Cost pressures and funding gap modelling 2023 - Technical Annex

The LGA tends to update its analysis on future cost pressures and funding gaps facing local councils on an annual basis. This analysis is based on financial data reported by councils in the Revenue Outturn (RO) forms published by the Department for Levelling-up, Housing and Local Government (DLUHC).

Background

The LGA tends to update its analysis on future cost pressures and funding gaps facing local councils on an annual basis. This analysis is based on financial data reported by councils in the Revenue Outturn (RO) forms published by the Department for Levelling-up, Housing and Local Government (DLUHC). We also use set of metrics to capture service cost and demand drivers.

The model applies cost drivers, such as inflation and pay, and demand drivers, such as demographic change, to councils’ spending in a base year to identify the cost pressures faced by councils in delivering the same level of service in future years. These modelled future cost pressures are then compared to known or modelled future changes in councils’ core revenue funding – core spending power (CSP) – to assess the sufficiency of future funding relative to pressures. 

Our analysis of funding pressures relates solely to 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. 

This note sets out the design of the model, the data sources used, and the assumptions made relating to the cost and demand drivers. Further details on the data and assumptions are available in Appendices one and two.

Model design summary

To assess future cost pressures: 

  • We take outturn council spend by service (excluding education, fire and police) in a base year. We use 2019/20 as the base year owing to the distortion of more recent data by COVID-related spending. 

  • We apply cost and demand drivers to spend in the base year to forecast future spending pressures in each sub-service. Cost drivers include metrics such as forecast inflation and pay while demand drivers include factors such as change in population or household numbers.  

  • Some of our cost and demand drivers are formal projections made by external bodies such as the OBR and the ONS. Where we do not have formal forecasts, we use the trend in the relevant metric over the five years up to and including 2019/20.   

  • Our model is based on total service spend, so is gross of sales, fees and charges and ‘other’ income. We apply cost and demand drivers to these income lines and then net this forecast income off our forecast total spend figure to produce forecast net spend figures by service and in aggregate.

To estimate the funding gap: 

  • We compare the change in modelled cost pressures over a particular period against change in forecast CSP over the same period.  

  • Our 2023 model assesses funding sufficiency in 2023/24 and 2024/25.  

  • We calculate the funding gap in 2023/24 as the change in cost pressures from 2021/22 to 2023/24 minus the change in CSP from 2021/22 to 2023/24. For the 2024/25 funding gap we replace the 2023/24 data with the increase in cost pressures to 2024/25. 

We use 2021/22 as the base-year for these calculations to reflect the fact that the sector faced significant unfunded in-year pressures in 2022/23 as inflation, pay and energy costs were substantially higher in-year than when councils set their initial 2022/23 budgets.  

Our engagement with the sector and our review of draft statements of accounts for 2022/23 suggests that many councils dealt with these costs through one-off measures such as using reserves. This means that unfunded costs from 2022/23 will still be exerting a cost pressure on councils’ 2023/24 budgets. Keeping the base-year for our calculations at 2021/22 ensures that these unfunded costs continue to be recognised in our estimates.  

Furthermore, keeping 2021/22 as the base year for the calculation addresses the lag between when peak inflation appears in our cost pressures calculation and when CSP is uprated in line with inflation. Peak inflation appears in our cost pressures in 2022/23, but key elements of CSP were not uprated by the same amount until 2023/24. Using 2021/22 as the base year corrects for this lag. 

Cost pressures

Expenditure data

Each year, councils submit financial data to the Department for Levelling Up, Housing and Communities (DLUHC) on spending and income through the RO forms. The cost pressures model only considers General Fund revenue spending and income; capital and Housing Revenue Account spending are not within the scope of this analysis. 

Revenue outturn data from 2019/20 is used as a baseline. We use 2019/20 as the base year due to the distortion of more recent data by COVID-related spending. The 2019/20 baseline data is uprated by the measures outlined in this technical annex to create a modelled 2021/22 base year that is free from the impact of COVID-19 spending. 

