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 and Chancellor’s Budgets.
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 and Chancellor’s Budgets. This analysis is based on financial data reported by councils in the Revenue Outturn (RO) forms, along with a set of measures 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 as a starting point. In order to increase the accuracy of the analysis, measures are applied to 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 Department for Levelling Up, Housing and Communities (DLUHC) on spending on, and income from, delivering local services through the Revenue Outturn (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. This is because the 2019/20 data was the latest published outturn data when the analysis was carried out, and this data was mostly unaffected by the COVID-19 pandemic. The 2019/20 baseline data is uprated by the measures outlined in this technical annex, and the 2021/22 uprated data is used to analyse the change in net spending.
Using this financial data, the cost pressures model projects the path of council spending between 2021/22 and 2024/25 in ten major service blocks:
- Adult 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, as detailed in Appendix 1.
Net Expenditure in each case is split into 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 referendum limits). The following General Fund revenue spending is excluded from the model:
- Education as council spending cannot be separated from school spending
- Housing benefit payments as it is strictly ringfenced from general council budgets.
Methodology
The cost drivers / measures 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.
These essentially break down into two categories:
- drivers of unit cost (e.g. inflation, the National Living Wage, pay, energy, etc.)
- drivers of service usage (e.g. population change, increased traffic miles, etc.)
There are general measures which apply to all or most service areas, such as population change and inflation, and more specific measures which only apply to individual service areas, for example the change in vehicle miles for road maintenance. These measures are explained in more detail in the following sections
Where possible, the measures 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 variables are based on published projected data or previous trend data, and sources of this data, is in Appendix 2.
In adult social care, services provided for working-age adults (18-64) and older people (65+) are mainly commissioned. Due to significant evidence on the exposure of adult social care providers to the national living wage, the running costs of these services are treated differently from others in the model through the inclusion of a pay-related uplift. Further detail is provided later in this document.
Measures impacting all or most services
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. These measures are included in Appendix 2.
Change in pay of employees
There are two pay pressure measures included in the model: one for directly employed council staff, and one for adult social care commissioned services. The pay pressure measures 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 implementation of the upper limit of the Low Pay Commission forecast for the National Living Wage (NLW) every year. This is applied to the employee cost lines of each service.
The NLW is expected to rise significantly by April 2024 (potentially over 20%% on current estimates) to meet the Government’s manifesto commitment of matching 66% of median earnings by 2024/25. As further evidence of the scale of the challenge, 35 per cent of the current full time equivalent workforce is currently below the level of pay that could be required for National Living Wage compliance in 2024.
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% (the effective increase in the pay bill as a result of the national insurance contribution increase) is deflated by 30% (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 following the analysis outlined previously. Only the 2022/23 pay 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 (there is no further increase in NI contributions in 2023/24).
The pay pressure on adult social care commissioned services, briefly mentioned above, is also calculated using projected changes in the NLW. 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.
More specifically, 70 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 such as the UK Home Care Association’s fair price of care model which suggests around 65-70% of the cost of an hour of home care is related directly to the 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, because of this 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 0-5 year olds is used for Early Years), and 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, 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, so we have used trend analysis of actual demand instead.
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 is used instead of population for the majority of individual service lines in adult social care. It is 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 applied to 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). Inflation figures are taken from the Office for Budget Responsibility’s (OBR) March 2022 economic and fiscal outlook.
Inflation applies as a single factor to all sales, fees, and charges, and other income lines. For running expenses, where appropriate, inflation is weighted alongside another factor to more appropriately represent the costs councils incur.
Change in energy prices
Considering the rapid pace of increasing energy prices, it was appropriate to account for this impact separately from inflation. It has been difficult to source reliable projections of future energy prices. As a result, the energy assumption used in the modelling is based on the change in energy prices at the end of 2021/22. The change from quarter 3 to quarter 4 of 2021/22 in the cost of electricity per kilowatt hour for large/very large organisations has been used. The data is sourced from the Department of Business, Energy and Industrial Strategy (BEIS). This provides a basis to predict short term pressure of rising energy prices and is only applied to 2022/23. In future years, CPI inflation is used.
In order to calculate the proportion of running expenses which are related to energy costs, the subjective analysis return from 2019/20 is used. Included in this return, is the amount spent on premises energy costs within running expenses, which is 1.6 per cent of total running expenses (excluding balancing items). Therefore 1.6 per cent of all service running expenses (except for adult social care commissioned services and street lighting) are affected by the change in energy assumption, with the remaining 98.4 per cent affected by CPI inflation as they mostly constitute purchases from suppliers of products and services.
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 consulted to ensure the demand and cost driver measures were appropriate and relevant.
This section provides information on all other measures used in each service area (excluding those described above). Each measure is applied to all relevant 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 from 2015 to 2019. 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 from 2015 to 2019. 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 from 2015 to 2019 (2020 excluded due to the COVID-19 pandemic). 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 from 2015 to 2019 (excluding 2020 excluded 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 from 2015 to 2019 (2020 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 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 from 2015 to 2019 (2020 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 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 sourced from the Department of Business, Energy and Industrial Strategy (BEIS).
- 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 from 2015 to 2019 (2020 excluded 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 from 2015 to 2019 (2020 excluded due to the COVID-19 pandemic). 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 from 2015 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 revenue outturn line “Obesity - adults” and is based on the average Hospital Admission with a primary diagnosis of obesity (ages 16+) from 2015 to 2019 (2020 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 revenue outturn line “Obesity - children” and is based on the average Hospital Admission with a primary diagnosis of obesity (ages under 16) from 2015 to 2019 (2020 excluded due to the COVID-19 pandemic). The data source is from NHS digital; table 2.2.