Rising to budget-setting challenges
Finance teams face a complex set of circumstances as they prepare budgets for the coming financial year. Here, we provide some helpful tips to guide them on their way
FINANCE
Image: Istock
Dave Roberts
Senior Associate, Campbell Tickell
The budget-setting process seems to be starting earlier each year. Although the 2022/23 financial year has just begun, local authorities will already be thinking about next year’s budget. Given the current cost of living crisis following two years of ‘other challenges’, local authorities could be forgiven for approaching budget-setting with a sense of foreboding. Yet, in my experience, there are solutions to help meet the myriad challenges.
Key challenges
First, let’s begin with a recap on some key challenges:
- It is clear now that Covid-19 is far from over. While lockdowns appear to be a thing of the past, implications from Covid-19 remain likely for some time for any organisation that employs staff, for parents, and for those involved in social care and older people’s services
- Brexit is far from settled, and the relationship between the UK and the EU remains strained at best, with seemingly little chance of a thawing of the current situation any time soon
- The Russian invasion of Ukraine took many by surprise. In addition to the horrendous human cost, it has turned out to have significant implications for the supply of essential resources within continental Europe and the UK
Council implications
All these issues continue to have a significant and increasing impact on the economic outlook for the UK, and in some cases the combined impact is greater than that of the individual events. Local authorities are not immune to this and there are some significant implications for local authority finance departments to deal with:
Inflation, as measured by the Consumer Prices Index (CPI), is currently at 9%. The latest Bank of England inflation forecasts suggest CPI could exceed 10% over the coming months. This will have implications for:
- General cost levels, meaning less can be delivered with finite resources
- Fuel and energy cost levels
- Council rent and service charge levels, increasing pressure on households already feeling the pinch through increases in food prices and energy bills
- Increased construction costs placing pressure on development and infrastructure projects and potentially reducing viability of some developments
- Increase in bad debts and unrecoverable income
Rising interest rates, while arguably necessary to help try to ease inflationary pressures, will also impact on:
- Local businesses, reducing capacity for investment and potentially increasing the business failure rate
- Household budgets, with reduced amounts being available for discretionary expenditure thus further impacting on businesses and local services
- Financing of local authority investment projects, potentially leading to increased costs and delays in income
The combined impact of Brexit and the situation in Ukraine has led to a shortage of both skilled labour and some building materials in the UK, as well as significantly increased prices in some areas.
For instance, the cost of building timber has increased by 30% over the past year.
This will clearly have a significant impact on the ability of councils to invest in existing assets, as well as to deliver programmes of new housing and other assets which are vital to local areas.
Where next?
So where does all of this leave local authorities? Finance teams will by now be familiar with the need to review and recast their financial plans to take account of the extraordinary circumstances we find ourselves in. To help guide this process, here are some of the steps and ideas I have found helpful:
- Assume inflation will hit the levels being forecast and assess the potential additional cost across the organisation
- Make realistic assumptions about pay awards over the next few years
- Reassess the council’s overall risk profile and need for mitigation activities
- Review any new ventures in the context of the changing economic outlook and risk profile
- Consider the potential impact on existing development activity, along with the possible need for new exit strategies
- Consider spending freezes in non-essential areas – easy to say and less easy to do, I appreciate
- Consider an emergency budget process (again!)
“The Bank of England is forecasting that the current inflation spike will quickly drop next year and CPI will fall back to around 2% by roughly 2024-25. But of course this is by no means guaranteed.”
Any and all of the above may well be necessary to try to achieve a balanced financial position for this year, although there is a chink of light on the horizon.
The Bank of England is forecasting that the current inflation spike will quickly drop next year and CPI will fall back to around 2% by roughly 2024-25. But of course this is by no means guaranteed, and could be affected by external as much as internal factors.
Even so, budget-setting will remain a challenge for the foreseeable future.
