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23 November 2015

Spending Review 2015: Does George Osborne understand the cost of cutting care?

The expected funding shortfall facing adult social care in the Chancellor's Autumn Statement.

By Spencer Thompson

A care crisis is brewing. The combination of falling local government budgets, a growing elderly population, and rising wages in the care sector could, without urgent attention, cause widespreadclosures of care homes and a growing number of older people unable to access care.

This week, all eyes will be on George Osborne as he present the government’s spending review. For the review to be a success it must provide a credible plan for how to meet the growing demand for care services, even if that involves compromising elsewhere in the Government’s deficit reduction strategy.

How much funding does the social care system need? Projections published last week by the Health Foundation suggest that net spending on adult social care by local authorities will need to rise by 4.4 per cent a year above inflation over this parliament in order to keep up with demand. This is far faster than the NHS, which has a crisis of its own but can fall back on pay restraint as a source of savings. The care sector, relying as it does on a large number of low paid workers in independent providers, has no such option. Nor can the care sector shorten stays to save money, another way in which the NHS has been able to cut down on costs in recent years. Social care budgets will need to rise by £3bn above inflation by 2019/20, the period covered by the spending review. On top of that, care providers need to fund the introduction of a National Living Wage, expected to reach £9 by 2020 and cost the sector over £2bn by 2020/21.

Could productivity increases in the sector do the heavy lifting, meeting higher demand but with fewer resources? Local authorities and providers are increasingly innovating in the way care is delivered and paid for. Examples include the integration of the NHS and social care underfoot in places including Manchesterthe growth of “e-marketplaces” for care and digital apps that streamline care delivery, and trials of new models of patient-empowering care across the country. While these have huge potential to deal with rising demand over the medium and long-term, we can’t rely on innovation in the care sector to eliminate the short-term funding gap.

How much funding is social care likely to receive? Unlike the NHS, the government in Westminster can’t simply pull a lever and deliver the required funding, as social care is funded out of local government budgets. To a large extent, the general funding trend for local councils will determine  the resources available for social care.  We won’t know the detailed picture until the spending review, but with the Chancellor looking to cut non-protected budgets (those outside the NHS, defence, schools and international development) by over a quarter, it’s going to be tough to unlock the required funding out of a central government pot.

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So what should the government do? Trailed at the weekend, the plan to give local government the ability to raise more in council tax in order to pay for care is a start. It is expected that Osborne will announce that local government can increase council tax by up to 2 per cent, so long as the proceeds from the increase are spent on social care. It has been estimated that if all councils in England take him up on the offer, it could bring in up to £2bn a year.

This is unlikely to be enough if, as expected, other sources of local government revenue are squeezed. While business rates and council tax receipts are expected to grow healthily over this parliament, the grants that councils receive from central government are in the firing line in the spending review. The most optimistic forecast suggests that the pot out of which social care is funded will shrink by 6 per cent, if local government grants are cut in line with the average of all unprotected areas of spend. This means that even with the £2bn of extra council tax revenue raised, local government may have to raid other services, such as housing, public health and planning in order to plug the gap. The alternative would be a continuation of care rationing, or increasing user charges.

If the Chancellor has no further plans for social care beyond a welcome but insufficient council tax measure, he will only be delaying the inevitable. We’ve argued for months now that the Chancellor should be looking to raise at least £5bn through tax measures, with a further £3bn unlocked through targeting a lower surplus at the end of the spending review. While there will be competing demands on any extra resources, social care should be near the top of the queue.

Spencer Thompson is a senior economic analyst at the IPPR.

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