Despite welcome new funding announced in the 2022 Autumn Statement, a combination of sharply increasing cost and demand pressures means that the sector is in a parlous financial position. Much-valued services, frequently focused on the most vulnerable in society, are under pressure and at risk. Additional government support is needed urgently to ensure local financial and service sustainability.
Rt. Hon Jeremy Hunt MP
Chancellor of the Exchequer
1 Horse Guards Road
Ahead of the Office for Budget Responsibility providing its next set of public finance forecasts on 6 March and your statement in Parliament, we wanted to write to you about the financial challenges faced by councils at the current time. Despite welcome new funding announced in the 2022 Autumn Statement, a combination of sharply increasing cost and demand pressures means that the sector is in a parlous financial position. Much-valued services, frequently focused on the most vulnerable in society, are under pressure and at risk. Additional government support is needed urgently to ensure local financial and service sustainability.
But we also wanted to highlight and demonstrate the support and value that councils can provide to you in delivering the objectives of your Budget and the Government’s wider policy objectives. As locally rooted bodies with a democratic mandate, councils have the legitimacy to work with residents and across public services to find ways to best meet communities’ needs, to drive change and make services better. We think there is a compelling case for the Government to invest in councils in order to capitalise on these strengths. Furthermore, while the sector is currently in need of additional financial support, there are also gains to be had from empowering councils for no or only minimal cost.
The Local Government Association (LGA) is currently preparing a Local Government White Paper. After wide consultation with local government and across the public sector and Government, it is clear that the sector has a strong offer that can support the delivery of your Budget and wider Government objectives. Public services can be delivered faster, better and more efficiently at a local level. Crucially, investing in and empowering councils can drive economic growth, and lead to better value for money for public spending. Council services can act to prevent more costly demand passing to other public sector bodies such as the NHS.
Our letter to you in October last year ahead of your Autumn Statement set out the challenging state of council finances at that time. With no meaningful new support announced for councils at either the Autumn Statement or the Provisional Local Government Finance Settlement the position has not improved since then. Consequently, councils up and down the country are currently facing significant challenges in setting balanced budgets for 2024/25 without affecting local services.
The fundamental challenge facing the sector is that cost and demand pressures are rising faster than funding. Our analysis shows that by 2024/25 cost and demand pressures will have added £15 billion (28.6 per cent) to the cost of delivering council services since 2021/22. Despite increased funding in both 2023/24 and 2024/25 we estimated in October 2023 that the sector was facing a funding gap of £2.4 billion in 2023/24 and £1.6 billion in 2024/25. We have not revised this analysis following the OBR’s new projections at the 2023 Autumn Statement. However, if we were to do so we would anticipate a greater funding gap in 2024/25 as inflation and wages are forecast to be higher in 2024/25 than in our October model. The funding gaps produced by our analysis relate solely to the funding needed to maintain services at their current levels. The implication here is that councils do not have enough funding simply to stand still.
To illustrate the scale of cost pressures affecting the sector it is helpful to examine the impact of the increase in the National Living Wage (NLW) from £10.42 to £11.44 (a 9.8 per cent increase) from April 2024. Our analysis shows that this will add £1.6 billion to the cost of commissioned adult social care services alone in 2024/25. This is greater than the amount that social care councils can raise if they increase their council tax rates to the maximum (5 per cent) before a referendum is needed – £1.5 billion in 2024/25 (excluding taxbase growth).
Ultimately 44 per cent of the additional £3.6 billion in core spending power available to councils (excluding standalone fire authorities and the Greater London Authority) in 2024/25 will go solely to fund cost increases in commissioned adult social care due to the NLW increase. This leaves a reduced amount of funding to address the impact of the NLW increases on other parts of the local government workforce and outsourced services highly exposed to the NLW such as waste collection and disposal, and the impacts of inflation, demand pressures and other cost drivers across all services. This is the third year in a row that councils have had to absorb a large rise in the NLW following increases of 6.6 per cent in 2022/23 and 9.7 per cent in 2023/24.
In addition to the economy and sector-wide inflationary and wage pressures there are individual service areas with cost and demand dynamics that are exerting higher cost pressures:
- Rising costs in children’s social care – budgets up by 13.6 per cent in 2023/24 compared to 2022/23 driven by huge increases in placement costs. LGA research has shown that in 2022/23 councils paid for over 1,500 placements costing £10,000 or more per week – more than 10 times greater than the 120 placements purchased by councils at this price in 2018/19.
