IFS: Councils will need billions of pounds in additional funding to meet the rising costs of adult social care – even if council tax increases at double the rate of inflation

A growing elderly population, increases in the number of disabled adults, and increases in wage and other costs, mean that English councils will likely need billions in extra funding over the next parliament if they are to meet the rising costs of providing adult social care. That will be required just to maintain services at current levels. And councils’ spending on local public services per resident will, next year, still be at least 20% below 2009–10 levels, on average.  

That’s according to new analysis from the Institute for Fiscal Studies which shows that, with councils now largely dependent on council tax and business rates to fund their spending, a growing gap is likely to open up between their income and what they need to meet the rising costs of service provision, especially for adult social care. 

• With council tax rising in line with inflation (2% a year), by the end of the parliament councils will need an extra £4 billion a year from the government just to maintain social care services at current levels and stop further cut backs in the share of national income spent on other services like children’s social care, public health and housing. This would rise to £18 billion a year by the mid-2030s.  

• Even with council tax going up by 4% a year every year – double the rate of inflation – councils may need an additional £1.6 billion a year in real-terms funding by 2024–25. This would grow to £4.7 billion by 2029–30 and £8.7 billion by 2034–35.

The costs of any increases in generosity of the system pledged in the election campaign would come on top of these pressures. For example, according to the Health Foundation and The King's Fund, the cost of Labour’s plan for free personal care for the over 65s would be £6 billion if introduced next year, increasing to £8 billion in real terms by 2030. And such pledges would not restore adult social care services back to their 2010 levels – since when hundreds of thousands of people have lost support as a result of stricter eligibility criteria. That would cost something like a further £8 billion a year in 2020-21, and require even more in the longer term.

An additional £1.3 billion in government funding has been allocated for the coming financial year, 2020–21, and councils with social care responsibilities will be allowed to increase council tax by up to 4%.

• Even if spent in full, this additional funding from the government and council tax will only be enough to undo around one-fifth of the peak-to-trough fall in councils’ spending on services. 

• Not all councils benefit equally from the additional funding planned for next year – and some may even see their funding fall. That’s because some councils have benefited from pilot schemes allowing them to retain more of the growth in local business rates revenues, and most of these pilots will come to an end in March. 

There are big choices to be made over funding of local government:

• The long-term funding gap could be closed by giving councils additional tax raising powers, such as via a local income tax. Or they could be provided with additional grant funding from Westminster. The former would give councils and their residents more discretion over how much to tax and spend, and stronger financial incentives to grow the local economy. But the latter would more easily allow money to be targeted at places where spending needs are the highest and/or local revenue-raising capacity is the lowest.

•  The conflict between current policies for local government funding and for social care provision needs to be resolved. The funding system has increasingly prioritised financial incentives, which means undertaking less redistribution as local needs and revenue-raising capacities change. But at the same time both the Conservatives and Labour have wanted to ensure consistent social care service provision across the country. The next government will have to square this difficult circle. 

David Phillips, author of the work and an Associate Director at the IFS said:

 “The additional funding announced for councils next year could be just a lull in the storm. Detailed public spending plans for 2021–22 and beyond have not yet been published. But we do know that councils will rely on council tax and business rates for more of their funding going forwards. And those revenues just don’t look like they will keep pace with the rising costs of services like adult social care – even with council tax bills going up at 4% a year, which is double the rate of inflation. That means finding billions more in funding to top up existing local tax revenues, even before thinking about new initiatives like free personal care.” 

ENDS

Notes to editors:

1. 'The outlook for councils’ funding: is austerity over?' will be available at 00:01 on the IFS website: https://www.ifs.org.uk/. 
2. This is a pre-released chapter from the IFS’s first annual report on local government funding, ‘English local government funding: trends and challenges in 2019 and beyond’, released on 13 November 2019. The full report will be launched at an event at 10:00 at Broadway House, London. For full details and to register to attend visit: https://www.ifs.org.uk/events/1779.
3. In addition to the pre-released chapter on the outlook for council funding, the report includes an analysis of changes in councils’ revenues and spending since 2009–10 (across the country and across services), and an analysis of the impacts of two funding schemes designed to incentivise growth and development – the Business Rates Retention Scheme and the New Homes Bonus – on different councils’ funding.  
   
4. This report forms part of a major programme of work funded by the Local Government Finance and Devolution Consortium. This consortium is generously supported by Capita, CIPFA, the ESRC and PwC and is also supported by the Municipal Journal and a large group of local government bodies, including the Society of County Treasurers and a number of unitary, district, metropolitan, and London councils.