Felicity Hawksley, journalist

After 30 years of low and stable inflation, the UK rate is now the highest it’s been since 1992. This means that few accountants in the public sector will have dealt with significant levels of inflation in their careers.

To many, actually handling the impacts of inflation is an unknown unknown. Inflation has an insidious and reciprocal effect on the public sector, and accountants from local councils all the way through to national departments will have their hands full managing the fallout.

At a broad level, public sector accountants face two main challenges: understanding how much cash there is, and understanding (and advising on) how to spend it.

‘We need to have a collaborative approach. We have to work with our partners in housing and local authorities, too’

On the first matter, accountants are bound to be disappointed. The public sector has been cutting spending in real terms for years – only the Cabinet Office, Department of Health and Social Care and Department for International Development had larger budgets in 2019 than in 2010. And the Chancellor has already indicated that cutbacks will follow the past 18 months of post-war record spending.

So with less cash on hand, and the cost of goods, services and wages rising across the economy, the public sector’s purchasing – and recruiting – power is badly eroded.

On the second matter – understanding where to spend – many accountants’ focus will be on the method. Government departments and local councils have varying means of managing their spending. While some have more direct control over their budgets for staff and resources, others funnel funds towards quangos, businesses, and charities that have their own rules and measurements for spending.

This can mean that accountants have limited channels for distributing cash and, for the purposes of management and reporting, must keep an eye on efficacy and waste, confusion and even impropriety.

Council’s hands are tied

Stephen Fitzgerald FCCA, an interim finance director at a local council, says inflation is so far exerting three key pressures on local authorities: energy, wages and the cost of contracts. When asked how he plans to manage it all, Fitzgerald says that his hands are ‘somewhat tied’.

‘While nominally central government has done away with council tax caps, anything above a 2% interest has to go to a referendum – which, as we’ve seen, goes down like a lead balloon,’ he says.

Fitzgerald explains that council tax is ‘close to being a local tax that’s nationally set, and the referendum requirement is a pretty tight collar’. Raising significant additional funds from the local tax base is, he says, next to impossible.

‘The impact of social inequalities on healthcare is massive’

Long-term impact

Tim Kelland FCCA, an assistant director in the finance delivery unit at the NHS in Wales, notes that the health service faces similar issues: energy-intensive equipment, competition for increasingly rare skilled staff forcing wage increases and inflation-pegged service contracts are all bearing down on cash-strapped budgets.

But he also highlights that even relatively transitory inflation may have a long-term detrimental effect on NHS budgets. ‘The impact of social inequalities on healthcare is massive. In real terms, a decline in living standards means people have worse housing, poorer diets and less healthy lifestyles overall.’ This, he says, ‘stores up problems for years down the line’.

Kelland emphasises that to address this, the NHS has to work right across social care and education. ‘We need to have a collaborative approach,’ he says. ‘We can’t look at healthcare in isolation; we have to see it at the population level and work with our partners in housing and local authorities, too.’

Cut to the bone

But Steph Beeston-Clarke FCCA, who runs her own accountancy firms specialising in assisting charities and not-for-profit organisations with their finances, says that the capacity of the sector to address inflation has already been dealt significant damage by years of austerity, particularly where charities are delivering government services.

‘There’s a limit on the advice I can give my clients,’ she says. ‘Most of them are already very conscious of how they spend money. Everything is going to cost more, donations are going down, the number of people they serve is going up, grants are for less money – it’s a perfect storm. Added to this, some difficult decisions might need to be made to reduce or stop services because wages are no longer affordable to run them.’

Beeston-Clarke cites an example of one client running a food pantry – a membership grocery service – for the local area: ‘They were providing food, sanitary items and clothes for around 20 families; now that’s 60 families and rising. They were paying around 29p for 500 grams of pasta’; now it’s 70p. What can we say to help? The most we can do is look at costs and connect them to other charities or organisations that might have advice or resources to share.’

Regardless of where in government they work, there’s no doubt that over the next few months, with inflation rising, uncertainty over interest rates, wages stagnating and a cost-of-living crisis lurking, public sector accountants face many challenges.

The tools they choose to measure inflation, the timing of their decisions and the advice they give to those in power will make them central players in the UK’s response to what might be the bumpiest ride in 30 years.