- Escalating costs of home to school transport for children with special educational needs and disabilities (SEND) – budgets up by 23.3 per cent in 2023/24. This is driven by ongoing growth in the number of children with Education, Health and Care Plans. Budgeted net spend in 2023/24 is £1.4 billion, a 137 per cent cash terms increase since 2016/17.
- Increasing costs and demand in adult social care means budgeted spend on adult social care increased by £2.5 billion (12.8 per cent) in 2023/24. Department of Health and Social Care (DHSC) data shows that average fee rates for external home care increased by 9.6 per cent and supported living by 8.4 per cent from 2022/23 to 2023/24.
- Increasing costs of homelessness services with multiple contributory cost and demand drivers, including asylum and resettlement issues and an insufficient supply of affordable housing, pushing budgets up by 19.9 per cent in 2023/24. Government data published in July 2023 shows that more than 104,000 households were in temporary accommodation at the end of March 2023 – the highest figures since records began in 1998.
Councils have made huge efforts over recent years to manage their budgets. Innovative actions such as transforming the way services are delivered through greater digitalisation and introducing shared service arrangements, alongside taking tough decisions over the range of services provided, have ensured that councils have been able to manage their financial pressures to date and to continue to deliver core services. But the scale of pressures absorbed by councils to date, including a 24 per cent real terms reduction in core spending power from 2010/11 to 2024/25, means that financial resilience in the sector is at an all-time low. An LGA survey following the 2023 Autumn Statement showed that one in five leaders and chief executives felt they are at risk of receiving a Section 114 report this year or next.
Drawing on reserves is not a sustainable solution to current budget pressures. Use of reserves may provide a degree of resilience over the short-term, but this is only temporary as reserves can only be spent once. If councils use reserves repeatedly to offset recurrent pressures they rapidly find themselves still having to address unfunded pressures but now also with depleted reserves. Furthermore, not all councils have seen reserves growth while others have seen growth from a very low base. Councils should be provided with additional recurrent funding rather than encouraged to use their reserves.
Despite councils’ best efforts to protect services their financial challenges are having a marked impact on service provision:
- Spending is increasingly concentrated on fewer people. As resources have diminished, councils have protected services such as social care (adult and children’s) where there are clearly defined statutory responsibilities and regulatory oversight. On average (at the median) social care accounts for 63.9 per cent of budgeted service spend (excluding education) in 2023/24 amongst councils with social care responsibilities, up from 56.5 per cent in 2016/17. This means councils are less able to support local and national agendas on key issues such as housing, levelling-up, the cost-of-living crisis, and climate change.
- There are growing concerns over the quality and scale of service provision. The LGA Annual Resident Satisfaction Survey shows that the share of respondents that are satisfied with council service provision has fallen for every service area in the survey between 2016/17 and 2023/24 with the exception of waste collection. Satisfaction levels for key services such as street cleaning, road maintenance, pavement maintenance, library services and sport and leisure have all fallen by between 5 and 9 percentage points since 2016/17.
- Increasingly unsustainable workforce challenges: Growing workforce issues provide a clear indicator that services are becoming increasingly unsustainable. More than nine in 10 councils are experiencing staff recruitment and retention difficulties. As the area of the public sector most exposed to increases in the NLW, councils have been unable to increase salaries of key professions in the sector as pay awards have had to address the fast escalation of the NLW without any additional funding. This makes the sector less attractive for individuals with key skills relative to other sectors (both public and private).
- Reduced spend on preventative services: As funding has fallen, councils have focused their spend on meeting their statutory obligations. This has led to a reduction in spend on preventative services and a greater focus on reactive, demand-led provision. This is despite the growing body of evidence of the financial and social benefits of prevention. For instance, reductions in spending on preventative services for adolescents is highly correlated with rising rates of 16 and 17-year-olds entering care.
The offer from councils
While the sector is currently in need of additional financial support we also want to draw your attention to the benefits that investment in councils can bring to the delivery of key national government policies while also protecting the public purse. Consultation work to support the preparation of the LGA’s Local Government White Paper has demonstrated that the sector can support the delivery of your Budget. In particular, there are three core areas where we feel there is strong evidence that investing in and empowering councils will deliver a strong return for government:
- Driving economic growth;
- Delivering better life opportunities while protecting the public purse; and
- Convening power and understanding place to improve public services.
