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Weathering the perfect storm

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In the face of rising costs and falling revenue streams, councils are re-juggling their budgets to cope.

Ministers have confirmed the finance settlement for local government. In line with the three-year settlement agreed last year, councils will receive a grant increase of 4.2% for this year.

These rises are significantly below the inflation rate for goods and services bought by local authorities, which have been badly hit by recent hikes in fuel and food costs.

Relief may be on its way next year with inflation set to cool significantly.

But in the meantime, these are tough times for council budgets. These cash flow problems are likely to be compounded by extra spending pressures resulting from the downturn.

With local government in the middle of its annual budget-setting season, LGC looks at how authorities are coping with the combination of rising costs and falling income streams.

Small districts are suffering a particularly severe squeeze. Rushcliffe BC in Nottinghamshire is facing a deficit for next year of£750,000 on an annual net budget of£11.9m.

Annual savings in subsequent years will have to increase to£1.4m by 2013-14 10% of its projected net budget for that year. The council is just coming to terms with the scale of the task ahead.

“The savings have not been identified as yet,” says Neil Morton, its head of finance.

Glasgow City Council is a lot bigger than Rushcliffe, but it also faces acute difficulties, with a£5m overspend in the current year. This includes a£1.9m deficit in development and regeneration services, caused by reduced advertising income and building warrant and planning application fees. Education has a£1.6m hole in its budget, resulting form higher energy and transport costs together with reduced income from children’s placements from other authorities.

And the authority’s social work services is£1.4m out of pocket, mainly because of higher residential school-placement costs and social work overspending “represents a high risk to the council’s overall financial stability”, according to the authority’s latest budget monitoring report. Glasgow is also behind budget on the collection of council tax income and non-domestic rates.

Stephen Curran (Lab), Glasgow’s treasurer, says: “The perfect storm of inflation added to the credit crunch means there are significant pressures on our budgets which we will have to deal with. If we do not, we will see our reserves cut to an unacceptably low level.

Over recent years we have taken difficult decisions which have allowed us to put money in the bank for a rainy day and it’s certainly raining now. While things will still be bad, they will be significantly better than they might have been.”

Councils in Northern Ireland are also being squeezed, with particular problems resulting from errors by the Land & Property Services Agency . It told councils they would receive more in rates income than they actually received.

Belfast City Council is being hit by the loss of£5m revenue for the current year, with further losses in projected revenue for the next two years, on an annual net budget of£110m.

“So£5m is a sizeable change especially when you are told after the year is over and you spent that,” says Trevor Salmon, Belfast’s deputy chief executive and director of corporate services.

That£5m has had to be taken from the council’s reserves, which had stood at a healthy£14m, but which have now fallen to a mere£4m or so against what Mr Salmon believes should be a minimum of£10m.

Matters have been made worse for Belfast by severe inflation a 50% hike in gas and electricity prices in a year, 25% rise for oil, another 25% on landfill disposal and for the current financial year a 2% rise in employer contributions to the local government pension fund (with further rises in each of the next two years).

Council income has also gone down, with the loss of£300,000 on building control applications and other revenue falls at leisure centres and catering facilities. Belfast has been hit by a big fall in investment income, following the cut in its reserves.

In addition, the drop in property values has meant the council has put on hold plans to dispose of surplus assets, the capital receipts from which were to have gone towards investment and regeneration of key city sites.

Belfast has made efficiency savings this year, reducing its overheads by£1.7m. Half-a-million pounds has been cut from its insurance bills, by greater tendering of policies and brokerage services. More savings have been achieved by e-auctions for procurement, cutting£105,000 on IT hardware and£130,000 on other goods and services.

But other councils in even the worst recession-affected areas are apparently faring better. A Local Government Association report predicted councils in London and the south-east would be the hardest hit by the recession, as the financial industry’s crisis hits jobs and income.

Westminster City Council , which had£16m in Icelandic banks, says income has stood up well, with parking fees and planning application receipts only slightly down. It has found£100m for emergency measures to help local businesses and residents.

This package is being financed by changes to spending priorities, with a small amount coming from reserves. Westminster says councils must react differently from in the past, when they cut jobs and services in a recession.

Wandsworth LBC also says its financial situation is stable. And Manchester City Council says it is “one of the richer councils”, without any immediate crisis.

Tower Hamlets LBC , on the edge of the troubled Canary Wharf financial district, is also playing down the situation.

“The authority has a three-year budget which it agreed in February 2008, and had factored in what we have known for some time, that the economy was entering a downturn,” says spokeswoman Kelly Rickard.

“For example, we anticipated that the council tax base would be increasing by a much lesser amount than the historic trend as the downturn affected new housing completions.”

However, Tower Hamlets says the downturn is proving more severe and fast-hitting than it had anticipated.

“The authority does not expect to be immune to the impact of the financial downturn, although it is still quite early to assess what that impact will be,” says Ms Rickard.

“The position in Tower Hamlets is complicated by the fact that, on one hand, the preparations for the Olympics may cushion the impact on the local economy, while on the other hand, the significant presence of the financial services sector in the borough may have an adverse effect. We are expecting downward pressure on income from planning fees, building control fees and local land charges.”

As the real impact of loss of income becomes clearer, many more councils are likely to be forced to accept that more drastic surgery on their spending will be necessary.

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