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The introduction of the National Living Wage (NLW) on 1 April will push care services for older people and the disabled towards breaking point, council leaders have warned.
In a statement, the Local Government Association (LGA) said the NLW could destabilise the whole care provider market.
Councillor Izzi Seccombe, the LGA's community wellbeing spokeswoman, said: "Councils fully support proposals to introduce a NLW to help ensure care home staff receive a fair day's pay for a fair day's work. However, the cost of implementing it will significantly add to the growing pressure on services caring for the elderly and disabled which are already at breaking point."
The LGA estimates the NLW will cost councils £330m at least in 2016/17 to cover increased contract costs to home care and residential care providers but warn the actual cost is likely to be much higher. It estimates the NLW could cost councils £1bn a year by 2020/21.
The Government announced in the Spending Review, that England's 152 councils can increase council tax by up to a further two per cent (up to 3.99 per cent in total) in 2016/17, with the extra income being spent on social care. Research published by the LGA last month found nine in 10 councils in England are planning to raise around £372m for social care services in 2016/17 using the two per cent precept.
But the LGA is warning that, for some councils, this extra money will be swallowed up by covering the cost of the NLW. For others, it is not enough to cover increased care provider costs, let alone cover the cost of other pressures within the system and protect social care services from further cutbacks.
The LGA expects to see some care providers pulling out of the market or going bust and has said it is organising talks with care providers about the social care funding crisis and the NLW.
"There is a real risk that councils will struggle to cover the increased contract costs to care providers as a result of the NLW. A lack of funding is already leading to providers pulling out of the publicly-funded care market and shifting their attention towards people who are able to fully fund their own care.
"We know that care home and domiciliary care providers cannot be squeezed much further and we will be organising an urgent summit with them to unite our concerns that a care home crisis is creeping closer to reality and behind calls for urgent additional funding."
Councils have already had to close a £5bn funding gap in social care since 2010. The LGA continues to urge the Government to bring forward to this year the £700m of new funding earmarked for social care by the end of the decade, through the Better Care Fund.
Councillor Izzi Seccombe added: "The Government needs to bring forward desperately-needed social care funding to allow councils to ease the pressure on care providers and protect the services which ensure our loved ones enjoy the dignified and independent quality of life they deserve."