Using this financial data, the cost pressures model projects the path of council spending for major service blocks: 

  • Adult social care 
  • Children’s social care 
  • Public health 
  • Highways and transport 
  • Housing services (not including housing revenue account (HRA) or housing benefits) 
  • Cultural and leisure service 
  • Environmental and regulatory services 
  • Planning and development services 
  • Central services (including ‘other services’) 

These service blocks are split further into individual service lines, as detailed in Appendix 1. 

The following General Fund revenue spending is excluded from the model: 

  • Education services - council spending cannot be separated from school spending.
  • Fire and Rescue, and Police – these services are in general provided by single service authorities with their own precept).  
  • Housing benefit payments – this spend is strictly ringfenced from general council budgets. 

Total spend in each service area is split into:  

  • employee costs - which relate predominantly to the cost of councils’ employees; and  
  • running costs - which relate to other costs incurred by councils including the commissioning of services from external providers.  

We also model change in sales, fees and charges income and other income. These projections are subtracted from our modelled total spend to arrive at net spend cost pressures. This means that, for instance, an increase in sales, fees and charges would reduce the net spend cost pressures. The methods used for calculating change in these income lines are set out below. 

Cost and demand drivers

The cost and demand drivers are variables which directly affect service spend. There are two categories: 

  • drivers of cost (e.g. inflation, the National Living Wage, energy prices etc.) 
  • drivers of demand (e.g. population change, increased traffic miles, etc.) 

Cost and demand drivers are applied to different components of total spend (employee and running costs) and income (sales, fees and charges and other income). Spend or income in the base year is multiplied by the projected annual change for each relevant driver to calculate future spend and income estimates. 

Both types of drivers can be grouped into general measures, such as population change and inflation, which apply to all or most service areas, and specific measures which only apply to specific service areas, for example the change in vehicle miles for road maintenance.

Where possible, the measures are based on published projected data such as the OBR inflation forecasts or ONS population projections. Where these formal projections are not available projected change is based on an average annual change over the previous five years. In 2023 model this is up to and including 2019/20. This provides an annual average change figure for future years that has not been distorted by COVID-19 in 2020/21 and 2021/22. 

The projected change to all variables is based on public data.

General drivers

There are a few measures 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.  

Pay

There are two pay pressure assumptions included in the model: one for directly employed council staff, and one for adult social care commissioned services. This is because pay for directly employed staff is driven by the “Green Book” terms, including the pay settlements agreed by the sector, whilst in social care the National Living Wage is a much stronger predictor of pay bill impacts. The pay pressure assumptions affect each employee cost line in every service area. 

Change in pay of employees 

The change in pay for directly employed staff has been calculated based on the total pay bill impact of pay settlements agreed in 2019/20 through to 2022/23 including pay drift (the cost of annual increments payable to staff at certain stages in their local government employment). In 2023/24 we include the pay bill cost of the pay offer (excluding pay drift). We use the Office for Budget Responsibility’s (OBR) wage increase forecasts for 2024/25. These figures are applied to the employee costs line in each service area.  

Employers’ pension and national insurance costs are included in the employee costs line in the RO data. Consequently, these costs are uprated in line with the annual pay uplift and any demographic drivers applied in a particular service area.  

Change in pay in commissioned adult social care service 

The pay pressure on adult social care commissioned services is calculated using projected changes in the National Living Wage from the Low Pay Commission. As this does not encapsulate the full costs of adult social care providers, the pay pressure is combined with Consumer Price Index inflation, which follows our modelling from last year. This weighted assumption is 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. 

Seventy per cent of the cost base of running expenses for adult social care commissioned services is assumed to be related to provider staff costs and is heavily driven by the rapidly increasing NLW. This is based on evidence from the UK Home Care Association’s fair price of care model which suggests around 70% of the cost of an hour of home care is related directly to care worker salary and on-costs. CPI inflation has been applied to the remaining 30 per cent of adult social care commissioned services running costs. 

Change in population

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

The appropriate population age is used for each service (for example population change for 0-five year olds is used for early years). The change in population affects most services’ cost/income lines, with the notable exclusions of adult social care and children’s social care. 

