Spending Review 2021: Budgets rise, tough calls remain

Inflation and pay rises may erode additional funds for local government

Paul Dossett, Head of Local Government, Public Services Advisory

There were more spending commitments than expected in today's Spending Review with budget increases announced across all departments and an estimated average increase of 3% in core spending power for local government. Local government will welcome the funding settlement announced today. It is multi-year, and that it represents an additional £1.6 billion in core grant funding over each of the next three years for adult social care and other services, with an estimated average real-term increase of 3% each year.

According to our analysis of provisional government data, 79% of English councils overspent on their budgets in 2020/21. While new funding is needed, how far a 3% increase will go is unclear.

The extra support will also vary by region. While it's encouraging that we haven't seen a direct return to austerity, tough decisions are likely to remain for the sector through the medium term in managing service and demand pressures.

The Local Government Association estimates that the average increase in annual cost pressures facing councils is £2.6 billion per year to maintain services at their current level, so borough treasurers and finance directors will be keen to understand the detail when councils receive their settlements in December. The changes to rates in certain sectors will present significant support for the business community. It will also result in lost revenue for councils, and they will need to seek assurance that the government will provide additional funding for this loss.

However, this additional funding may prove cash neutral for local governments due to an inflation forecast of 4% next year, the national living wage increasing to £9.50 an hour and the Chancellor stating all public sector workers will receive a fair pay award next year. Tough decisions are likely to remain through the medium term in managing service and demand pressures. The homelessness crisis remains the biggest variable in the sector. The new £640 million funding announced for this today is likely to be a drop in the ocean compared to what's needed to tackle this growing crisis across the country.

To support economic recovery the Chancellor announced several changes to business rates. These included a more frequent revaluation, a further year of 50% discount for hospitality, retail and leisure business, and a new twelve-month 100% relief for businesses undertaking improvement to their property. Councils will be seeking assurances that the government will provide funding for these additional costs.

There were more spending commitments than expected in today's Spending Review with budget increases announced across all departments and an estimated average increase of 3% in core spending power for local government. This increased funding is by no means a silver bullet. According to our analysis of provisional government data, 79% of English councils overspent on their budgets in 2020/21. While new funding is needed, how far a 3% increase will go is unclear.

The extra support will also vary by region. While it's encouraging that we haven't seen a direct return to austerity, tough decisions are likely to remain for the sector through the medium term in managing service and demand pressures.

The changes to rates in certain sectors will present significant support for the business community. It will also result in lost revenue for councils, and they will need to seek assurance that the government will provide additional funding for this loss.

The homelessness crisis remains the biggest variable in the sector. The new £640 million funding announced for this today is likely to be a drop in the ocean compared to what's needed to tackle this growing crisis across the country.

Levelling Up Social Care Funding with Health is as vital to the NHS as it is to Local Government

Nick Clarke, Director, Public Services Advisory

The £4.8 billion additional funding announced by the Chancellor for Local Government is welcome. Councils will be waiting with keen interest on what their specific allocation will be. Because the greatest financial pressures most Tier 1 Councils currently face concerns social care where structural demand and inflationary cost pressures show no sign of slowing down.

In fact, in some areas such as residential and home care, many councils are now facing an unprecedented crisis as carers leave the sector for other better-paid jobs. 

This is already having a direct – and significant – impact on the NHS. Some people cannot be discharged safely from hospital into residential or home care as there is no timely capacity to provide needed care. This will directly impact the NHS' ability to reduce the backlog in surgeries even with the additional funding announced today if there are no beds available for patients if they are already occupied. That is why levelling up social care funding is as important to the NHS as Local Government.

Levelling up here does not mean that social care funding should match NHS funding. The total funding between them should be appropriate to deliver the joint ambitions both have: high-quality care and a good, sustainable working environment for staff. A lack of funding within some Local Government to pay carers more to remain in the sector will heighten the NHS's challenges this winter.

Councils will still face tough decisions on how much to allocate to social care departments and for directorate heads to decide what to fund in social care. With an ageing population, more complexity of need, staff and carers leaving the sector, significant increases in safeguarding enquiries, inflation-busting increases in care costs, the need to fund the National Living Wage increase, rising mental health needs, spiralling SEND spend and more children needing social care support and intervention, the list is nearly endless and the decisions unenviable. The money will go quickly.

