Inflation + recession = budget crisis: Local Government Chronicle

Posted on December 29, 2008 · Posted in Local Government Chronicle


The Government’s grant increases of 4.2% and 4.4% for English councils for the next two years are significantly below the inflation rate for goods and services bought by local authorities, which have been badly hit by hikes in fuel and food costs. Added to which, local government minister John Healey told the House of Commons, councils are expected to accelerate their drive on efficiency savings: “to redouble their efforts”, as his department put it.


These are tough times indeed for council budgets. The Local Government Association has already said that it expects local authorities in London and the South East to be the hardest hit by the recession, as the financial industry’s crisis hits jobs and income.


Even small district councils are suffering a severe squeeze. Rushcliffe Borough Council in Nottinghamshire is facing a deficit for next year of three quarters of a million pounds 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 another authority in difficulty, with a £5m overspend in the current year. Overspends against budget for the current year include a £1.9m deficit in its Development and Regeneration Services, caused by reduced advertising income and building warrant and planning application fees; £1.6m in Education Services, resulting form higher energy and transport costs, and reduced income from children’s placements from other authorities; and £1.4m in Social Work Services, mainly because of higher residential school placement costs, with social work overspending “represent[ing] 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.


Councillor Stephen Curran, City Treasurer at Glasgow City Council, 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 very badly hit, with particular problems caused by errors by the Land and Property Services agency that told councils they would receive much more in rates income than they have actually received. In the case of Belfast City Council, it 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, deputy chief executive and director of corporate services at Belfast City Council.


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 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 gone down, with the loss of £300,000 on building control applications and other revenue falls at leisure centres and catering facilities. The council has also 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 development sites.


Belfast has already made efficiency savings in the current year, bringing down its overheads by £1.7m. Half a million pounds of this has been cut from its insurance bills, through greater tendering of policies and brokerage services. Further savings have been achieved by the adoption of e-auctions for various procurement, cutting £105,000 on IT hardware and another £130,000 on other goods and services.


Yet other councils in even the worst recession-affected areas are apparently faring better. Westminster City Council – which had £16m in Icelandic banks – says that income has stood up well, with parking fees and planning application receipts only slightly down. And the council has found £100m for emergency measures to help local businesses and residents (see box), financed by changing some spending priorities, with a small amount coming from reserves. The council says that authorities need to react differently from in the past, when they cut jobs and services in a recession.


The London Borough of Wandsworth also says that its financial situation is stable and as expected. And Manchester City Council says that it is “one of the richer councils”, without any immediate crisis.


Tower Hamlets, on the edge of the troubled Canary Wharf district, is another that is 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 began to affect new housing completions.”


However, Tower Hamlets says that 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 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. We are also anticipating that some debts, including council tax, may become harder to collect.”


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.




How councils are helping their local economy


Westminster City Council has launched a 15 point programme of support for the local economy. Measures include paying local businesses quicker; loans for people struggling to pay their mortgages; creating a council-run apprenticeship scheme to create a pool of skilled labour for employers; revamping district shopping centres; creating cheap homes for the homeless; and a proposed freeze on the council tax for 2009/10.


Manchester City Council has just adopted a ‘Manchester minimum wage’, through which all council staff will be paid at least £6.74 per hour – more than a pound higher than the national minmum wage. Those benefiting include school crossing patrol staff.


Glasgow City Council has also just launched a programme to combat the local effects of the credit crunch. Measures include relaxing development rules, extending a fund providing flexible loans to small and medium-sized companies; deferring payments required from developers; creating more flexible rules on land disposal; establishing a new regeneration fund; and forming an Economic Advisory Board.