Councils warn they are ‘running out of road’ to prevent financial insolvency, as in-year overspends top £600m

CCN Latest News, CCN News 2023 | 01 November 2023

New analysis has revealed that England’s largest councils face overspending their budgets by over £600m this year, as ‘uncontrollable’ spending pressures drive up the cost of delivering services to vulnerable children.

Councils are warning that this leaves them ‘running out of road’ to prevent financial insolvency, with these overspends contributing to a projected total funding deficit of £4bn for these councils over three years up to 2026.

According to the analysis, these overspends, combined with future funding shortfalls, mean that one in 10 of these ‘well-managed’ councils are unsure or not confident they can balance their budget this year – a legal requirement – with this increasing to four in 10 next year and six in 10 by 2025. This is despite councils planning to make over £2bn worth of ‘challenging’ savings and service cuts over the three-year period to prevent issuing Section 114 Notices.

The County Councils Network (CCN) and Society of County Treasurers (SCT), which conducted the budget survey of 41 of county and unitary authorities, says that a combination of stubbornly high inflation, rising demand and ‘broken’ provider markets for children in care are leading to the historically high overspends.

Download the analysis here.

While all council frontline services are experiencing higher than expected costs, increasing demand and an acute rise in the costs of placing children in care mean in-year spending on children’s services is spiralling out of control, with almost half (£319m) of the projected £639m overspend attributable to this service.

The CCN is calling for emergency funding for children’s services this year and next to prevent them having to undertake drastic spending reductions to other services and reduce their reserves to ‘unsustainable levels’.

The budget survey of 41 county and unitary councils, which cover half of England’s population, reveals:

  • Councils’ total cost pressures this year top £3.7bn from a combination of higher than expected inflation and demand, with local authorities now forecasting that they will overspend their budgets in 2023/24 by £639m this year – an average of £16m per council.
  • Rising costs and demand totalling £319m in children’s services account for almost half (45%) of the projected overspend. Adult social care (25% – £179m), education, transport – including home to school transport – and highways (22% – £154m), alongside housing (£24m – 3%), make up the bulk of the remaining additional in-year pressure.
  • Overspends and cost pressures have worsened an already challenging financial outlook. This year, the funding gap for the 41 councils has grown to £1.6bn, with a further shortfall of £1.1bn in 2024/25 and £1.3bn in 2025/26, meaning a total funding shortfall of £4bn between 2023-2026. Over the course of the three-year period councils have pencilled in £2bn of savings and service cuts but this would only reduce the deficit by half.
  • As a result of cost pressures soaring, and despite increased funding, council tax rises and £1bn worth of savings and cuts this year, councils are still forecasting a budget deficit of £603m in 2023/24, with the analysis showing 1 in 10 of these councils are unsure or not confident they can balance their budget this year.
  • Faced with this bleak financial picture, councils’ confidence in setting a balanced budget plummets further over the next two years. Some four in 10 of these councils are unsure or not confident they can balance their budget in 2024/25, with this increasing to six in 10 by 2025/26.

Over recent weeks several county authorities have sounded the alarm bells on their in-year financial position, based on their first quarter of 2023/24 projections. Derbyshire County Council have forecast that they are on course to overspend their budget by £46m, Shropshire Council by £37.6m, Suffolk County Council by £22m and Hertfordshire County Council by £16.4m. However, this survey shows for the first time the scale of the challenge across all of England’s largest councils.

With children’s services making up almost half the projected overspends, councils point to a sharp increase in post-pandemic demand in children’s services and the cost of care placements rising due to inflation and a ‘broken’ provider market. Recent research by the CCN showed there was a surge in over 20,000 extra referrals in county areas following the pandemic and over 1,000 more children in local authority care; a trend that has not abated since.

Local authorities are putting in place emergency cost cutting and savings programmes to bring in-year expenditure down. However, with many of these spiralling costs in demand-driven statutory services, councils have little wriggle room to bring down costs.

The CCN says that unless the government steps in and provides emergency funding, councils will need to make dramatic cuts to services both this year and next to balance the books to prevent their authorities running out of reserves and becoming insolvent.

Cllr Barry Lewis, CCN Vice Chair and Finance Spokesperson, said:

“This analysis lays bare the financial challenge facing county authorities. Historic in-year pressures are worsening an already bleak financial outlook, meaning our councils are facing down the barrel of a £4bn funding black hole.

“The majority of the £639m of additional and unexpected spending this year is simply outside of councils’ control. The number of vulnerable children requiring care has risen dramatically post-pandemic, while inflation and a broken provider market in statutory care placements mean councils face no choice but to pay spiralling fees.

“County authorities will do all they can to bring down costs over the coming period and have pencilled in £2bn of unprecedented further savings to help balance the books. But after a decade of continuous cutbacks, the scale of reductions and use of reserves needed to fill the funding shortfall is simply unsustainable.

“Last year the Chancellor stepped in with much needed additional resources for adult social care. We now need the same priority to be given to vulnerable children, providing emergency funding this year and next.

“Birmingham’s recent financial difficulties and issuing of a Section 114 were undoubted made worse by the council’s performance and governance. But, unless we act now, this analysis shows that other well managed councils are running out of road to prevent insolvency.”

Notes to editor

  • The Budget survey was conducted during September 2023. In total, 31 responses were received out of 41 county council and unitary authorities across the SCT membership – 76% response rate. Revenue Outturn data has been used to uprate total respondent figures to total figures, providing an estimate for all 41 councils.