LGA analysis - Councils face almost £3 billion funding gap over next two years

Councils in England face a funding gap of almost £3 billion over the next two years just to keep services standing still, new analysis by the Local Government Association reveals today.

The LGA – which begins its Annual Conference in Bournemouth today (July 4) – is warning that inflation rates pose a further danger to the financial sustainability of local services.

It is calling on the Government to ensure councils have adequate resources to meet ongoing cost and demand pressures, protect local services from cutbacks and invest in improving the services our communities rely on.

It comes as new LGA analysis on the cost pressures facing councils reveals that:

• The cost to councils of delivering their services at current levels will exceed their core funding by £2 billion this year and £900 million in 2024/25.

• If inflation fails to fall in line with the forecast at the March 2023 Budget - and instead is in line with more recent inflation projections from the Bank of England - this would add an extra £740 million in cost pressures this year and an extra £1.5 billion in 2024/25.

• This is just the funding needed to maintain services at their current levels. It does not include addressing existing underfunding in areas such as the adult social care provider market, children’s social care and homelessness, nor does it include funding to improve or expand council services.

The LGA said councils will need to consider options such as making cutbacks to services or using reserves to meet their legal duty to balance the books this year.

Councils hold reserves so they can plan for the future and deal with known risks. They can only be spent once and the LGA is warning that using reserves to plug funding gaps is not a solution to the long-term financial pressures that councils face.

The Government has confirmed some funding streams for councils over the next two years. However, significant uncertainties remain in the level of funding they will have in 2024/25 which is hampering financial planning and their financial sustainability.

Greater funding certainty for councils through multi-year settlements and more clarity on financial reform is vital so councils can plan effectively, balance competing pressures across different service areas and maximise the impact of their spending.

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

“Inflation, the National Living Wage, energy costs and ongoing increasing demand for services are all adding billions of extra costs onto councils just to keep services standing still. 

“Councils’ ability to mitigate these stark pressures are being continuously hampered by one-year funding settlements, one-off funding pots and uncertainty due to repeated delays to funding reforms.

“The Government needs to come up with a long-term plan to sufficiently fund local services. This must include greater funding certainty for councils through multi-year settlements and more clarity on financial reform so they can plan effectively, balance competing pressures across different service areas and maximise the impact of their spending.”

Notes to editors

1.       The three-day LGA Annual Conference begins in Bournemouth today (July 4). Speakers include Levelling Up Secretary Michael Gove MP, Labour Leader Sir Keir Starmer MP, Education Secretary Gillian Keegan MP and Liberal Democrat Leader Sir Ed Davey MP.

The LGA has also published a series of Make it Local briefings, setting out how local government can solve the challenges we face as a nation and radically reset of the culture of Whitehall.

Visit our Annual Conference website to view the full programme. To book your place, please contact [email protected] for a media promotion code which you can use to obtain a complimentary pass.

2. LGA analysis estimates that maintaining council services (excluding education, police and fire) at their current levels will cost an additional £13.4 billion in 2024/25 compared to 2021/22 – a 25.6 per cent increase.

• Projected cost pressures by service area (net spend)

Once increases in estimated core council funding are taken into account, the LGA estimates that councils need a further £2 billion in 2023/24 and £900 million in 2024/25 in order to deliver services at their current levels in each year. These funding gaps assume that all councils will increase their council tax rates in each year by the maximum allowed before a referendum is required.

Funding gaps for 2023/24 and 2024/25 are calculated by comparing changes in estimated cost pressures from 2021/22 against change in councils’ core funding from over the same period. This means that unfunded cost pressures from 2022/23, when inflation averaged 9.9 per cent according to the OBR, are included in the 2023/24 and 2024/25 funding gap calculations. Where councils addressed unfunded in-year costs in 2022/23 through one-off measures, such as the use of financial reserves, councils will still need to find additional funding to plug those gaps in 2023/24. Equally, while the use of contracts to purchase goods and services may have given councils a degree of protection from in-year cost increases in 2022/23, councils will face higher prices as contracts are uprated annually in the future to reflect inflation.

The LGA analysis uses CPI inflation forecasts published by the OBR at the time of the 2023 Spring Budget. Subsequently, data in the Bank of England’s Monetary Policy Committee’s May 2023 report indicates that annual average CPI inflation for 2023/24 and 2024/25 could be roughly two percentage points higher in each year than the Spring Budget figures. Inflation above the OBR rate will feed directly into both higher cost pressures and a larger funding gap in 2023/24, unless additional in-year funding is provided. However, while inflation above the OBR rate will feed directly into higher cost pressures in 2024/25, there will not necessarily be an equal increase in the funding gap as core funding for that year, which is partly linked to the CPI inflation rate in 2023/24, may also increase.

Further information on how the cost pressures and funding gaps were calculated is available in this technical annex - Cost pressures and funding gap modelling 2023 - Technical Annex | Local Government Association.