Facing the reality of the funding gap

Wider problems affect local councils

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It's almost a year since chancellor Alistair Darling handed councils a three-year slice of doom and gloom with the last comprehensive spending review.

The offer was dubbed "the worst settlement for local government in a decade" by then Local Government Association chair Sir Simon Milton (Con).

But, despite the run on Northern Rock weeks earlier and oil prices hovering around the $80 per barrel mark, few would have anticipated the soaring fuel prices and market turmoil in store.

The current level of fear over the fundamental soundness of the nation's economy also seems less alarmist than it did in autumn 2007. Back then the consumer price index (CPI) — the government's preferred measure of inflation — was running at 2.1% and the settlement was initially calculated to be worth a real-terms funding increase of 1% per year for its three-year run.

Last week's inflation figures placed the CPI at 4.7%, and most people assert inflation within the local government sector is worse.

Added to this, unemployment has just risen to 1.72 million and the TUC predicts it will hit two million at some point next year — a move that will place extra strain on a whole range of council services.

Ellie Greenwood, senior financial policy consultant at the Local Government Association, said the combined effects of inflation and the economic downturn are becoming clearer. She believes the real effects of last year's CSR are a real-terms cut of roughly 1.5% for councils, based on the current inflation figures.

"We have heard anecdotally that councils are being affected by decline in revenue in some areas," she said. "There has been a downturn in development, so you see planning fees falling away.

"Because of the slowdown in the property market, councils have suffered losses due to reductions in the number of property searches required."

She added that fewer people driving, because of high fuel prices and other economic constraints, meant a decline in revenue from council-run car parks. Likewise, rising food prices increase the cost of providing school dinners and offering services such as meals on wheels.

Outsourced services contracts — such as refuse collection, back room services, and highways maintenance agreements — are another area where councils face inflationary pressures.

One source told LGC that some deals, which had not been properly scrutinised, were facing price increases in the region of 10 to 15%, when inflation plus agreed increases were factored in. Even the rising cost of black bags for bin collections is emerging as an issue.

Sarah Pickup, who chairs the resources committee of the Association of Directors of Adult Social Services , said that as well as funding the increased costs running of their own care homes, councils were under pressure from private providers seeking to increase their fees for looking after council clients.

She said that while some councils could exert a degree of influence of the rises involved, authorities also had to be wary about pushing private care homes to the limit of financial viability.

Ms Pickup, who is director of adult care services at Hertfordshire CC , said that compensation for the rising fuel expenses of domiciliary care workers was also a big issue.

"There are some agencies that don't cover the cost of mileage, although some agencies do pay," she said.

She added that people earning the minimum wage were likely to quit their jobs in many areas if their fuel costs were not met.

Steve Eling (Lab), Sandwell MBC 's deputy leader and cabinet member for strategic resources, said that while rising fuel and power prices were expected to cost around £1.6m extra for next year's budget, there were other more significant costs.

He said that the downturn in the property market was likely to reduce the council's funds for capital projects by £30m over the next five years.

David Wood, director of resources at Malvern Hills DC , said that the picture was particularly grim for his tier of local government.

He said revenue losses from council-owned commercial property, coupled with soaring costs left authorities with smaller budgets little leeway to avoid cutting services to balance the books.

Mr Wood, who is also honorary secretary of the Society of District Council Treasurers, said a bold step from the Department for Communities & Local Government would be to remove its 5% cap on council tax increases.

"I think we should be given a two or three year window when capping is removed, because for many councils there's nowhere to go," he said.

"We're accountable to our council tax payers. If the council feels the need to put its council tax up it should be able to justify that to its electorate."

London Councils' director of finance Steve Lord was sceptical of authorities' appetite for removing the cap, suggesting even that the level could be lowered to 4%.

Local Government Employers chair Sir Steve Bullock (Lab), said that while consumer price rises had an effect on councils, staffing costs were a major local authority cost they did not reflect.

At a time when public sector unions are hotly disputing pay settlements based on the government's 2% guidance, he said that the current 2.45% "final offer" tabled in April might not be so generous if it was being made now.

"The offer that was made was at the limit of what local councils collectively found was affordable, and I suspect if you asked them what was affordable now it would be less than what we said six months ago," said Sir Steve, who is also Lewisham LBC's elected mayor.

Despite anticipated pressures of heightened unemployment and an extra burden on housing services and benefits advice for people in need, Sir Steve said he did not expect any renegotiation of the CSR from the government.

He said a further series of assistance packages, along the lines of the recent housing proposals, were more likely.

And the current downturn is likely to have even broader impacts on local government. Alan Jones, Somerset CC chief executive, said the pressures of the current economic situation — and the bailout packages offered to financial institutions — could result in an extra squeeze on public sector finances.

"Ministers are avoiding the question of whether we are going into a recession, but clearly we are," he said. "If you were thinking about how you were going to support the money markets, one of the areas where government is able to cut back will be the public services generally, and local government in particular."

Mr Jones added that authorities that had chosen local area agreement (LAA) performance indicators focused on economic development or job creation could fail to hit their targets.

Cllr Elling agreed that councils that had chosen reducing unemployment LAAs would be lucky to keep their current unemployment rates stable.

The downturn is sparking fresh thinking in local government. As exclusively revealed in LGC (01/07/08), fuel price rises has forced one group of councils, led by Kent CC , to investigate bulk-buying on the commodities market in a bid to make savings of 20% or more on necessities such as diesel.

But Sir Steve struck a cautious note on Kent's initiative, arguing that, whether in groupings or individually, councils were being pushed into the role of energy speculators. And they risked being left with egg on their faces if they made the wrong decisions.

Alison Scott, assistant director for local government at the Chartered Institute of Public Finance & Accountancy , said that the message for councils should be simple: "Look at procurement processes and to take an across-the-board view of efficiency savings."

At a time when 'belt tightening' is the phrase on everybody's lips, that translates to: 'Find more and bigger belts to tighten'.