Financial predictions have shown a £3.7m overspend forecast for a Teesside council, with delays to cost-saving measures.

Places for children in care and pay for council staff are said to be the biggest pressures on the budget of Stockton Council. The authority says it may need to dip into its reserves to plug the gap in its finances.

The council says it is facing “significant financial challenges presented by the current inflationary environment” this year and in the coming years in its medium term financial plan. Its latest report says: “These challenges are not unique to Stockton and are being faced by many councils across the country, many of which are in a more difficult financial position.”

The report giving the financial update says: “The projected position indicates a significant financial pressure for the current financial year, largely as a result of inflationary pressures, the pay award offer and pressures on placements for children.”

It says the pressures exceed the extra resources put into the year’s budget. It adds: “The costs of children in our care continue to be the main element of the pressure.”

How the council cares for children and having enough places for those children is a key focus of the “transformation programme” which is being drawn up to change council services and save money, linked with work to improve children’s services. But it says “it is difficult to predict financial savings” at the moment and “the activity to generate the savings has been delayed”.

Children’s services also have higher staffing costs because of agency staff covering vacancies. So a turnover target for the budget is not being met.

More financial strain comes from more – and more expensive – residential placements for adults, with a £130,000 rise in costs for public health contracts. The council is focusing on supporting people to live independently to ease this pressure.

A pay award for council employees will cost an extra £1.5m if accepted, an almost two per cent higher rise than budgeted. The council report says: “The unions have rejected this offer and are balloting its members on potential industrial action.”

There are varying cost pressures, savings, income or overspends relating to buying energy in advance, concessionary transport, car parking, sale of recyclable materials, grounds maintenance, community transport, rent allowances, employees and investments, with treasury management costing £1m less than budgeted. “The council is currently benefiting from an improved cash flow position meaning that external borrowing will not be required as soon as originally anticipated,” says the report.

Also on the positive side, the council is expecting to get £1.8m more in government grants and a business rate top-up, because of higher inflation. It is also saving £2.5m through staff turnover.

The authority says if it cannot save enough to meet the £3.7m shortfall, it will need to look at using earmarked reserves – money set aside for specific reasons like insurance and fleet renewal funds. It adds: “The use of reserves to fund overspends is not sustainable and it is a key area that we must work to avoid as part of the transformation programme.”

There is ongoing uncertainty over how much money councils will get from central government. The council is unlikely to find out more about its finance settlement until December.

About £6.6m more is expected to be spent until 2026 in the council’s capital programme, which is for buildings, assets and major projects. This will be from various sources of funding including grants and cash from developers.