Medium Term Financial Strategy (MTFS) 2025/26 - 2029/30

The Council is facing numerous financial challenges from external factors which it will plan to overcome to remain on a sustainable financial footing. (See PESTEL analysis in supporting information).

In its White Paper published on 7 June 2024, the Local Government Association (LGA) estimates that:

• Local authorities face £2.3 billion in additional costs and demand pressures, such as inflation and demographic growth, in 2025/26, and a further £3.9 billion in 2026/27.
• Cost and demand pressures are rising faster than funding which have added £15 billion to the cost of delivering services since 2021/22.
• In addition to cost and demand pressures, councils have also faced a 22.2% reduction in core spending power from 2010/11 to 2024/25.

Inflationary Pressures

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 peaked at 11.1% in October 2022. Inflation has been on a slow downward trend after is peak of 11.1% and is now in line with the Bank of England's target of 2%. While rates have now dropped, the cumulative impact of higher inflation remains a pressure on Council budgets.

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 2024/25, (offer status) made by the National Employers has been factored into contingency estimates. Any pay award or National Living Wage (NLW) increases are 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 2024 the Bank of England (BoE) cut the bank base rate from 5.25% to 5.00%, the first rate reduction since a series of fifteen incremental increases resulted in a 16 year high interest rate of 5.25% on 16 August 2023. The cut was responding to a reduction of headline inflation from 7.9% CPI in June 2023 to 2% CPI in May 2024 and remaining at 2% the following month, therefore achieving the banks CPI target. The base rate reduction is expected to lower the cost of borrowing and provide stimulus to the economy ahead of a predicted inflation increase above the 2% target figure.

Gateshead Context

Over the years all local authorities have faced significant cuts to their funding from central government because of the previous Government's austerity measures, at a time when pressure on core service delivery has increased, particularly in Children's Services and Adult Social Care, and homelessness support. Many Councils have been forced to reduce 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. While inflation has reduced to Bank of England targets, the cumulative impact of higher inflation over recent years remains a cost pressure.

Lack of Funding Reform to Address Areas with High Needs/Low Tax Bases

Under the previous Government, longer-term reform of local government funding was continually delayed. The current system is out of date, opaque, and overly complex and it requires urgent reform. 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 a comparatively low council tax and business rate base. The link between need and funding has been eroded. The Government's manifesto has outlined that they will replace the business rates system so it can raise the same in a fairer way, but it remains unclear how this will impact on the

Council's funding. 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.

Brexit Impacts

The medium and long-term implications of Brexit remain unclear and they continue to emerge, but they include shortage of labour, shortage of goods and materials including longer lead in times and price increases.

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 significantly reduce 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 have 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.

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.

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

The Chancellor's statement on 29 July 2024 confirmed that regular spending reviews and longer-term planning and spending plans will be re-introduced. The next Spending Review will be a multi-year review, covering at least three financial years and will conclude in Spring 2025. This approach should improve stability, encourage innovation, and enable informed value for money decisions, compared to the short-term funding settlements in recent years. This will include consolidating funding streams for local authorities into the Local Government Finance Settlement, with a 'mission-led approach' to public service delivery including greater focus on long-termism, investment in prevention, managing demand, and local integration of services.

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. The MTFS assumes use of earmarked reserves in 2025/26 and 2026/27. A plan to replenish reserves forms part of this MTFS.