Can councils afford the new National Living Wage?

George Osborne’s budget announcement that, from April 2016, a new National Living Wage (NLW) for the over 25s will be introduced has been welcomed by many in local government as a progressive measure. However, the Local Government Association (LGA) has sounded a note of caution over how the changes will be funded.

The cost

From 2016, all local government employees over 25 must be paid at least £7.20. By 2020 this will rise to over £9 per hour. Although 95% of the local government workforce is paid at or above the required rates, the LGA estimates that raising the pay of the estimated 92,820 remaining (and mostly part-time) staff to meet the threshold will cost £6.8m in 2016.

Much more onerous is the impact on home care and residential care providers. Social care services spend approximately 60% of their budgets on staff, and the LGA estimates that a further £330m will be needed to ensure providers can afford to pay them the NLW in 2016, a figure which could reach £1bn by 2020.

The context

Previous estimates by the LGA suggest that councils could lose up to £3.3bn (12%) of government funding in 2016 alone. Worse still, a CIPFA survey discovered that councils’ cash reserves are already close to being fully allocated to existing investments and risk management projects, leaving little in the pot for the cost of the NLW.

This hasn’t gone unnoticed. The government has now deferred the introduction of its ‘care-cap’ from 2016 to 2020. This would have capped individual liability for care costs at £72,000 and increased the financial threshold for state support from £23,250 to £118,000. Postponing should allow councils to adjust to the new burdens of the NLW, but it doesn’t address the immediate cash shortage.

The solution

Given the scale of government cuts, it’s tempting to pass the burden to care providers; but data from Four Seasons Healthcare, Bupa and HC-One (the three largest home care providers) shows gross operating profit at an all-time low of 15%. Factor in the cost of the pay increases and this would fall to 10%, at which point, market analysts Laing Buisson claim, “even providers with prudent levels of gearing [debt] would start going to the wall.”

LGA chairman Cllr Gary Porter has called on the government to fund the costs, and we believe that the government must also heed the calls of the National Audit Office and start using and sharing information gleaned from the first phase implementation of The 2014 Care Act to introduce and properly fund proposed changes.

If financial support isn’t forthcoming, innovation is essential. Councils must continue to seek efficiency savings, and ensure that all revenue sources are collected as diligently and intelligently as possible to maximise the limited funds available. It may also be wise to look for new ways to raise funds, and continue pushing the Conservative government to extend its promise of devolved powers for major cities to local authorities.