Mayor Joanne and other Liverpool City Region leaders ask for government support over impact of inflation

Mayor Joanne Anderson has joined Metro Mayor Steve Rotheram and other Liverpool City Region leaders in issuing a joint letter to the Secretary of State for Levelling Up, Housing and Communities Michael Gove asking for the Government to recognise the impact of rapidly rising inflation rates on local government finances.

Specifically, the City Region’s political leaders are calling on the Government to take action to provide adequate national support so that local authorities aren’t forced to make cuts to essential services and the support provided to vulnerable residents.

In a letter to the Secretary of State, the political leaders point out that the highest levels of inflation for four decades are already driving up the costs of the raw materials, labour, and services which Councils must pay for in order to provide essential public services. This is happening at a time when residents are facing the biggest cost of living squeeze since records began and the most vulnerable residents in the region are struggling to pay for their most basic needs. This in turn is driving up demand for Adult and Children’s Social Care services at a time when Council services are already under immense pressure.

The Government announced its funding settlement for Councils at the end of 2021, when estimates of price inflation and wage growth suggested that both would be in the region of 3% for this year. In the letter, the political leaders point out that, whilst these assumptions were – at the time – realistic, clearly there has been a dramatic shift since the end of 2021.

The latest estimates from the Office of Budget Responsibility (as of May 2022) are that the Consumer Price Index will actually reach 7.8% this year. Coupled with continuing growth in demand for Council services, the Liverpool City Region local authorities are now facing enormous financial difficulties.

The local authorities within the Liverpool City Region are committed to tackling these challenges positively and constructively but given the scale of the challenge, they are now asking the Government to give this their urgent attention.

A copy of the letter is below.

Dear Secretary of State

The Impact of Inflation on Local Authorities

You have spoken on many occasions about the outstanding work which local authorities carried out to support the country’s response to the COVID-19 pandemic, and we know that you recognise that our continued effort is crucial in securing our recovery.

That challenge has been made all the more difficult by the impact of global and national economic factors in recent months, and is compounded by the impact of a decade of austerity on local government budgets.

We are committed to face these challenges positively and constructively. However, in the context of a recent national Government policy debate which appears to be aimed at reducing the cost of public services, we considered it essential to write to you to illustrate the real and current impact of inflation on our ability to deliver much-needed support for local people at the same time not only as dealing with a cost of living crisis but also “Levelling Up”.

The highest levels of inflation for four decades are now driving up the costs of the raw materials, labour, and services which our Councils must pay for in order to provide essential public services. This is happening at a time when residents in our City Region (and indeed elsewhere) are facing the biggest cost of living squeeze since records began. Building on the increased need for public services created by the evidenced and disproportionate impact of COVID-19 on our City Region, the level of demand for our Council services is growing rapidly.

The impact of inflation on the day-to-day cost of living is also placing particular strain on our most vulnerable residents and families who are struggling to afford their most basic needs. This is driving up demand for support from our Adults’ and Children’s Social Care services – both of which were already under immense pressure prior to these recent economic developments.

Our Councils’ budgets for 2022/23 were set in early March 2022 based on estimates that price inflation and wage growth would both be in the region of 3% in 2022/23. These were not unrealistic assumptions as they reflected the Government’s own forecasts for inflation in 2022 and 2023, specifically:-

  • In October 2021, the Autumn Budget and Spending Review 2021 Statement set out forecasts that the Consumer Price Index could reach 4% in 2022, but would fall to 2.6% by 2023;
  • In December 2021, the provisional Local Government Finance Settlement uprated grant funding for 2022/23 by the actual Consumer Price Index as at September 2021 (3.1%); and,
  • In February 2022 (when our budgets were being finalised), the Office of Budget Responsibility forecast that the Consumer Price Index could reach 4.7% in 2022, but would fall to 2.3% by 2023.

We do not seek to criticise those national assumptions. But, clearly and unarguably, there has since been a dramatic shift in these expectations. The latest estimates from the Office of Budget Responsibility (as at May 2022) are that the Consumer Price Index will reach 7.8% this year – significantly higher than both the inflationary increase in funding which our Councils received and the forecast increases which informed our budgets for 2022/23.

Coupled with continuing growth in demand for services, our Councils are now facing enormous financial difficulties.

