Funding gap set to grow to £50bn by 2025

May 22, 2019

Councils in England could face a funding gap of over £50bn over the next six years, says a new report from the County Councils Network (CCN). Local authorities warn that they will have to resort to providing the ‘bare minimum’ if no extra funding is made available.

This independent analysis of councils’ financial sustainability up to 2025 was conducted by PricewaterhouseCoopers LLP (PwC) on behalf of CCN. It has found that rising demand for services and rising costs, driven in part by inflation, could contribute to councils needing an additional £51.8bn of funding over the period 2019-2025.

CCN is today warning that yearly Council Tax rises, using reserves, and making services more efficient and productive, will not be anywhere near enough to fill the funding gap. This means that councils will have to set out further rounds of cuts to local services, but CCN argues that even these actions will not be enough to prevent some councils from being unable to manage their budgets.

The funding gap that CCN warns won't be filled is only the amount it will cost to keep services ‘standing still’ – rather than improving or enhancing them. It will also not cover reversing the last nine years of cutbacks. Even assuming Government will continue to allow councils to raise local Council Tax by 2.99% each year, the cumulative funding gap will still be over £30bn.

Those running some of England’s largest councils say that today’s report demonstrates the need for Government to provide a significant funding boost in this year’s Spending Review. Alternatively, it says, Government should provide immediate clarity and emergency funding for next year if the review is delayed owing to Brexit uncertainty. The funding gap for this current year alone stands at £4.8bn.

PwC’s analysis found that county authorities face the largest funding pressures and are most exposed to financial risk – with limited ability to raid reserves, raise fees or introduce charges for certain services.

Even if county authorities raised their council tax by 2.99% – and their tax base grew at an optimistic rate of 1.98% per year over the six-year period, it would only eradicate less than half of their funding gap – leaving a funding black hole of £11.6bn for those county authorities.

The report goes on to say that rural areas have seen the largest reductions in government funding, and as a result council tax will represent almost 70% of their income by 2024/25.

Councillor Paul Carter, Chairman of CCN said, 'Over the last decade councils have played a crucial part in reducing the deficit, but the yearly compounding effect of funding cuts and rising demand means that the situation is fast becoming untenable. This research demonstrates the need for Government to provide all councils with additional resources at the Spending Review, with the most significant financial challenges being experienced by county and metropolitan authorities most in need.

'Today’s report concludes that counties are most exposed and least able to address these financial pressures – local government is at the limit of its elasticity. Therefore, this Spending Review is crucial if we are to protect and enhance services...

'With the Ministry of Housing, Communities, and Local Government expected to put together an ambitious but realistic submission for additional departmental funding in the Spending Review for local authorities to match population growth and rising demands and demographic pressures, particularly social services, it is imperative that the Treasury delivers.'

The research also looked at the funding pressures councils have faced over the last four years and found that CCN councils faced a funding gap of £5.4bn between 2015 and 2019. Conversely, councils in London had a notional funding surplus of £2.4bn over the same period.

CCN says that this is further evidence of the ‘historic underfunding’ of shire counties compared to urban areas. In 2015, the report suggests they had a ‘underlying’ £1bn notional funding gap which would indicate they had £1bn of ‘unmet needs’.

The report also reveals:

  • Only 11% of the cumulative funding gap nationally from 2020 could be plugged using council ‘rainy day’ reserves. For shire county councils this figure falls to just 7%. CCN said that reserves in no way could, or should, be used to fill funding shortfalls and councils are already at a severe financial sustainability risk, with counties most exposed.
  • The fragile nature of the social care system is laid bare in the report. Spending on adult social care will rise by £6.1bn nationally by 2025 compared to a decade before – this is before accounting for any additional costs arising from the Government’s planned ‘social care green paper’. By 2025, counties will account for 47% of all local government spending on adult social care and will need to spend an additional £2.9bn annually compared to 2015/16 on these services due to rising demand and costs.
  • Spending for children’s social care will rise faster than any other local government service. Spending need on children’s social care will rise nationally by 48% during the period, compared to 43% for adult social care.
  • By the start of 2020, local government would needed to have made £13.2bn of savings and cuts since 2015 to balance budgets, on top of Council Tax rises. This year, the non-cumulative funding gap for all councils will stand at £4.8bn. The funding gap for 2025 will be £12.2bn.

Simon Edwards, Director of CCN said, 'The publication of this research by CCN comes at an important time. It lays bare the stark reality facing the sector and severe financial challenges now being felt by all types of councils.

'The modelling undertaken by PwC is the most advanced and detailed to date. They looked at more than 17 different cost drivers across 10 local government services, alongside the impact of other rising costs on council budgets such as inflation and the living wage.

'PwC’s report provides a platform for the sector to unite around ahead of the Spending Review and make a united case for additional funding, while also recognising that the diverse circumstances faced by different types of councils to influence the fair funding review.

'It is county authorities that have the most limited choices in responding to future spending requirements. We now want to take our case to the Treasury and convince them of the need to invest in all of local government, while ensuring that the Government implement the fairer funding review so that residents can be provided with a more consistent level of service based on genuine need.'

Read the full PwC Summary Report, Independent review of local government spending need and funding.

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