Rising prices and wages land councils with their own cost-of-living crisis

Inflation is weighing on Nazia Rehman’s mind. Not only has the Wigan councillor been approached by scores of residents who can’t afford their energy bills, but some of the town’s community centres – tasked with helping the very same people – now face similar problems.

“They’re saying they’re not sustainable any more because of the risk they can’t afford their expenses,” she says. “They’re our eyes and ears: people use them and they’re so valued by our community. It would be a disaster if they go.”

As the councillor responsible for finance and resources in the Greater Manchester town of 320,000, she has seen first-hand how demand for services is ballooning just as the price of providing them is escalating dramatically thanks to the cost-of-living crisis.

Wigan council has seen its own energy costs increase by about 115%, making it expensive to keep open buildings that homeless and elderly people, and many families, rely on – just when levels of poverty are expected to rise sharply.

“As an organisation we face a huge risk,” she says. “And it’s not just financial; it’s human now, because people depend on us.”

Rehman’s worries are a taste of the inflationary pain ripping through local authority budgets. Councils across Britain are facing growing challenges as the cost-of-living crisis sweeps the country. The highest rates of inflation for at least three decades are driving a sharp rise in the cost of the raw materials, labour and services they have to buy to provide public services.

In addition to the hit on energy costs, Rehman says contractors working on its building projects have requested an extra £1m on one scheme and a further £600,000 on another as the price of materials spirals. It doesn’t help that the council’s finances are already at breaking point after a decade of cuts left the town among the hardest-hit by austerity: £160m has been sliced from its budget since 2010.

“It’s austerity by stealth,” she says. “We’re in a crisis. But after a decade of cuts, then the pandemic and the unfolding crisis in Ukraine, it’s really, really challenging for us to respond.”

Government figures show councils and the public sector collectively buy more than £290bn of materials and services – from road grit to school meals – from private firms, and spend billions of pounds more on staff wages and energy bills for council buildings.

The Institute for Government says local authorities are on course to be between £800,000 and £2bn out of pocket as a result of inflation that’s higher than was expected when chancellor Rishi Sunak set out funding limits in his autumn spending review.

Even before taking account of inflation, the Local Government Association estimates the allocation from Westminster is at least £1bn short of requirements, as councils face growing pressures from an ageing population and an economy still grappling with Covid.

Then there are wages. With inflation forecast to peak close to 9% later this year, driven by soaring global energy prices after the Russian invasion of Ukraine, pay disputes are bubbling to the surface as wages fail to keep pace. Councils and the wider public sector are suffering the biggest real-terms cuts. Refuse collectors have gone on strike in Coventry, Glasgow and Brighton, and unions say civil servants could take industrial action after the government announced a 3% cap on pay last week.

Despite the pressures, Sunak has suggested efficiency gains should be sought to fund any additional public spending pressures. He believes expansive budgets are already in place for the public sector, while tax cuts should now be prioritised over further growth in state spending.

To hammer home the point, ministers last week launched a new cabinet committee on efficiency and value for money, saying £5.5bn of savings could be targeted, with the money then pumped back into public services.

But with town halls already stretched by a decade of austerity, this could undermine Boris Johnson’s promise to “level up” the country. This is risky for the Tories with local elections due next month.

In Warrington, Cathy Mitchell, deputy leader of the Labour-run council, says there are few efficiency savings to be found after a decade of cuts. With its own network of buses to run, the council has been hit by higher fuel costs after diesel prices reached a record high, and competition from the private sector on pay means it is struggling to retain drivers.

“The low-hanging fruit went years ago. We started with austerity in 2010, so 12 years in is a bit cheap to say ‘Let’s find efficiencies.’ We’ve lost a fifth of staff since austerity started. The people left behind are doing a lot more with a lot less,” she says.

Councillor Ian Ward, on building site
Councillor Ian Ward, leader of Birmingham city council: ‘It’s pressure at both ends.’ Photograph: Andrew Fox/the Observer

A government spokesperson said support with living costs was being made available for families across the country. Councils in England will also have access to £54.1bn in grant funding, an increase of 3.7bn on a year earlier, “in recognition of their vital role in providing essential services and supporting some of the most vulnerable people in our communities”.

In Birmingham, council leader Ian Ward has been convening local charities to discuss a coordinated response to the soaring cost of living. As Europe’s biggest local authority, with a budget of more than £3bn a year – and spending worth more than £200m to host this year’s Commonwealth Games in the city – the council is all too aware of inflation denting its finances.

“I am worried about the impact it’s going to have on families across Birmingham, and the charities are in similar position,” says the Labour councillor. “They’re at the sharp end of this. As demand goes up, they’re going to struggle to meet that, and they’ll need more funding. It’s a pressure at both ends.”

The council set its budget assuming inflation would be 2% this year, with 2.5% wage growth. “Now we know inflation is going to be running at a lot higher than that, and that will no doubt feed into wage demands as well,” he says, adding that the government needs to recognise this issue and increase funding for councils.

“It’s not just rising cost; it’s the rising demand for services as more and more people are tipped into difficulty.”

There are ways councils can offset the squeeze. They have more financial muscle in negotiations with suppliers and can achieve economies of scale unavailable to households, and this meaning they could face lower rates of inflation than consumers. Many, including Birmingham’s, agreed fixed 12-month contracts with energy suppliers before prices rocketed.

 Gazprom logo
Several local authorities are looking at getting out of supply contracts with Russia’s Gazprom. Photograph: Reuters

Others aren’t as fortunate. Several local authorities are exploring ways to get out of contracts with Gazprom, the Russian state-owned energy giant, after Vladimir Putin’s invasion of Ukraine. Public sector bodies are estimated to have bought about £106m of energy from Gazprom since 2016, according to data provider Tussel.

Ripping up contracts is unlikely to come without cost. In Portsmouth, the council expects to face early-exit charges of more than £100,000, while the recent sharp rise in global energy prices means replacing its existing deal could cost more than £300,000.

Slough borough council has predicted that its energy costs could rise by more than £3m by 2025 as gas prices soar, while three Scottish councils on Tayside are likely to see bills rise by £7m this year.

Andrew Burns of the Chartered Institute of Public Finance and Accountancy, which represents public accounting professionals, says the cocktail of risks facing councils comes just as calls on their services rise.

“A pound is buying less, yet demand is increasing. I hate to use the phrase, but it’s a perfect storm of uncertainty and financial challenges all going in the wrong direction.”

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