In children’s social care the numbers of looked after children which have grown faster than child population. Using population growth would underestimate the likely pressure, so we have used trend analysis of actual demand instead. 

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

We ‘cost-weight’ the PSSRU demographic demand projections metrics. Predicted demand for more costly services such as residential care is given a greater weight in our model than predicted demand growth for community care or direct payments. 

Change in inflation

Consumer Price Index (CPI) inflation is applied to running costs 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). Inflation forecasts are taken from the Office for Budget Responsibility’s (OBR) March 2023 economic and fiscal outlook. 

Change in energy prices

Considering the rapid pace of increasing energy prices, it was appropriate to account for this impact separately from inflation. This has been modelled separately based on various sources to give an estimate of total energy expenditure in the years covered by the model. 

Firstly, a total energy expenditure figure for 2019/20 is taken from the subjective analysis return (SAR). The SAR is also used to establish the proportion of running expenses attributable to energy costs, which is 0.1 per cent for social care and 2.3 per cent for all other services, excluding balancing items. Therefore 0.1 per cent of all social care service running expenses and 2.3 per cent of all other service lines (except for adult social care commissioned services and street lighting) are affected by the change in energy assumption, with the remaining 99.9 per cent and 97.7 per cent respectively affected by CPI inflation. 

A briefing from BEIS is used to establish the split of energy expenditure between gas and electricity. The 2019/20 expenditure figure from the SAR is then split into estimates of gas and electric costs, and divided by average unit costs to estimate overall energy usage. This usage is then multiplied by forecast cost, which is taken from the utilities index of the disaggregated CPI in the supplementary economy tables of the OBR’s March 2023 economic and fiscal outlook. We apply the thresholds from the Energy Bill Relief Scheme applied in 2022/23 to estimate the reduced rate paid by councils. However, our data is not sufficiently granular to do the same for the 2023/24 Energy Bills Discount Scheme.  

Service specific drivers 

This section provides information on all other measures used in each service area (excluding those described above).  Each measure is applied to all relevant employee costs and running costs lines. 

Adult social care

The change in 16-59 year olds using illicit drugs is applied to the RO line “Social support: substance misuse and support” and is based on the average change of adults aged 16 to 59 using illicit drugs from 2015/16 to 2019/20.The data source is from the ONS; table 3.08. 

The change in the number of Asylum seekers 18 and over is applied to the RO line “Social support: Asylum seeker support”. We use Home Office data on the number of Asylum Seekers in Receipt of Support by Local Authority.  

This data is not broken down by age group. To capture those 18 and over we have weighted the new indicator by the age breakdown that is available in the Asylum Initial Decisions and Resettlement dataset. 

The trend-based projection for this metric is based on the annual change in the average number of asylum seekers across the four quarters in each year calendar year from 2014 to 2020. Given the significant recent increase in asylum seekers we also include data for 2022. We do not include data for 2020 and 2021 as data in this period is likely to have been affected by COVID-19.

Children's services

The change in the number of looked after children is applied to the revenue outturn RO 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 RO line “Children's social care - Asylum Seekers”. We use Home Office data on the number of Asylum Seekers in Receipt of Support by local authority.  

This data is not broken down by age group. To capture under 18-year olds we have weighted the indicator by the age breakdown that is available in the Asylum Initial Decisions and Resettlement dataset. 

The trend-based projection for this metric is based on the annual change in the average number of asylum seekers across the four quarters in each year calendar year from 2014 to 2020. Given the significant recent increase in asylum seekers we also include data for 2022. We do not include data for 2020 and 2021 as data in this period is likely to have been affected by COVID-19.  

Highways 

The change in vehicle miles – principal local authority roads is applied to the RO line “Structural maintenance - principal roads, Environmental, safety and routine maintenance -– principal roads” and is based on the average change in vehicle miles of principal LA roads from 2015/16 to 2019/20. The data source is from the Department for Transport; TRA 0102. 