The following sections set out the benefits that investment in councils can deliver for the Government, and the steps we feel you should introduce in your Budget in order to capitalise on these strengths.
Delivering economic growth, skills and housing
Councils play a wide role in promoting growth and prosperity, directly affecting local economic activity through designing and delivering policy, deploying skills and capabilities, and developing key relationships, especially as they take on the functions of Local Enterprise Partnerships (LEPs). All councils would benefit from clarity on a joined-up, longer-term approach to funding, building on the Government’s Funding Simplification Plan; and Whitehall departments adopting a ‘devolution first’ principle, entrusting councils with the powers and funding to deliver for their communities. In the short term, the Government must ensure that transfers of LEP responsibility are matched by sufficient funding and a commitment to work with the sector to identify any capacity issues some areas may face.
Council cultural services, including libraries, have a key role in supporting growth in the creative industries. The creative industries contributed £115.9 billion to the UK economy prior to the pandemic and accounted for 2.2 million jobs, supported by the skills pipeline and supply chain from local cultural services. They grew at four times the rate of the rest of the economy and are geographically dispersed in more than 700 micro clusters across the country – addressing regional inequality and disparities in productivity. Library Business and Intellectual Property centres reach new groups of entrepreneurs and create more sustainable businesses than other forms of start-up support. Establishing stronger connections between trusted cultural hubs and economic growth funding and business development programmes will turbo-charge a new generation of entrepreneurs and enable individuals from different backgrounds to reach their potential.
Councils are vital to addressing government priorities to support more people into work and address employers’ skills needs. But fragmented initiatives and services to achieve this seldom align with each other or the needs of local communities. Councils and devolved authorities are already doing a lot to cohere the system. The Government should route the Universal Support programme through local government, and work with us to build capacity to deliver it.
The sector wants to go further with the right powers and funding and we urge the Government to back the LGA’s Work Local and pilot it by giving local leaders a single pot of funding to work with partners, to design, commission and have oversight of a ‘one stop’ all-age skills and employment service. A cost benefit analysis reveals that for a medium-sized combined authority, a Work Local approach making more effective use of around £270 million per year has the potential of an extra 2,260 people improving their skills and an additional 1,650 people moving into work. This could boost the local economy by £35 million per year and save the taxpayer an extra £23 million per year.
Councils share the collective national ambition to tackle local housing challenges and create great places for current and future generations. Councils need a long-term national commitment to support a council house building renaissance and improvements in existing stock. Long-term certainty on powers and funding could help councils scale up to deliver an ambitious build programme of 100,000 high-quality, climate-friendly social homes a year. It would also improve the public finances by £24.5 billion over 30 years, including a reduction in the housing benefit bill and temporary accommodation costs. In Quarter 2 of 2023, provisional statistics showed that local authorities started 1,750 new dwellings, the highest rate since 1990.
Additional support from government would allow councils to scale-up further. An expansion of council housebuilding would provide a counter-cyclical boost to housing supply; offer a pathway out of expensive and insecure private renting towards home ownership; reduce homelessness; tackle housing waiting lists and support the growth of green skills and net zero supply chains. Key to achieving these gains is the need for further reform to Right to Buy. Councils should be given: the right to retain 100 per cent of receipts on a permanent basis; flexibility to combine Right to Buy receipts with other government grants; the ability to set the size of discounts locally; and the ability to recycle a greater proportion of receipts into building replacement homes.
Improving life chances while protecting the public purse
Investment in council services is proven to lead to better outcomes and life chances for residents. But in addition, there is also strong evidence that high quality council services prevent demands and pressures being passed onto other public service providers, often requiring far more costly forms of intervention. By capitalising on the local knowledge and expertise of councils in supporting children and families, government can not only improve outcomes but avoid significant societal costs. Research for the Care Review estimated the societal cost of adverse outcomes for looked after children at £9 billion per year, while the ‘Big Five’ children’s charities found that a failure to invest in children’s social care now will lead to approximately £1 billion in additional costs to the Government over the next ten years.
