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Funding gap growing as councils “firmly in eye of inflationary storm”

Councils in England face a funding gap of £4 billion over the next two years the Local Government Association reveals today.

Councils in England face a funding gap of £4 billion over the next two years the Local Government Association reveals today. 

This is a £1 billion increase since the LGA’s initial analysis in July as cost and demand pressures continue to rise.

 New LGA analysis - published ahead of the Autumn Statement next month - also shows that by 2024/25 cost and demand pressures will have added £15 billion (almost 29 per cent) to the cost of delivering council services since 2021/22. 

Councils are facing an “inflationary storm” which is adding unsustainable costs onto council budgets. Some councils have warned these costs are threatening their financial sustainability, not least because councils have already absorbed a 27 per cent real terms cut in core spending power since 2010/11. 

Many councils are working proactively with each other to share and transform their services to ensure they continue to deliver high quality services to residents. 

In its submission to the Chancellor, the LGA said the Government needs to provide immediate funding so councils can deliver the 2023/24 budgets they set this year, and meet ongoing cost and demand pressures.

Government also needs to ensure that councils have sufficient resources to set balanced budgets next year without having to make drastic cuts to services. 

Additional resources cannot come solely from hard-pressed council taxpayers, the LGA said. 

Council tax increases are not the long-term solution to the financial challenges facing councils particularly during a cost-of-living crisis. In addition, increases in council tax raise different amounts of money in different parts of the country and it would fall short of the sustainable long-term funding that is needed.

The LGA is clear that using financial reserves to plug funding gaps is also not a solution to the long-term financial pressures that councils face. Councils hold reserves so they can plan for the future and deal with known risks. Reserves can only be spent once and will rapidly be depleted if used to meet councils’ unfunded day-to-day spending.

Councils also want to work with the Government on a long-term plan for greater funding certainty for councils through timely multi-year settlements and more clarity on financial reform. 

Cllr Pete Marland, Chair of the LGA’s Resources Board, said: 

“Councils remain firmly in the eye of the inflationary storm and severe funding and demand pressures mean that council finances are under pressure like never before.  

“None are immune to the risk of running into financial difficulty and others have already warned of being unable to meet their legal duty to set a balanced budget and are close to also having to issue Section 114 notices.

“The easy savings have long since gone. Councils are being faced with tough decisions about cutting valued services, increasing council tax and fees and charges during a cost-of-living crisis.  

“We urge the Chancellor to act to address the acute financial challenges faced by councils. This is vital to protect the local services our communities rely on every day but also to reduce costs falling on other public services and support the delivery of key government agendas on areas such as housing, levelling up and climate change.”

Notes to editors

The LGA estimated in July that councils were facing funding gaps of £2 billion in 2023/24 and £900 million in 2024/25. Following an updated inflation forecast from the Bank of England in August our analysis now shows funding gaps of £2.4 billion in 2023/24 and £1.6 billion in 2024/25. 

These gaps relate solely to the funding needed to maintain services at their current levels.

While annual average inflation peaked at around 10.0 per cent for the economy as a whole and is forecast to fall to an annual average of around 6 per cent in 2023/24, this is not necessarily the case for all councils. Because councils purchase goods and services through annual contracts, these contract prices will often be uprated in 2023/24 based on inflation over the preceding 12 months. For these contracts councils will experience peak inflation in 2023/24.

The LGA’s Autumn Statement submission is accompanied by appendices on three key areas of council activity that are experiencing sharp financial and/or demand pressures.