Council funding - a step forward, but not out of the woods

The Scottish Budget dance has taken another swirl as the Bill passes its first stage. Let’s have a look at what the changes mean for local government and pay.

First a quick recap. The draft budget proposed no cash increase for local government, which meant a ‘real terms’ cut in council budgets of around £153m. This was in a year when the Scottish Government had a cash increase in its own budget from Westminster of £188m. They also announced a new pay policy, but allocated nothing in the budget to pay for it.

After the Finance Settlement was published with details of individual local authority allocations, councils spotted an ‘accounting error’, which after the government correction resulted in a number of winners and losers.

On the day of the Stage 1 debate this week, the Government announced that an agreement had been reached with the Greens to support the budget, in return for an additional £159.5m of revenue funding. No repeat of last year’s padding the numbers by mixing capital and revenue. They also improved the pay policy by extending the 3% band to those earning up to £36,500. It remains at 2% for those earning above that.

Dealing first with the revenue funding, this roughly means that councils are now getting a standstill budget in ‘real terms’. However, that does not mean there won’t be more cuts in the coming year.

That’s because ‘real terms’ means an assumption that inflation will be 1.4% next year. No one really believes this will happen, certainly not a prudent council finance director. The OBR has forecast that the CPI will be 2.4% next year and the RPI 3.3%. Pay alone, which is 55% of the budget, will be around double the government’s inflation assumption according to the pay policy.

Then there will be the usual round of ‘unavoidable commitments’. These include demographic change, which IJBs alone calculate at 2% per annum. Most IJBs are already reporting big shortfalls in their planned budgets for next year and will be looking for additional financial support. Not helped by the £66m allocated for the living wage and other new care duties only being ‘support’, not the full cost.

COSLA calculated all these demands at 2.6%, plus 3% for a realistic inflation estimate. That’s where their £545m figure comes from, which was the basis for Scottish Labour’s budget proposal.

That leaves pay. Does the revised budget meet the Scottish Government pay policy, let alone the trade union side claim?

A 3% pay increase costs councils around £210m. As pay makes up around 55% of the revenue budget, £88m of the new money is for pay. Then councils can increase the council tax by 3% raising £77m, which by the same proportions is £42m for pay. That’s a total of £130m, or a shortfall of £80m. They could of course meet the cost by spending almost all the new money on pay, but that leaves almost nothing for inflation and those unavoidable commitments.

Councils also have less flexibility in other areas. They can increase charges again, but the income is dropping off every year they do this, quite apart from the regressive nature of many charges. Councils took £79m from their reserves last year, not something they can continue to do.

In summary, the extra money is very welcome and makes a significant contribution to the draft budget shortfall. It also means that local government is suffering as badly, but not much worse (this year at least), as other departments outwith the protected spending areas. However, it still means an underfunded pay policy and service cuts.