The cost-of-living crisis, skyrocketing inflation, and other local government finance pressures, July 2022

  • By Amy Leppänen


  • London boroughs are budgeting in a hugely uncertain economic environment. A two-year settlement is needed to provide medium term funding certainty.
  • Just as the cost-of-living crisis is hitting residents hard, rising inflation is squeezing borough budgets. Our analysis suggests inflation could drive additional budget pressures of up to £400m this year without further funding support.
  • The legacy of Covid-19 continues to add pressure to budgets and the government should not take the latest reserves figures as a sign of good financial health.
  • Adult social care funding reform is a new financial risk for London boroughs and funding must appropriately reflect the impact on working-age as well as older adults.
  • High needs funding pressures are creating a risk to financial resilience. The Department for Education and the Department for Levelling Up, Housing and Communities must work together to ensure council taxpayers are insulated from these pressures
  • The 2021 Census may have significantly undercounted London’s population and particularly its hard-to-reach communities because it was held during the third national lockdown. The government must ensure population estimates account for any temporary dip in the population.
  • Despite having the highest homelessness rates in the country, London looks set to lose out from reform of the Homelessness Prevention Grant.

The need for greater funding certainty

Spending Review 2021 set a three-year envelope for local government funding. However, boroughs continue to have very little certainty over funding for the next two years.

There have now been four one-year settlements in a row, which hinders strategic long-term planning, the ability to deliver value for money, and helps explain why some authorities may have felt it necessary to add to reserves in recent years to manage growing risks relating to this uncertainty.

London Councils welcomes the announcement from the previous Secretary of State for Levelling Up, Housing and Communities of a two-year settlement for 2023-24 and 2024-25 – although we are still seeking an earlier indication of the precise funding figures for London boroughs so that there is more time for budget setting.  

Boroughs also need certainty over the scale and scope of the government’s proposed local government funding reforms. These will have major implications for boroughs’ future finance strategies and plans for service provision, so we are keen to see details as soon as possible.

Rising inflation driving additional budget pressures

The changes to GDP inflation (from under 3% at the time of the Spending Review in October 2021 to over 4% in March 2022) means that the finance settlement for 2022-23 is now worth £100 million less in real terms than when it was agreed.

London Councils’ modelling also suggests that inflation may lead to additional budget pressures of at least £400 million in 2022-23, as borough contracts and other running costs (such as energy bills) may be closer to CPI inflation (set to peak at 11% this year) and with pay inflation almost certain to exceed the 2% boroughs have budgeted for on average.

Capital programmes are being scaled back with many marginal projects now unviable – affecting school buildings, affordable housing, and local transport and regeneration schemes.

London Councils is seeking in-year funding support from the government to help deal with these pressures. Next year’s settlement, which was due to be flat in real terms even at the time of the Spending Review in 2021, must be updated to reflect the new economic environment.

The legacy of Covid-19 continues to add pressure to council budgets

The pandemic cost £3 billion in additional spending and lost income for London boroughs.

The government’s funding support covered the impact in 2020-21 and 2021-22. However, over £300 million of tax losses that occurred in the last two years won’t hit boroughs’ budgets until this year and next year (due to delays in how tax collected flows through the finance system).

Any surplus in funding received so far, which may have been temporarily set aside in specific reserves, is being used by boroughs to mitigate budget pressures caused by those tax losses and heightened demand pressures, notably within adult and children’s social care. The rising cost of inflation is a new and separate issue.

Adult social care funding reform is a new financial risk for boroughs

The government provided around £162 million of funding in 2022-23 for local authorities to prepare adult social care markets for reform and moving to a “fair cost of care”. DLUHC and DHSC are working with councils to collect data to inform the distribution of a further £600 million in 2023-24 and 2024-25, as well as the distribution of £800 million next year for the wider reforms.

Concerns are emerging across local government that the funding set aside to cover the reforms may not be enough. A recent report by Newton and the County Councils Network found that costs could exceed funding by £10 billion over ten years nationally.

The impact will vary but it will be greater for London boroughs with a higher proportion of self-funders. Any funding for reforms should also reflect the relatively higher spending on social care for working age adults in London.

London Councils is concerned whether, over the longer term, the level of funding support for social care through the Health & Social Care Levy will be able to meet the growing demand pressures resulting from the pandemic, an ageing population, and rising complexity of need within younger adults. Boroughs need assurance these issues will be addressed ahead of the next Spending Review, due in 2024.

Amy Leppänen, Parliamentary Officer