Somerset Council could face a budget gap of up to £130m next year, its chief financial officer has warned.

The council declared a financial emergency in November 2023 and was only able to set a balanced budget in February by agreeing to £35m in savings, devolving numerous services to town and parish councils, and planning to sell off a large number of ‘non-operational’ assets.

The council’s chief financial officer Jason Vaughan left the organisation over the summer as part of a reorganisation of its senior leadership team and a wider transformation programme, with around 1,000 jobs expected to go as the council streamlines its operations.

But even with all these changes, interim chief financial officer Maria Christofi has warned that the council faces significant financial challenges when it comes to set its next budget in February 2025.

The council’s medium-term financial plan (which predicts how much the council will raise in taxation and have to spend in the next five years) was discussed at length when the executive committee met in Taunton on October 7.

Deputy leader Liz Leyshon said: “None of us expected this work to be painless.

“We have had just the one financial year within which to take the necessary actions at this scale to avoid the issuing of a Section 114 notice [effectively declaring bankruptcy].

“Be aware that these figures could change due to circumstances that are well beyond our control.”

The council originally estimated that there would be a £104m budget gap in 2025/26, and this gap – if left unchecked – would rise to nearly £199m by 2028/29.

The budget gap is being primarily driven by rising demand for children’s services and adult social care, with the council still reeling from cuts in central government funding since 2010 along with the impact of the coronavirus pandemic and recent periods of high inflation.

In the current financial year, the council is forecasting an overspend of £8.4m – of which £7.1m comes from the cost of children’s social care placements.

Even if the council’s main contingency reserves are used, this in-year overspend will still be in excess of £2.3m on current projections – with further reserves being raided to balance the budget.

Following additional work behind the scenes, Ms Christofi has presented three scenarios which the council may face when it sets its 2025/26 budget early next year.

The ‘low’ scenario envisions lower inflation and the council being able to “contain demand pressures to a minor level” – but this still results in a budget gap of more than £68m.

The ‘central’ scenario takes a more realistic or “prudent” view on inflation (which affects pay levels) and the council’s ability to deliver high-demand services – with the budget gap under these circumstances being estimated at just shy of £89m.

The ‘high’ or worst case scenario finds the council increasingly incapable of meeting demand for services in the face of higher than anticipated inflation – with the budget gap being in excess of £129m.

The council has attempted to bring down its projected budget gap by reviewing its capital programme (reducing the amount of external borrowing in the process) and ensuring savings agreed in the budget can be safely achieved.

But even if the full council approves the maximum possible rise in council tax, and all savings are realised, these steps in and of themselves will not be enough to balance the books.

Councillor Sarah Wakefield, portfolio holder for adult social care, said: “Seventy-five per cent of what we spend on placements is spent on wages – it’s a huge part of our budget.

“I always thought that the sale of our commercial investments would save us from having to draw down on the capitalisation directive?”

As part of the 2024/25 budget, the government provided Somerset Council with a capitalisation directive of £36.9m – meaning it could use the proceeds of selling off assets to pay for day-to-day services, something which is not normally permitted.

Ms Christofi replied: “When we sell the commercial assets, the proceeds will come in and we will see a reduction in the gap for the current financial year.

“There is no one-off funding in next year’s budget, whether as a capitalisation directive or a change of use for reserves. Until those sales happen, I don’t want to count that money yet.”

Councillor Mandy Chilcott, the shadow deputy leader, warned: “The longer you try and predict ahead, the more unpredictable it becomes.

“The three scenarios are predicated on a view of inflation, and we know there are pressures on inflation even as we sit here, with the cost of heating and fuel going up and other worldwide challenges.

“Only time will tell, but I think there are some stretched figures in here.”

Councillor Lucy Trimnell added: “We’re going through our reserves at quite a high rate.

“We would need to have an underspend to add to them, and I wonder which will come first: the underspend or having nothing left in our reserves?”

Ms Christofi responded: “We want to avoid using our general reserves at all costs.

“Earmarked reserves are there for a specific purpose – they will be spent on those specific purposes.

“It’s down to us to ensure that we replenish reserves, to ensure that the financial resilience and sustainability of this council continues to be in a good position.

“If we were to come in underspent, then at the end of the financial year we could top up our reserves.

“There are a number of actions we are taking across the council, and I want to see us take those actions to the fullest extent that we can – especially around placement costs and commissioning.”

Further updates will come before the executive committee in the coming months before the budget proposals come before the full council for approval in February 2025.