Medium Term Financial Strategy (MTFS) 2024/25 - 2028/29

The Council is facing numerous financial challenges from external factors which it needs to overcome if it is to remain on a sustainable financial footing. (Also see PESTEL analysis in supporting information). The Local Government Association (LGA) estimates that:

• local authorities face £1.4 billion in additional costs and demand pressures, such as inflation and demographic growth, in 2023/24, and a further £2.4 billion in 2024/25.
• the cost to local authorities of delivering their services at current levels will exceed their core funding by £2 billion in 2023/24 and £900 million in 2024/25.
• if inflation fails to fall in line with the March 2023 budget, and instead is in line with the more recent inflation projections from the Bank of England, this would add £740 million in cost pressures in 2023/24 and £1.5 billion in 2024/25.

The MTFS assumes CPI to fall to 2% in 2025/26. If it remained at anticipated Q3 levels of 5.4%, this would add a further £2m to the MTFS funding gap in 2025/26.

Inflationary pressures (unavoidable)

Since February 2022, the war in Ukraine has led to inflationary increases, notably around food, fuel and utility prices, which are affecting the economy generally. Annual headline CPI inflation eased to 8.7% in April, down from 10.1% in March and a peak of 11.1% in October 2022. Inflation has been on a slow downward trend after is peak of 11.1%. The rate dropped again on 20 September to 6.7% in the year to August, down from 6.8% in the year to July and from 7.9% in the year to June. The reductions are predominantly driven by last year's rise in energy costs falling out of the comparison but remains higher than the Bank of England's expectations of 2%. Whilst remaining at a high level in 2023/24, CPI is forecast to fall to approximately 5% by the end of the year and is expected to fall further still in future years as the position stabilises.

Pay award / National Living Wage (NLW)

This cost pressure relates to the cost of pay awards agreed for employees of the Council as well as social care fees. Local Authority pay awards are determined through the national bargaining process rather than being mandated by Government. Pay award 2023/24, (offer status) made by the National Employers is in line with the previous year and has been factored into contingency estimates. Any pay award or NLW increases is unfunded from Government and must be met from settlement funding which puts additional pressure on the Council's budget.

Cost of borrowing

On 3 August 2023, the Bank of England (BoE) increased its rate from 5% in June 2023 to 5.25% in response to rising inflation and this rate was maintained in September's review. This was the fourteenth consecutive increase, and is the highest rate since March 2008, as part of the BoE's monitory policy which looks to reduce inflation to 2% and provide certainty in the financial markets. Any increase in the base rate or further uncertainty in the economy could translate into increased cost of borrowing.

Gateshead context

Over the years all local authorities have faced significant cuts to their funding from central government because of the Government's austerity measures, at a time when pressure on core service delivery has increased, particularly in Children's Services and Adult Social Care. Many Councils have been forced to abandon spend on preventative measures to fulfil their statutory duties.

Cost of living crisis

Current financial outlook in terms of high inflation and interest rates as well as cost of living risks, notable around food, fuel and utility prices that our residents and businesses are facing.

Lack of funding reform to address areas with high needs/low tax bases

Longer-term reform of local government funding has been delayed until the next Parliament and a structural solution is needed to meet the many statutory duties and demands placed on local authorities.

Over the last decade, Government strategy to reduce reliance on grant and localise funding has resulted in moving ever-larger amounts of funding away from councils who have the highest need to those who can grow the most resource locally. The change of emphasis in how funding has been allocated has benefited councils with low needs, a large and growing council tax base, and a thriving business estate, by comparison to authorities like Gateshead with high needs and low council tax and business rate base. The link between need and funding has been eroded. The Council will continue to lobby the Government for a fairer and sustainable system for local government funding.

Social Care funding

Adult Social Care is the Council's largest budget with significant demand and cost pressures supporting some of the most vulnerable residents in the borough. Whilst the Council has welcomed additional funding for Adult Social Care in 2023/24 and 2024/25, including new grants such as the Market Sustainability and Improvement Fund and the Discharge Fund, the duration and level of this funding is unknown as it is re-purposed funding intended for social care reforms which have been delayed. This lack of clarity around the future funding for social care beyond 2024/25 makes it difficult to plan strategically and resource effectively without risk to the Council.

Brexit impacts

The medium and long-term implications of Brexit remain unclear and are still emerging and will continue to do so for some time to come, but they can be summarised as shortage of labour, shortage of goods and materials including longer lead in times and price increases.

Thirteen years of austerity

An early consequence of over a decade of funding cuts has been cuts to preventative spend. As funding reduced and demand for services increased, many councils have been forced to abandon spend on preventative measures to fulfil their statutory duties. The cumulative impact of years of cuts has a significant impact on communities. The Council has consistently lobbied the Government over the disproportionate cuts to funding which impact unfairly on local authorities with high levels of deprivation, and low tax bases.

Short-term and late funding settlements / one-off tranches of funding

Councils' ability to mitigate the funding uncertainty and demand pressures has been hampered by a financial framework characterised by one-year and late funding settlements, the proliferation of one-off funding pots, and continuing delays to funding reforms.

One-year local government settlements hinders councils' ability to strategically plan over the period of the MTFS, something which is crucial to deliver investment, valued local services and support to vulnerable residents. This situation is compounded by the lateness of financial settlements in the budget setting timetable with major grant funding announcements as late as February and some made after the budget is set in February.

Whilst additional funding is always welcome, short term annual funding leaves councils and partners unable to plan service delivery over the medium/long term. It hinders the ability to recruit and put long term stabilising measures into action.

The changing landscape to accessing funding has recently seen Local Authorities having to bid for additional funding. Furthermore, many of these specific grants are competitive, ringfenced, lower value which are then resource intensive to bid for and manage. Gateshead has been successful in the bid to the UK Shared Prosperity Fund; however, there is an expectation costs will offset the funding therefore not included in the MTFS forecast.

Overall, the increasingly fragmented approach to local government funding challenges the Council's ability to plan effectively over the medium to long term.

Pressure on reserves

Reliance on use of reserves for permanent budget requirements is not a prudent and sustainable approach in the long-term but can be used, where appropriate, to pump prime 'invest to save' initiatives or in a planned approach to bring permanent budget savings through transformation. A plan to replenish reserves forms part of this MTFS.

Devolution

The leaders of County Durham, Gateshead, Newcastle, Northumberland, North Tyneside, South Tyneside and Sunderland councils have agreed in principle to a devolution deal which the Government has confirmed it is 'minded to' approve. A devolution deal for the region means unlocking £4.2 billion of investment, over 30 years, and seeing additional powers transferred from Whitehall to local people with better knowledge and experience of our communities. It is expected to create 24,000 extra jobs, generate 70,000 courses to give people the skills to get good jobs and leverage £5.0 billion of private sector investment. The new authority, which would cover an area which is home to around 2 million people, will have the power to make decisions on areas such as transport, skills, housing, finance, and economic development. The deal includes:

An investment fund of £1.4bn, or £48m a year, to support inclusive economic growth and support our regeneration priorities.

• an indicative budget of around £1.8bn, or £60m a year, for adult education and skills to meet local skills priorities and improve opportunities for residents
• a £900m package of investment to transform our transport system, with £563m from the City Regional Sustainable Transport Fund, on top of funding already announced for our buses and metro system
• £69m of investment in housing and regeneration, unlocking sites to bring forward new housing and commercial development

The impact of the new arrangements will continue to be reviewed throughout the period of the MTFS.