The Institute for Government recently estimated that local authorities in England will be facing unbudgeted costs of up to £2bn as a result of inflation being significantly higher than was forecast in the Chancellor of the Exchequer’s Autumn Budget and Spending Review announcements. In the Liverpool City Region, we estimate that this impact could exceed £100m in 2022/23 alone across the full range of Council budgets. Examples of the impact on Council services include:-

• Care providers are raising serious concerns about their financial viability as they struggle to cover their own costs within the fee levels agreed with local authorities;

• Capital projects – many of which are essential in driving the longer-term recovery and growth of our communities – have also been hit. Under standard contractual terms with developers working on building projects, Councils are facing significant extra costs due to increases in the price of raw materials;

• The local government pay award for 2022/23 has still to be resolved –with inflation forecast to exceed 10% this year, pay disputes are inevitable if pay offers represent significant real-terms pay cuts. While removing any “cap” on pay increases, the Government has previously stated that any pay award must be funded from Council budgets. This was already going to be difficult when pay was forecast to rise by around 2% – pay awards above those levels will add significant pressure on Council finances if they are not resourced from additional funding provided by the Government;

• Contract prices for supported bus contracts are expected to rise by up to 30%; and,

• Operational revenue budgets across the full range of Council services are being impacted by increases in the costs of materials, fuel and energy, with the cost of providing school meals being hit by rocketing food prices.

The financial challenge of inflation comes on top of the enormous pressures faced by Councils after a decade of austerity when the biggest cuts in local authority funding impacted on Councils in the most deprived areas of the country because they relied more heavily on the Government grants which were cut so severely. Our Councils were also less able to raise income from increases in Council Tax and Business Rates.

Between 2010 and 2020, successive Governments cut funding for our local authorities more than anywhere else in the country. Together, the six local authorities in the Liverpool City Region lost over 28% of our funding – equating to a cut of £336 for every resident, almost twice the England average. Our Councils managed those cuts in a planned and responsible manner, ensuring that budgets were allocated to the services which are needed and valued most, and that our statutory responsibilities were maintained. Even so, we had no choice but to make significant reductions in the local services that communities rely on and need.

Inflation pressures are also particularly damaging for Council finances because we do not have the ability to passport these additional cost pressures onto local residents or local businesses. Indeed, in more deprived areas such as the Liverpool City Region, Councils have a social responsibility not to expect residents to pay for the essential support which they need.

Without extra support, the Councils in the Liverpool City Region will once again have to balance the books by cutting more essential services to our vulnerable residents.

Over the last decade or so, we have prioritised every possible option to achieve greater efficiency and minimise the need to cut budgets for essential services. Our Councils are still looking to invest in innovative solutions to drive sustainability and reduce future demand for services. We are now being asked to deliver even more services to residents, with significantly less support from Government. It is clearly not realistic to expect financial pressures of this magnitude to be addressed through further efficiencies.

As you have stated, the Levelling Up agenda is crucial for deprived areas with high levels of demand for Council services – such as the six local authorities in the Liverpool City Region. There are many people – retirees, schoolchildren, full-time carers, and others outside the labour market – whose quality of life is underpinned by public services. Levelling Up in areas like ours cannot possibly succeed without the basic level of funding which is needed to meet the day to day running costs of our most essential services.

In effect, the Local Government Finance Settlement for 2022/23 was determined on the basis of a set of assumptions which has since been proven to be significantly inaccurate. We appreciate that those assumptions were legitimate at the time, but global and national events since then have created a wholly different set of circumstances. It would be unfair and unrealistic to expect stretched local authorities to be able to cope with the scale of those changes without further support. We therefore urge you to ensure that the inflationary pressures facing local authorities in 2022/23 are properly and fully funded as an immediate priority.

In the longer-term, for Levelling Up to be effective, it is essential that inequalities in local government funding are addressed. This must be reflected in both the forthcoming “Fair Funding” Review and the 2023/24 Local Government Finance Settlement – which should ensure that local authority funding is fairly distributed on the basis of local levels of deprivation and properly reflects the prevailing rates of price inflation and wage inflation which affect the services that Councils deliver.

We appreciate the scale of the challenge set out in this letter, and hope that you will equally appreciate that the local government sector cannot resolve it without national Government support. We trust that you and your Cabinet colleagues will give very serious and urgent consideration to the points which we have raised above. We would of course welcome any further or more detailed discussions which you or your officials may wish to have on these matters.

Yours sincerely,

Steve Rotheram
Liverpool City Region Metro Mayor

Councillor Mike Wharton
Leader of Halton Council

Councillor Graham Morgan
Leader of Knowsley Council

Joanne Anderson
Mayor of Liverpool

Councillor David Baines
Leader of St Helens Council

Councillor Ian Maher
Leader of Sefton Council

Councillor Janette Williamson
Leader of Wirral Council

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