An investment in adult social care is an investment in the lives and futures of our loved ones, as well as our national infrastructure. First and foremost, high quality care and support helps people maintain their independence and relationships and helps people to stay in work. Most care is informal and unpaid, provided by family and friends who provide an estimated £59.5 billion of care a year. The care workforce is bigger than that of the NHS. Employment in the adult social care sector represents 6 per cent of total employment in the UK. An increase in funding for adult social care enables an increase in funding for care providers and the voluntary and community sector. These sectors and organisations do vital work, much of which helps alleviate demand pressures on the NHS, freeing up acute capacity which is central to tackling hospital backlogs. Finally, adult social care is an innovative and tech-friendly sector, with technology playing an ever-greater role in the delivery of high quality care and support.
Sport and cultural services boost productivity and reduce pressure on the NHS and social care services by helping people manage their conditions independently. ‘Get Active’, the new Government Sport Strategy sets out ambitious targets of getting over 2.5 million more adults and one million more children active by 2030. The network of over 3,000 council facilities will be crucial to making this happen, particularly given their engagement with the population groups that the strategy identifies will benefit most from increasing activity levels. Social prescribing initiatives demonstrate how culture and leisure services can contribute to reducing pressure on acute services. For example some evaluation studies have reported sixty per cent reduction in GP contact times.
Finally, we know that preventive public health services such as smoking cessation, weight management, health visiting and sexual health services are essential to prevent disease, improve people’s quality of life and reduce health inequalities. If the Government provides public health with the long-term resources it needs this will reduce the long-term cost of treatment on the NHS while maintaining a sustainable health and social care system. Such investment will have a greater return than if the same money was spent in the NHS; academic analysis shows public health expenditure by councils is three to four times as cost-effective in improving health outcomes.
Convening power and understanding place to improve public services
Councils have unrivalled local knowledge and sit at the heart of dense networks of public, private and third sector bodies. This means that further empowering councils and organising and delivering public services locally through them can deliver huge benefits.
For instance, devolved models for delivering net zero are more efficient, and more effective. Innovate UK modelled interventions in heat, buildings, and travel, and concluded local targeted action would hit net zero by 2050 while saving around £140 billion, returning an additional £400 billion in co-benefits. Unfortunately in 2021 the National Audit Office confirmed ‘serious weaknesses in central government’s approach to working with local authorities on decarbonisation, stemming from a lack of clarity over local authorities’ overall roles, piecemeal funding, and diffuse accountabilities’ - these conditions have persisted. Government should seriously consider our proposals for backing local climate action by giving all places the clarity, certainty, and flexibility to help deliver net zero through an evolving set of Local Climate Action Agreements underpinned by multi-year, place-based funding allocations which are reviewed and adapted over Spending Review periods up to 2050.
Likewise further empowerment of councils can help deliver the Government’s objectives in relation to children with special educational needs and disabilities (SEND). The Government’s SEND and Alternative Provision improvement plan rightly acknowledges that while councils and their partners are working hard to meet the needs of children with SEND in their local areas, not all children and young people with special needs are able to access the support they need. Councils, with their democratic mandate, are ideally placed to convene and lead local SEND systems, bringing health and education partners together to quickly deliver the right support to the children that need it. But councils need the powers to hold partners to account which they cannot do within the existing system. Without further change sufficiency of funding will remain a major concern, as well as hampering efforts to ensure the needs of all children with SEND can be met effectively.
The need for action
The financial challenges faced by the sector, and their implications for services, need immediate action from the Government. We are calling for the Government to ensure that all councils have sufficient funding to set balanced budgets for 2024/25 and develop sustainable medium-term financial strategies. Not only will this require the Government to provide additional funding but greater certainty on funding is also needed. Specifically, the Government should:
- Provide funding for councils that reflects current and future demands for services.
- Provide multi-year and timely settlements for councils to allow them to plan and make meaningful financial decisions.
- Ensure that funding is sufficient for councils to recruit and retain appropriate numbers of skilled staff.
- Ensure that any new policy on the NLW is matched by funding for councils to cover the cost.
- Adopt a renewed focus on prevention to address existing and future demand for services such as social care and homelessness support.
We urge you to take these crucial steps in your Spring Budget to secure the financial sustainability of the sector. But we also ask that you look beyond the financial challenges faced by the sector and recognise the huge offer from the sector to support you in the joint endeavour of delivering your Budget and government policy more widely. Investment in councils has the potential to reduce costs falling on other public services and to support the more efficient delivery of key government agendas such as economic and housing growth.
Cllr Shaun Davies
Chair of the Local Government Association