Cost pressures modelling 2021 – Technical Annex

The LGA regularly updates its analysis on future cost pressures facing local councils, especially aimed at influencing the Government’s set piece announcements, such as Spending Reviews. This analysis is based on financial data reported by councils in the Revenue Outturn (RO) forms, along with a set of assumptions which are considered to drive demand for services and therefore spend on delivering services.

The model draws on net expenditure figures recorded in the RO forms. In order to increase the accuracy of the analysis, assumptions directly affect components of net expenditure: cost of employees, running costs, income from sales, fees, and charges, and other income.

Further detail on the expenditure information and assumptions are provided in the sections below, and the full list of all Revenue Outturn lines and all assumptions are detailed in the documents linked in the Appendices section.

Expenditure data

Each year, councils submit financial data to the Ministry of Housing, Communities and Local Government (MHCLG) on spending and income from delivering local services through the Revenue Outturn (RO) forms. The cost pressures model only considers revenue spending and income; capital spending is not within the scope this analysis.

Revenue outturn data from 2019/20 is used as a baseline. This is because the 2019/20 data was the latest published outturn data when the analysis was carried out, and this data was unadjusted by the COVID-19 pandemic.

Using this financial data, the cost pressures model projects the path of council spending between 2019/20 and 2024/25 in ten major service blocks:

• adults Social Care
• children’s Services (excluding Education)
• public health
• highways, roads and transport
• housing (not including housing revenue account (HRA) or housing benefit)
• culture, recreation and sport
• environment including waste
• regulatory services
• planning and development
• central services.

These service blocks can be split further into individual service lines, detailed in Appendix 1.

Net Expenditure was split into its four composite parts:

• employee expenditure
• running costs
• sales, fees and charges
• other income.

Sales, fees and charges and other similar income are treated as reductions to gross expenditure to arrive at ‘net expenditure’ within the model. This means that an increase in sales, fees and charges would reduce the cost pressures by reducing total expenditure.

Spending has been excluded on Fire (as a group of single-service authorities with their own precept), Police (for the same reason, as well as reflecting the likelihood that they will continue to receive differential treatment in the Spending Review and future council tax frameworks). Spending on Education has also been excluded as local council spending cannot be separated from mainstream education spending, and spending has been excluded on HRA and housing benefit spending.

Assumptions and Methodology

Assumptions are variables which directly affect net expenditure. The projected annual change in these variables is multiplied by the previous year’s relevant expenditure line to represent the change in costs/income. Where possible, the change in these variables is based on published projected data; if this is not available the projected change is based on an average change over the previous five years. The projected change to all variables is based on public data from reliable sources.

Assumptions essentially break down into two categories:

• drivers of unit cost (inflation, pay drift, efficiencies)
• drivers of service usage (population change, increased traffic miles).

There are general assumptions which apply to all or most service areas, such as population change and inflation, and more specific assumptions which only apply to individual service areas, for example the change in vehicle miles for road maintenance. These assumptions are explained in more detail in the following sections.

Where possible, the assumptions are based on published projected data; if this is not available the projected change is based on an average change over the previous five years (excluding the year of the pandemic). The projected change to all variables is based on public data from reliable sources. Information on whether assumptions are based on published projected data or previous trend data, and sources of this data, is in Appendix 2.

Assumptions impacting all or most services

There are a few assumptions which affect all or most services and are considered to drive the demand for and cost of delivering services. These are: change in pay of employees, change in population, and change in inflation. These assumptions are included in the list of all assumptions in Appendix 2.

Change in pay of employees

There are two pay pressure assumptions included in the model: one for directly employed council staff, and one for adult social care commissioned services. We liaised with the workforce team to calculate the change in pay pressures over the next three years. The pay pressure assumptions are the biggest factors affecting the cost pressure forecasts and affect each employee cost line in every service area.

The change in pay for directly employed staff has been calculated based on the recently implemented pay spine having a minimum level that reaches £10.75 per hour by 2024/25 and hits the maximum Low Pay Commission forecast for the National Living Wage (NLW) in the years preceding. The pay pressure assumption is applied to direct council employee costs covered by local government services collective bargaining. This leads, effectively, to average annual pay bill pressures of 3.8 percent, with the largest increase in 2023/24.

The main reason for such a high estimate is that the NLW is expected to rise significantly in the next three years (potentially 18 percent on current estimates) to meet the Government’s manifesto commitment of matching 66 percent of median earnings by 2024/25. As further evidence of the scale of the challenge, currently the bottom 7 pay scale points pay below £10.75 per hour, accounting for almost 100,000 FTE posts, or around a quarter of all local government FTE posts that are on the pay spine.

If the Government retains its stated policy on the NLW, significant increases to the pay bill will be unavoidable for local government to ensure councils remain legally compliant with minimum wage legislation, avoid being pegged to the NLW, and avoid a further renegotiation of the pay spine which could result in even greater upfront cost.

