified.

Cabinet member for finance Mark Shayer (Con), said: “This is good progress but it remains a very serious position to be in at this stage in the financial year, especially when we know we will have a very significant shortfall in the resources we need to set a balanced budget for next year.”

The council has now launched a recovery plan and will review all of its fees and charges, procurements and contracts, capital program costs, management of debts, buildings and other initiatives.

“This is urgent and we have to take decisive action. We will leave no stone unturned or opportunity missed to identify ways of reducing costs as overspending is simply not an option,” Cllr Shayer added.

As part of its cost-cutting efforts, Plymouth ended garden waste collections earlier this year. By stopping collections in August, instead of November as planned, the council estimates it will save around £200,000.

Lancashire. Looking for efficiencies

Lancashire CC is another council to have revised its forecasts earlier this month and is projecting an overspend of £17.7m against an initial budget of £948.1m.

This is expected to rise to a shortfall of £87m in 2023-24 and the council is looking to find efficiencies now.

Unlike other councils, Lancashire is confident it can weather the storm, and has tried to reassure residents.

Alan Vincent (Con), deputy leader, said: “As a council we have successfully faced much tougher financial challenges in the past few years and because of our active stewardship our financial health is good, with healthy reserves.”

Nevertheless, Lancashire is looking to make savings. “Wholescale staffing reductions are not something we are currently considering, but if wages and inflationary pressures continue to rise that reluctance would have to be tempered by the harsh realities that pressure creates,” Cllr Vincent said.

“We do know there are some big cost areas where we need to focus our efforts, including vacant posts, sickness absence and agency costs. We are also exploring our contracts and property costs to see what opportunities exist there.”

Raising council tax?

It is difficult for councils to simply pass on the cost of inflation to residents.

Councils cannot increase council tax by more than 3% each year, without putting it to a referendum – something no council has ever tried, although some have mooted it.

In Coventry, Cllr Brown said that if the council did put the idea to a vote. “I can pretty much guarantee what the answer would be”.

He also believes that in light of the pressures individuals are facing on their household incomes it would simply be “the wrong thing to do”.

Leicestershire is similarly reluctant to seriously consider the idea.

Cllr Rushton said: “Personally, I’m not in favor of increasing council tax by more than 3%.” And I’m sure we’d lose a referendum if we went for one.

“But if we did go for a referendum and it was passed by the population, it would require a 10% council tax increase compounded for four years to bridge the sort of gap which we’re looking to have to bridge.”

Call for longer term planning

When he was leveling up secretary, Michael Gove promised that next year’s financial settlement would cover a two-year period, instead of one year. However, a paper prepared for the LGA’s resources board later today warns that it is now “not clear whether there will still be a multi-year settlement”.

The obvious solution to the unexpected budget pressures is for the central government to release additional funding.

Cllr Rushton, said he hopes the new government will “recognise” the scale of the difficulties being faced by the local government.

Meanwhile Cllr Brown called on Ms Truss to properly review how local government is funded and highlighted delays to reviews of business rates and fair funding.

“The whole system of the way local government is financed needs to be overhauled,” he said.

Cllr Brown is also frustrated by how long it takes to get the local government finance settlement agreed each year, which makes it harder to plan.

“We have to fly by the seat of our pants, we have to best guess and it’s getting harder to do that,” he said.

If, as many expect, significant extra funding is not forthcoming, the next best thing is greater certainty so that they councils can plan for the long term.

As Ms. Pitt said: “If you allow for better financial planning, invariably, it results in better value for money.”

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