Market News

BY  Melissa Lawford

Rachel Reeves will blow an £8bn hole in council finances with her record Budget tax raid, local authorities have warned.

The funding gap between the cash councils receive and the cost of delivering their services will more than quadruple from £1.9bn in 2025-26 to £8.4bn in 2028-29, according to the Local Government Association (LGA).

Ms Reeves’s £25bn increase in employer National Insurance contributions (NICs), which comes into effect from April, means “new costs” for councils which are already grappling with soaring demand for services such as adult social care, the LGA said.

It also warned that the Chancellor’s decision to announce a higher than expected 6.7pc increase in the National Living Wage is “exacerbating this challenge”.

In its submission to the Treasury ahead of Ms Reeves’s Spending Review this June, the LGA said the cost of delivering council services will surge by 29.8pc over the next four years, worth an additional £21.4bn, as the local authority funding crisis deepens.

The Government plans to compensate public sector employers for the NICs rise. However, the LGA has warned that the £515m in compensation that will be allocated to councils in 2025-26 is nowhere near enough.

The LGA has calculated that councils need £637m to cover the direct costs of the employer NICs charges, plus an additional £1.13bn to cover the indirect costs of higher staff bills for commissioned providers of council services, such as care homes.

These extra costs will hit councils just as Britain’s ageing population drives demand for adult social care even higher. Persistent inflation this year, which the Bank of England expects will jump to 3.7pc, will also further increase councils’ costs.

Since 2021, six councils have effectively declared themselves bankrupt as they have become overwhelmed by debt. Grant Thornton, the accountancy firm, has warned that four in 10 councils are at risk of running out of money by 2029.

Last year, a record 18 councils had to use Exceptional Financial Support (EFS) to balance their budgets, getting the green light from the government to make £1.4bn from selling off assets or cancelling investments. Even after adjustments for inflation, this was 19 times the sum given the go ahead in 2018-19.

If Ms Reeves fails to invest in critical council services, which include temporary accommodation for homeless people and children’s special educational needs and disabilities provisions, it will hit economic growth, the LGA warned.

The LGA called on the Chancellor to take “urgent action” and provide councils with more cash to prevent them from having to make “impossible choices” on cutbacks to services.

Louise Gittins, the chairman of the LGA, said: “Without adequate investment now we risk not being able to deliver crucial services that so many depend upon and our desire to help government fulfil its ambitions for the future are severely hindered.”

Ms Reeves has committed to outlining a three-year funding settlement for councils in her upcoming Spending Review, which councils have called for after seven consecutive years of one-year funding settlements. The short-term funding plans have “severely hindered” councils’ abilities to make long-term plans for services, the LGA said.

However, Ms Reeves is under growing pressure to find savings for the public finances.

Britain’s tax and spending watchdog has warned her that she is on track to break her fiscal rules after higher government borrowing costs and lower growth have wiped out the small margin by which she was expected to meet her borrowing targets

A government spokesman said: “For too long councils have suffered from short-term solutions, which is why we are working hand in hand with councils to reform this outdated system and fix the foundations.

“Future funding decisions are a matter for the upcoming Spending Review.”