Merthyr Tydfil Council is currently facing a budget gap of more than £11m for next year. A report set to go before cabinet and full council on Wednesday, January 11 shows that after the provisional Welsh Government settlement in December, the authority is looking at a gap in its funding of £11.035m.
The provisional local government settlement saw a funding increase of 7% (from £110.7 million to £118.5 million) announced for Merthyr Tydfil for the 2023/24 financial year ranking it as 18th out of all 22 Welsh councils and below the Welsh average increase of 7.9%. The final local government settlement is due to be announced on March 7 or 8, the report said.
The Medium Term Financial Plan (MTFP) covering 2022/23 to 2025/26 was approved in March last year and indicated a projected budget deficit of £5.462m for 2023/24 and a cumulative budget deficit of £16.408 million over the period of the plan. But the revised budget deficit for 2023/24, taking into account additional funding through the settlement and increased costs arising from the pay award, high inflation, real living wage for care workers, spiralling energy costs, increasing interest rates and unavoidable additional demands, comes to £11.035 million.
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The report said: “A budget deficit of this magnitude for 2023/24 alone is normally what is expected over a two year period highlighting the challenge faced by the council in addressing unprecedented additional and unavoidable external financial pressures.” The report said business plans and other measures are currently being developed to address the budget gap and will be brought before councillors in the coming weeks.
The budget deficit assumes a council tax increase of 1% but that is yet to be decided by cabinet and full council.
The Welsh Government provisional settlement
The budget impact from the provisional settlement increase of 7% will give the council increased spending power of £4.062m for 2023/24 but the report said that although this is welcome, the better than expected settlement “does not protect the council from making difficult decisions in setting a balanced budget.”
Pay award
The pay award for 2022/23 was agreed between the National Employers for Local Government Services and Trade Unions at an increase of £1,925 on all National Joint Council (NJC) pay points. This results in a Merthyr Tydfil average salary increase of between 6% and 7%, compared to the budgeted 4%.
The teacher’s pay award was agreed at 5% from September 2022 with a projected 3.5% increase from September 2023. For non-teaching employees, a 3.5% increase is projected for 2023/2024 with an additional projected cost for Merthyr Tydfil for 2023/24 of £2.547 million.
Energy costs
Total additional energy costs across the council’s estate come to £2.647 million due to a projected increase of 293% for gas and 157% for electricity. The report said that energy markets are being closely monitored to determine whether the projected increases can be reduced.
Unavoidable additional demands
There are unavoidable additional budget demands resulting from service financial pressures such as demographic growth, legislative changes, new initiatives, loss of income and changes to grants terms and conditions. These total £2.785 million for 2023/24 compared to the indicative budget requirement of £3 million.
The report said: “It is recognised that without reflecting these additional expenditure requirements within the MTFP the council will face significant financial pressures in remaining within budget for 2023/24 and the medium to long term. All additional demand requirements however are subject to ongoing review with any identified amendments, owing to updated information, reported in due course. The potential for further demand requests should also be noted.”
Real living wage for care workers
The Welsh Government has said that the revenue settlement includes funding to enable councils to continue to meet the additional costs of introducing the
real living wage for social care workers. The new real living wage of £10.90 per hour has to be implemented by May 14, 2023 at the latest and applies to care workers within the independent sector since Merthyr Tydfil Council is currently paying all employees above the real living wage.
For Merthyr Tydfil, the additional cost is £2.646 million for 2023/24.
The impact of inflation
High inflation with the CPI currently at 10.7% has led to significant contract cost increases, the report said. For Merthyr Tydfil the inflationary impact is £2.384 million for 2023/24. Inflationary increases are subject to ongoing review and challenge but are considered unavoidable requiring inclusion in the 2023/24 budget because they result mainly from contract uplifts, the report said.
Employee costs reductions
The valuation of the Rhondda Cynon Taf Pension Fund in November 2022 has resulted in a reduction in Merthyr Tydfil’s employer contribution rate from the current year’s and budgeted future years’ rate of 25.3% to the actual
rate for the next three years of 21.8%. This has resulted in budget savings of £1.298 million for 2023/24.
During autumn 2022, the former Chancellor of the Exchequer announced the
reversal of the previously approved 1.25% rise in National Insurance contributions and this saves the council £491,000 in 2023/24.
Capital financing costs
The Bank of England’s most recent interest rate increase to 3.5% has resulted in the cost of borrowing to support capital expenditure becoming more expensive, with interest rates expected to peak at 4.75% during 2023. For 2023/24 this results in additional capital financing costs of £1.89 million as the council also reduced its risk exposure to increasing interest rates by re-financing an element of historic short term variable debt with longer-term fixed term debt.
This was done after consultation with the council’s treasury management consultant.
An extra Welsh Government grant for homelessness prevention
After the announcement of the provisional local government settlement, the council was told by the Welsh Government about an extra £475,000 for homelessness prevention which can be used to offset the costs of temporary accommodation. The report said that: “Although this additional funding is most welcome, the council is still faced with temporary accommodation costs of circa £2 million for 2023/24.”
Council tax
The council tax increase for 2023/24 is currently budgeted at 1% reflecting the approved increase for the 2022/23 financial year. No decision has yet been made for 2023/2024 but the report said that every 1% increase or decrease to the budgeted council tax increase of 1% has an impact of around £259,000 net impact on the revised budget deficit.
The report said that senior managers are currently looking at measures to address the revised budget deficit of £11.035 million for 2023/24 and that business cases are being developed to be brought before cabinet and council within the coming weeks.
Context
The report said that since the approval of the MTFP in March 2022 the economic position and outlook for the UK has deteriorated sharply with both high inflation and interest rates. It said that the Consumer Price Index (CPI) of inflation is currently at its highest since the early 1980s and as at November 2022 stood at 10.7%.
The report said that the Bank of England in December 2022 raised interest rates to 3.5% pushing the cost of borrowing to the highest level since 2008 as policy makers try to contain inflation amid fears of a looming economic recession.
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