By Daniel Hunter

Counterproductive cuts to local government funding will lead to increased costs for our hospitals, prisons, police service and welfare system, council leaders warn as the £14.4 billion scale of the funding blackhole facing local services.

The Local Government Association has updated its Funding Outlook Report to incorporate the additional 10 per cent real-terms cut to council funding for 2015/16, which was announced at the end of June. This cut comes on top of the 33 per cent real terms cut which will be made across the 2011/12 to 2014/15 comprehensive spending round period.

The model also incorporates the widening of the health budget to allocate £2.1 billion to adult social care services in 2015/16, a move which the LGA described as a pointer to other parts of Whitehall of the way that the public sector should be joining up to improve services and ultimately lower costs.

The updated outlook reveals that the financial blackhole facing local government is widening by £2.1 billion a year and will reach £14.4 billion by 2020. The analysis also reveals that the blackhole is growing at a rate £100 million a year faster than it was this time last year, indicating that the current funding system is broken and that a radical overhaul of the way services are provided and paid for is required across the entire public sector.

With our ageing population pushing up demand for adult social care services such as home care for the elderly and infirm, and the cost of providing councils two next-biggest-cost statutory obligations of children's social care and waste management also set to rise, the analysis shows that these three areas of spending will soak up an ever-larger share of council budgets.

The model shows that the money available to deliver all other local services, including leisure and cultural facilities, school support services, fixing the roads, building new homes and promoting economic growth will shrink by 46 per cent by 2020, down from £26.6 billion in 2010/11 to £14.3 billion by the end of the decade.

Town hall leaders warn that the scale of cuts will have inevitable consequences on services right across the board. In response, local authorities will have to reduce care services and tighten eligibility criteria, placing a greater strain on our hospitals and emergency rooms. Cuts to the money available for infrastructure and growth projects will curb the economic recovery, reducing job opportunities and increasing welfare costs. Reduced spending on leisure and cultural facilities will reduce the quality of life in many areas.

The LGA is calling on all political parties to acknowledge the scale of the problem that has been revealed by this analysis and take action in the next Parliament to make properly funded local services a priority. It is also calling for measures set out in the Rewiring Public Services report, which was launched at the LGA Conference on Tuesday, to be acted upon to avoid dangerous and costly reductions in local services.

The LGA believes that the announcement in the Spending Round of the widening of the health budget to allocate £2.1 billion to adult social care services in 2015/16 provides a pointer as to how other parts of the public sector should work to join up local and national services. This cooperative approach, which involved detailed and productive negotiation between local and national government agencies, will help fund the social care services which keep people healthy, independent and out of hospital. This will ultimately reduce the need for costly medical interventions.

"The looming £14.4 billion funding shortfall offers stark evidence that the current way of funding local services is no longer working. We are in danger of losing entirely some services, with significant reductions right across the board," LGA Chairman Sir Merrick Cockell said.

"This is a false economy which threatens to shunt additional costs onto the reactive parts of the public sector, particularly our hospitals, prisons and welfare system. There are large hidden costs associated with these cuts which will ultimately leave the taxpayer out of pocket.

"Whoever forms the next Government will need to address this funding shortfall as a matter of urgency. A key pillar of every manifesto must be support for the vital local services which keep people healthy and out of hospital, make sure children are ready to learn when they get to school and help deliver economic growth and jobs to local areas. This requires a complete overhaul of the way public services are provided and paid for. It is the only way to avoid the looming disaster revealed by this analysis.

"The widening of the health budget to incorporate adult social care is an indication of the type of joined-up approach that has to be adopted across Whitehall and all levels of government if we are to ensure the future of valued public services. The Government has made a start but this approach has to become the default option over the next decade."

The model is based on an optimistic view of future council funding, conservative estimates of increases in the cost of and demand for services, and extremely ambitious assumptions on councils' ability to discover ever-efficient ways of working.

The analysis shows that if councils use their financial reserves to cover the cuts, this invaluable safety net will be exhausted within three years and no money will be left to cushion the impact of future cuts. This would also mean that the funding shortfall in 2020 would be larger than if reserves were not used at all. This is because the funding trajectory remains unchanged, while the money available to cushion the cuts or deal with unexpected costs will have already been used up.

Speaking about the possibility of further efficiency savings, Sir Merrick said: "When people talk about councils being able to close the funding gap through greater efficiency they neglect to mention that the bulk of those efficiencies invariably involve either restructuring, tightening eligibility criteria for services and care, and prioritising spending on some services at the expense of others. In other words the efficiencies they talk about are, in significant part, cuts to budgets which lead to reductions in services.

"It is unfair to our residents to raise the expectation that trimming 43 per cent from council funding will have no impact on the services they receive."

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