The £4.8 billion funding to Local Government and the new Health and Social Care Levy will help paper over the cracks for some councils for a while longer. But it will not transform social care. Until the collective budgetary needs of both the NHS and social care together is considered to meet both the short and longer-term challenges they face with a fully integrated approach, especially around prevention, nothing will.

Delivering on the funds announced today must be the focus of the housing sector

Wayne Butcher, Director, Public Services Advisory 

The Budget presented by the Chancellor on Tuesday announced many "big-ticket investments", which are welcomed by the housing sector. A total of £10 billion was the overall ticket size, including announcements for 1 million new homes to which around 180,000 would be affordable, meanwhile £1.8 billion was marked for the conversion of brownfield sites and £5 billion committed to removing unsafe cladding.

The big question is how will this be delivered? In England, Grant Thornton believes agencies like Homes England have a lead role to play. The market needs the agency to act as implementer to ensure delivery happens at pace and scale. Homes England must collaborate effectively – working closely with local government, developers, and private sector investors to create delivery solutions to unlock the momentum needed and provide tangible outcomes underpinned by robust commercial structures governed appropriately. Ultimately it's about keys in the hand of homeowners and delivering the promises made.

Increased spending in healthcare will help with NHS recovery, but funding for critical capital expenditure remains unclear

Matt Custance, Head of Public Sector Healthcare

The Department of Health and Social Care (DHSC) budget will increase from £156bn in 21/22 to 178.5bn in 22/23, an increase of 14% in nominal terms, after which it will settles into a growth rate of between 2.5 and 3.0% nominal – likely to be just above inflation.

It needs to be acknowledged that government has continued to fund the NHS with real-term increases in spending at a time when other departments and local government have suffered. Funding has been announced to help NHS organisations to claw back elective waiting lists, which have ballooned during the pandemic, and additional funding for ongoing vaccinations and COVID-19 treatment. However, demand for healthcare has been increasing, even before the pandemic, while the workforce has become increasingly scarce, so whether this will be enough – only time will tell.

The capital budget appears now to be stuck at a level of around £9-11 billion a year – which is significantly more than the depths of the post-PFI period. This is likely to be enough to fund normal renewal of facilities and some backlog maintenance, but not enough to fund the New Hospitals Programme, which we believe will cost significantly more than £20 billion over the next 10-15 years. It's still unclear where this funding will come from. In addition, the Budget documents continue to ignore the additional 8 hospitals that government has promised. They mention only 40 hospitals in the New Hospitals Programme, which is concerning.

The NHS is facing cost pressures, most notably in the cost of the workforce but also in materials and supplies. To weather the storm, NHS providers need to invest in infrastructure and digital so that they can attract staff and use them better. £2.1 billion has been announced to fund digital innovation and this is a welcome boost – but we know from the Wannacry attacks that NHS IT systems are well behind other sectors and that few NHS organisations have the kind of digital systems they need to face the challenges of the coming decade. This is likely, again, to require new sources of funding not yet announced.

It's telling that healthcare and the NHS is not mentioned in the Investing for Growth section of the budget document, which focuses on so-called economic infrastructure. The pandemic has demonstrated the central role that the health of a population plays in determining economic outcomes. Yet, successive governments continue to treat health as just a spending department. As the largest employer in most towns and cities across the UK, as a magnet for life sciences industries and as an enabler of a productive and healthy workforce, the NHS needs to be recognised as a key driver of economic growth and a key part of the government's levelling up agenda.

Net Zero and Autumn Budget 2021 - Hot Take

Alasdair Grainger, Net Zero Director, Public Services Advisory

The Budget speech itself barely referenced net zero, with two mentions in the hour-long speech. When the Chancellor did use those words it was couched in the context of an innovation strategy. Despite that, BEIS as the Whitehall department leading the net zero push has done well in the SR21.

This is not surprising as HMT has already outlined its fiscal approach in the "plan for growth" earlier in the year - and this was structured around "innovation, infrastructure and skills". HMT likes to keep out of policy making were possible, preferring spending departments to push specific narratives.

Read more insight about net zero →