15 August 2008
Local authorities and NHS finance managers have warned that budgets are coming under strain as inflation soars.
The Consumer Prices Index – the government's preferred inflation measure – hit 4.4% in July, the highest level for 16 years, figures released by the Office for National Statistics on August 12 revealed.
Hikes in utility bills would push inflation up even further in the coming months, the Bank of England warned in its quarterly inflation report on August 13.
Governor Mervyn King described a 'chill in the economic air', saying: 'The British economy is going through a difficult and painful adjustment – to higher energy and commodity prices, and in the banking, credit and housing markets. This adjustment to our economy cannot be avoided. And, as a result, inflation is rising and growth is slowing.'
Inflation would remain 'markedly above the target until well into next year', while GDP projections showed 'output broadly flat' over the next year.
King suggested recession – where the economy shrinks for two consecutive quarters – could not be ruled out. 'It's bound to be the case that there is a possibility of a quarter or two of negative growth,' he said.
The Local Government Association confirmed that town halls were struggling to deal with the impact on budgets. A spokesman said: 'Councils face a triple whammy of a tight spending review settlement, high fuel costs and inflation.' Inflation was factored into the Comprehensive Spending Review settlement, 'but not a leap this big', he said.
Thanet District Council is among those affected, with a budget shortfall of £544,000 emerging. Its electricity bill has risen by 63% so far this year, while the price of wheeled bins – set to be provided to 8,000 homes – has gone up by 17% because they are made from oil-based products.
Martin Wise, Cabinet member for finance, said: 'We had already anticipated some of these issues, but not to this extent. The future grant increases we are currently due to receive from central government will be completely swallowed up by the rising cost of electricity alone.'
NHS trusts are also feeling the pinch. Chris Calkin, chair of the Healthcare Financial Management Association, said: 'One of our big concerns is energy costs. At my trust, fuel costs have gone up £750,000 on a budget of £350m in total – it's quite significant.'
Further costs as inflation 'percolated through' to items such as drugs and disposable equipment 'would hurt' trusts further down the line, he added.
'There is an increasingly tight financial position, and with the CSR already setting the parameters, we have got to be concerned.'
There was more gloomy news for the government as estimates from the National Institute of Economic and Social Research showed GDP growth falling to 0.1% for the three months ending in July.
Director Martin Weale said he expected zero growth for the three months to August. 'The government is likely to face even greater pressure to keep public spending on a tight rein. The fiscal position will get worse – that's why the government is looking to escape its fiscal rules.'
Carl Emmerson, deputy director of the Institute for Fiscal Studies, noted that the Budget forecast growth of 1.75%. 'Were growth to come in at 1% below that, you'd expect that to add around £10bn to borrowing.'
Lower than expected tax receipts, the £2.7bn cost of adjusting the income tax threshold and delay to fuel duty rises would all add to borrowing. He said: 'Any slight movement would breach the [sustainable investment] rule.'
PFaug2008
