Medium Term Financial Strategy (MTFS) 2023/24 - 2027/28

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)

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. The average inflationary pressure anticipated for the year was +2%. The Consumer Price Index (CPI) is now 10%, with Retail Price Index (RPI) at 12% based on the current Office for Budget Responsibility (OBR) forecast. There is uncertainty as to when or if these will fall back to previous levels.

Energy costs

2022 is an unprecedented year in relation to energy costs with +100% increase in both Gas and Electricity costs with expectation to rise further in 2023/24.

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 agreed pay increments. Local Authority pay awards are determined through the national bargaining process rather than being mandated by Government. Pay award 2022/23, (offer status) made by the National Employers is significantly higher than previously estimated. 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.

In May 2022, the Council agreed to take steps to address low pay in the workforce and this work will continue.

Government response to cost-of-living crisis (the Government's Growth Plan 2022 and 'Mini Budget')

Energy Bill Relief Scheme

On 21 September 2022 the Government announced a six-month scheme for businesses and other non-domestic energy users (including Local Authorities). This is welcome news as prices have been significantly inflated in light of global energy prices. After this initial six-month scheme, the Government will provide ongoing, focused support to vulnerable industries. There will be a review in three months to consider where this should be targeted to make sure those who most in need get support. No further details are available at this time.

Reversal of the Health and Social Care Levy

On 22 September 2022, the Government announced cancelling the Health and Social Care Levy, initially introduced via a 1.25% percentage point rise in National Insurance contributions, which took effect in April 2022. This will come in two parts; reduction of NI rates from 6 November 2022, removing the temporary 1.25% for the remainder of 2022/23 and the 1.25% Health and Social Care Levy will not come into force as a separate tax from 6 April 2023 as previously planned. The Government have committed to maintaining the additional spending on health and social care that was associated with the introduction of the Levy. This will result in lower employers NI costs for the Council than previously anticipated. However, it should be noted Local Authorities were identified as receiving funding as part of the Service Grant and would expect this to be reduced to offset, therefore no expected saving to the council.

Plan for Patients

In addition to the above on 22 September 2022, the Health and Social Care Secretary released a "Plan for Patients'. This included £500m of additional funding into Adult Social Care to help people get out of hospitals and into social care support.

Government's Growth Plan 2022

The Chancellor announced the Growth Plan 2022 on 23 September with potential implications for Local Government as set below:

• Investment Zones - new zones are intended to drive growth and unlock housing across the UK by lowering taxes and liberalising planning frameworks to encourage rapid development and business investment. Government has written to all local leaders to invite discussion. The Secretary of State will shortly set out the selection criteria to become and Investment Zone and the process for designated sites within
• Universal Credit - rules are to be tightened by reducing benefits if people do not fulfil their job search commitments
• Planning and Infrastructure Bill - there are plans to accelerate new roads, rail, and energy infrastructure. New legislation will cut barriers and restrictions making it quicker to plan and build new roads etc. Further information and guidance is not available at this time
• Housing - the Government aims to accelerate the disposal of public land for housing development

Cost of Borrowing

On 22 September, the Bank of England increased its rate from 1.75% in August 2022 to 2.25% in response to rising inflation. It is anticipated that the base rate will continue to increase over the next few months as the Bank 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 (challenges)

Over the years all local authorities have faced significant cuts to their funding from central government because of austerity, 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 rising 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.

Continuing economic uncertainty of the pandemic

The pandemic has both exacerbated and magnified the precarious state and volatility of local government funding which was already under strain. Despite receiving emergency funding, it is likely that the Council will experience longer-term impacts of the pandemic, the impacts of increasing demand for services, and potential reduced Business Rates and Council Tax income. Direct Government support in relation to the impacts of covid has now ended.

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

Longer-term reform of local government funding has been delayed 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 Government has confirmed that the fair funding reforms initially consulted upon in 2016 will not be implemented in the 2023/24 settlement.

Social Care funding

The funding for social care is already complex and the way in which funding is being considered for the charging reforms via short term grant allocations is going to further exacerbate this, and the reforms do not address the fundamental failings within the social care funding system.

Adult Social Care represents the largest budget with significant demand pressures. The lack of clarity around the future funding for social care beyond the very short term makes it difficult to budget 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.

Twelve years of austerity

An early consequence of over a decade of funding cuts has been cuts to preventative spend. As funding fell and demand for services grew, 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. This 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

One-year local government settlements hinders councils' ability to 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.

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. The Council's balances are at a minimum and with many competing demands these must be managed effectively.

Devolution

The Government announced, in the Levelling Up White paper in February 2022 that discussions are to be held with county areas with regards to a new devolution deal. Any impact of devolution discussions is currently not included in the MTFS forecast.