Added to the NLW, the pay pressure assumption for directly employed staff also accounts for changes to national insurance contributions as a result of the new health and social care levy. In order to estimate the increased cost to councils due to higher national insurance contributions, 1.09 percent (the effective increase in the pay bill as a result of the national insurance contribution increase) is deflated by 30 percent (as not all costs in employee costs are relevant, such as pension contributions). This figure is then added to the pay pressure estimate in 2022/23 (3.18 percent) following the analysis outlined previously. This results in the pay pressure for 2022/23 rising to 4.0 percent to account for increased national insurance contributions. Only the 2022/23 pay pressure is affected, as this is a one time increase in national insurance and after 2023/24 the increase has been built into the base costs (it will not increase again in 2023/24).

The pay pressure on adult social care commissioned services is calculated using projected changes in the NLW. As this does not encapsulate the full costs of commissioning a service, the pay pressure is combined with Consumer Price Index inflation, which follows our modelling from last year. Each assumption is weighted and applied to the adult social care running costs of direct services such as physical support, sensory support, support with memory and cognition, learning disability support, and mental health support.

To account for the rising costs in commissioned services as a result of the increase in national insurance contributions from 2022/23, two assumptions are calculated to impact social care (Children’s and Adults), and all other services. For the social care assumption, as with the pay pressure for directly employed staff calculation, 1.09 percent (the effective increase in the pay bill as a result of the national insurance contribution increase) is deflated by 30 percent (as not all costs in employee costs are relevant, such as pension contributions). This is then multiplied by 60 percent (the assumed proportion of social care running costs which are linked to agency costs) and 69.4 percent (representing the proportion of agency costs which are employee costs, derived from analysing the Subjective Analysis Return (SAR) data). This results in a 0.3 percent assumption applied to the running costs of social care services. The assumption for all other services follows a similar calculation as for social care, with 1.09 percent being deflated by 30 percent. This is then multiplied by 50 percent (the amount of all other services which are assumed to be outsourced) and by 28.6 percent (representing the proportion of agency costs which are employee costs, derived from analysing the Subjective Analysis Return (SAR) data). This results in a 0.1 percent assumption applied to the running costs of all other (non social care) services.

Change in population

An increase in population will likely increase the demand for services, and therefore both the costs and income from running the service will likely rise, because of this population projections affect the cost and income lines in each service. Data for population projections is taken from the Office for National Statistics (ONS).

The population age is tailored for each service (for example population change for 0-5 year olds is used for Early Years), and the change in population affects the majority of services’ cost/income lines, with the notable exclusions of adult social care and children’s social care.

In children’s social care, we have good information about actual demand for services, for example the numbers of looked after children which have grown faster than child population. Using population growth would underestimate the likely pressure.

On adult social care, following modelling from previous years, the Personal Social Sciences Research Unit (PSSRU) provides a more specific demographic demand assumption for adult social care services for adults aged 18-64 and 65+. This assumption is used instead of population for the majority of individual service lines in adult social care. It is also higher than population growth in those cohorts.

Change in inflation

We assumed that running costs and additional income from sales, fees and charges, and other income would be sensitive to prevailing economic condition. Therefore, Consumer Price Index (CPI) inflation affects running costs, sales, fees, and charges, and other income net expenditure lines for all services (except waste management where the Retail Price Index was considered more appropriate because many contracts are linked to this measure rather than the lower CPI).

Assumptions impacting specific services

Most of the other assumptions only impact one service area, and some impact just one service line of a service area.

Initially, these assumptions were based on our funding gap modelling from 2019 for ‘priority’ services, such as adult and children’s social care and homelessness, and 2015 for other services. Colleagues in the policy directorates of the LGA were then consulted to ensure the assumptions were appropriate and relevant, with changes incorporated.

This section sets out the other assumptions (in addition to the assumptions listed in the previous section) used in each service area. It explains whether the assumption is based on published projected data (in which case the annual change in future years will be different) or based on previous trend data (in which case the annual change in future years will be constant). A source for the data is also included.

Each assumption is applied to all lines of net expenditure data – employee costs, running costs, income from sales, fees, and charges, and other income.

Adult social care

• The change in 16-59 year olds using illicit drugs is applied to the revenue outturn line “Social support: substance misuse and support” and is based on the average change of adults aged 16 to 59 using illicit drugs over the past five years. The data source is from the Office of National Statistics (ONS); table 3.08.
• The change in the number of Asylum seekers over 18 is applied to the revenue outturn line “Social support: Asylum seeker support” and is based on the average change in the number of asylum seekers over 18 over the past five years. The data source is from the Home office.