The change in vehicle miles – other local authority roads is applied to the RO line “Structural maintenance – principal roads, Environmental, safety and routine maintenance – other LA roads” and is based on the average change in vehicle miles of principal local authority roads from 2015/16 to 2019/20 (2020/21 excluded 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 RO line “Structural maintenance - bridges, Winter service, Congestion charging” and is based on the average change in vehicle miles of principle local authority roads over the past five years from 2015/16 to 2019/20 (2020/21 excluded 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 RO line “Street lighting (including energy costs)” and is based on published projected data from the  ONS; table 406. 

The estimated change in cost per kilowatt hour is applied to the revenue outturn line “Street lighting (including energy costs)” and is based on the wider energy cost modelling as outlined above. 

The change in the number of vehicles registered is applied to the RO lines “on-street parking”, and “off-street parking” and is based on the average change in the number of vehicles licensed from 2015/16 to 2019/20 (2020/21 excluded due to the COVID-19 pandemic). The data source is from the Department for Transport; VEH0101. SORN vehicles (those declared off-road) are removed from the data set.  

Housing

The change in the number of Households is applied to the RO 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 RO 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 RO 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 RO 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 RO 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 RO 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 from 2015/16 to 2019/20 across England (2020 excluded due to the COVID-19 pandemic). The data source is from the ONS; table 3.08. 

The change in the number of new sexual transmitted infections (STI) diagnoses is applied to the RO 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   from the calendar year 2016 to 2019 (2020 excluded due to the COVID-19 pandemic). 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 RO line “Obesity - adults” and is based on the average Hospital Admission with a primary diagnosis of obesity (ages 16+)  from 2014/15 to 2019/20 (2020/21 excluded due to the COVID-19 pandemic). 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 RO line “Obesity - children” and is based on the average Hospital Admission with a primary diagnosis of obesity (ages under 16) from 2014/15 to 2019/20 (2020/21 excluded due to the COVID-19 pandemic). The data source is from NHS digital; table 2.2. 

Income

The cost pressures element of the model estimates future total service spending costs. To convert this into net spend we estimate future changes in sales, fees and charges income, and other income. We subtract these estimates from the total spend cost pressure to provide a net spend pressures cost. 

To calculate the funding gap we then compare change in net spend against change in CSP income; councils’ core revenue income stream.

Sales, fees and charges and other income 

The model includes an estimate of change in sales, fees and charges and other income.  

Sales, fees and charges  

To estimate future change in sales, fees and charges income we apply CPI inflation and demographic drivers relevant to the service area in question. However, in contrast to employee and running costs, where we use forecast measure of CPI inflation, we use the average of forecast CPI and a backward-looking measure of CPI inflation (over the 12 months to September before the financial year in question). This reflects the fact that some councils take a mix of approaches when setting their sales, fees and charges rates.  

Councils tend to set their sales, fees and charges rates in the autumn ahead of the relevant budget year. We use both forecast and backward-looking measures available at this point. We do not update previous years to reflect actual inflation as the rates themselves for that particular year cannot be changed retrospectively. 

Other income

Other income includes: 

  • Revenue income received to finance a function/project jointly or severally undertaken with other bodies.  
  • Contributions from other local authorities.  
  • Value of costs recharged to outside bodies including other committees. 
  • Recharges (to internal users). 

Calculation of estimated core spending power for 2024/25 

The model uses the final Core Spending Power (CSP) figures for 2023/24 published in February 2023. 

For 2024/25 we estimate CSP based on the based on the policy statement published by DLUHC in December 2022 which set out some broad principles for funding in 2024/25. Using this document and the Autumn Statement we have been able to: 

  • Model changes in council tax rates and the council tax base.
  • Calculate increases in adult social care grants.
  • Model growth in councils’ settlement funding assessment and other funding streams linked to business rates.

A small number of CSP funding streams, such as New Homes Bonus, fall outside these main lines and we have held these constant from 2022/23. The one exception is the funding guarantee for 2023/24 which DLUHC has been clear is a one-off. We have excluded this from our 2024/25 estimate.