‘Living wage’ would cost councils an extra £1bn a year by 2020, warns LGA

Implementing the government’s ‘national living wage’ policy will cost councils £1bn a year by 2020, an analysis by the Local Government Association (LGA) has found.

The policy, announced in the summer budget statement, will introduce a compulsory wage floor of £7.20 per hour for workers aged over 25 from April next year, rising to £9 by 2020.

The LGA’s analysis found councils would need an estimated £330m in 2016 to cover the increased contract costs to home care and residential care providers of paying staff the new wage. This cost pressure would then rise by around £170m a year, reaching £1bn by 2020, according to the LGA’s calculations.

‘Spending pressures’

Gary Porter, chairman of the Local Government Association, said it was vital that these costs were considered by the government in the wider debate on council funding.

“Councils support proposals to introduce a national living wage to help ensure staff receive a far day’s pay for a fair day’s work. However, our analysis shows the cost to councils of implementing the change will keep growing and reach £1bn by the end of the decade.

“Local authorities have made £20bn in savings since 2010 and are likely to face further funding reductions and spending pressures over the next few years.”

Impact of ‘living wage’

The LGA adjusted the UK Homecare Association’s (UKHCA) recommended ‘fair cost of care’ model to calculate what pressures the policy would place on contracts with providers. In 2016-17 alone this will cost councils an extra £293m.

The LGA also calculated how the policy would affect contracts with residential care providers by comparing the current rates of pay of care workers working in private and third sector homes with the expected levels of the national living wage until 2019-20.

In 2016-17, councils would need an extra £37m to cover the cost of increased residential care contracts, rising to £429m by 2020, found the LGA.

Care Act

Local authorities cannot avoid the impact of the new living wage on their providers. The Care Act statutory guidance states that councils should “assure themselves and have evidence that service providers deliver services through staff remunerated so as to retain an effective workforce”. It adds that: “Remuneration must be at least sufficient to comply with the national minimum wage legislation for hourly pay or equivalent salary.”‘

The LGA’s analysis follows calculations by market analysts Laing Buisson, which found councils would need to increase care home fees by 5% to meet the extra contract costs of the policy in that sector.

This was based on the assumption that residential care workers would receive an average pay increase of 10% – from the current minimum wage (£6.50) to the proposed living wage (£7.20).

The market analysts reached the 5% figure by using their ‘fair price for care model’ – a toolkit for calculating the reasonable operating costs of care homes for frail older people and older people with dementia, which takes account of the four main components of care home costs: staffing, repairs and maintenance, capital costs, and other non-staffing current costs.

‘Simply cannot afford’

A statement from the firm said the living wage was a cost councils “simply cannot afford” due to the present levels of funding from the central government.

Providers would also be unable to absorb the cost on their own. According to data from the three largest care home providers – Four Seasons Healthcare, Bupa and HC-One – providers’ gross operating profits have dropped to an all-time low of 15% and, if councils don’t raise their fees to take account of the living wage, this will drop to 10%. “At this margin, even providers with prudent levels of gearing [debt] would start going to the wall,” Laing Buisson said.

The government also announced in the budget statement that it would increase the employment allowance for National Insurance contributions from £2,000 to £3,000 in April 2016 to help businesses meet the increased cost of paying their staff the living wage.

However, William Laing, chief executive at Laing Buisson, said this measure “won’t make much difference” to care home providers.

Council fees falling further behind costs

Separately, LaingBuisson revealed that local authority fee rises were falling further behind what was required to keep up with inflation, averaging 1.9% as against estimated care home cost inflation of 2.5%.

The firm surveyed 166 of the 211 local authorities or health and social care trusts across the UK and found that almost a third – 53 authorities – had given homes no uplift in fees at all.

It said this meant that providers had endured a 5% drop in profit margins for council-funded residents over the past five years because of a squeeze on fees.

The Department of Health said it could not comment on the impact of the living wage policy because that would be to pre-empt the government’s spending review later in the year, which will set out spending plans for 2016-20.