Children’s services

• The change in the number of looked after children is applied to the revenue outturn line “Children's social care - Children Looked After” and is based on the estimated rate of growth in looked after children based on the projected child population. The population data source is from the ONS and the looked after children data is sourced from the Department for Education (DfE).
• The change in the number of Asylum seekers under 18 is applied to the revenue outturn line “Children's social care - Asylum Seekers” and is based on the average change in the number of asylum seekers under 18 over the past five years. The data source is from the Home office.

Highways

• The change in vehicle miles – principle LA roads is applied to the revenue outturn line “Structural maintenance - principal roads, Environmental, safety and routine maintenance - principal roads” and is based on the average change in vehicle miles of principle LA roads over the past five years (excluding 2020 due to the COVID-19 pandemic). The data source is from the Department for Transport; TRA 0102.
• The change in vehicle miles – other LA roads is applied to the revenue outturn line “Structural maintenance - principal roads, Environmental, safety and routine maintenance – other LA roads” and is based on the average change in vehicle miles of principle LA roads over the past five years (excluding 2020 due to the COVID-19 pandemic). The data source is from the Department for Transport; TRA 0102.
• The change in vehicle miles – all roads is applied to the revenue outturn line “Structural maintenance - bridges, Winter service, Congestion charging” and is based on the average change in vehicle miles of principle LA roads over the past five years (excluding 2020 due to the COVID-19 pandemic). The data source is from the Department for Transport; TRA 0102.
• The change in the number of Households is applied to the revenue outturn line “Street lighting (including energy costs)” and is based on published projected data from the ONS; table 406.
• The change in cost per kilowatt hour is applied to the revenue outturn line “Street lighting (including energy costs)” and is based on the average change in costs per kilowatt hour over the past five years published by Statista.
• The change in the number of vehicles registered is applied to the revenue outturn lines “On-street parking”, and “Off-street parking” and is based on the average change in the number of vehicles licensed over the past five years (excluding 2020 due to the COVID-19 pandemic). The data source is from the Department for Transport; VEH0101.

Housing

• The change in the number of Households is applied to the revenue outturn lines “Housing strategy, advice and enabling”, “Housing advances”, “Administration of financial support for repairs and improvements”, “Other private sector housing renewal”, “Rent allowances - discretionary payments”, “Non-HRA rent rebates - discretionary payments”, “Rent rebates to HRA tenants - discretionary payments”, “Other council property (Non-HRA)”, “Supporting People”, and “Other welfare services” and is based on published projected data from the ONS; table 406.
• A homelessness multiplier is applied to revenue outturn lines “Other nightly paid, privately managed accommodation”, “Private managed accommodation leased by the authority”, “Hostels (non-HRA support)”, “Bed/breakfast accommodation”, “Private managed accommodation leased by RSLs”, “Directly with a private sector landlord”, “Accommodation within the authority’s own stock (non-HRA)”, “Other temporary accommodation”, “Homelessness: Administration”, “Accommodation within RSL stock”, “Homelessness: Prevention”, and “Homelessness: Support”. The multiplier is calculated using the average growth in temporary accommodation and duty owed (source: Department for Levelling Up, Housing, and Communities; table 784) and the change in population (source: ONS).

Waste management

• The change in the number of Households is applied to the revenue outturn lines “Waste collection”, “Waste disposal”, “Trade waste”, and “Recycling” and is based on published projected data from the ONS; table 406.

Other environmental services

• The change in the number of Households is applied to the revenue outturn line “Climate change costs” and is based on published projected data from the ONS; table 406.

Planning and development services

• The change in the number of Households is applied to the revenue outturn lines “Building control”, “Development control”, “Conservation and listed buildings planning policy”, “Other planning policy”, “Environmental initiatives”, “Economic development”, “Economic research”, and “Community development” and is based on published projected data from the ONS; table 406.

Public health

• The change in 16-59 year olds using illicit drugs is applied to the revenue outturn line “Substance misuse - Treatment for drug misuse in adults” and is based on the average change of adults aged 16 to 59 using illicit drugs over the past five years. The data source is from the Office of National Statistics (ONS); table 3.08.
• The change in the number of new STI diagnoses is applied to the revenue outturn lines “Sexual health services - STI testing and treatment (prescribed functions)”, “Sexual health services - Contraception (prescribed functions)”, and “Sexual health services - Advice, prevention and promotion (non-prescribed functions)” and is based on the average number of new STI diagnoses over the past five years. The data source is from Public Health England; table 1 (a).
• The change in Hospital Admission with a primary diagnosis of obesity (Adults) is applied to the revenue outturn line “Obesity - adults” and is based on the average Hospital Admission with a primary diagnosis of obesity (ages 16+) over the past five years. The data source is from NHS digital; table 2.2.
• The change in Hospital Admission with a primary diagnosis of obesity (Children) is applied to the revenue outturn line “Obesity - children” and is based on the average Hospital Admission with a primary diagnosis of obesity (ages under 16) over the past five years. The data source is from NHS digital; table 2.2.

Appendix 2 lists all of the assumptions included in the cost pressures analysis.