Contact: Jon Pittam, ext 7400

1. Summary

1.1 This report begins the process of budget monitoring for 2002/03 and identifies the issues affecting the current forecasts for the 2003/04 budget and beyond. It highlights in particular the issues arising from the Chancellor's budget and the implementation of the recent White Paper.

1.2 The following decisions are sought:

· To welcome the announcement of additional resources for social services in the budget, but to express concern about the principle of introducing charges for bed blocking and to comment further when details of the proposed legislation are known

· To welcome the abolition of the `receipts taken into account' mechanism but note that the effect may be broadly neutral (or otherwise to review the implications for locally resourced capital programme guidelines when considering the 2003/04 to 2006/07 capital programme and in the light of pressures on the 2003/04 revenue budget)

· To defer making any further decisions on the allocation of the pay and recruitment contingency in the 2002/03 budget until the national pay settlement has been agreed, and decisions taken locally on employment in Hampshire

· To give further consideration to other adjustments to cash limits from the contingency sum in the 2002/03 budget in conjunction with the reporting of the final accounts for 2001/02 in July

· To consider a timetable for developing and consulting on a short and medium term budget strategy in July.

2. Reason

2.1 This report will keep the Cabinet informed of emerging issues and help it to shape the timescale and steps for developing the budget strategy from 2002/03 into 2003/04.

3. Other options considered and rejected

3.1 None.

4. Conflicts of interest declared by the decision maker or a member or officer consulted

4.1 Not applicable.

5. Dispensation granted by the Standards Committee

5.1 Not applicable.

6. Reason for the matter being dealt with if urgent

6.1 Not applicable.

Approved by: Date:

Councillor T K Thornber

Contact: Jon Pittam, ext 7400

1. Summary

1.1 This report provides an update on issues affecting the County Council's financial position in 2002/03 and 2003/04 and later years, which have arisen since the approval of the County Council's budget in February. The most significant events revolve around the Chancellor's budget in April and the Government's implementation plan for the proposals in the Local Government White Paper, published last December.

1.2 The report will keep the Cabinet informed of emerging issues and help it to shape the timescale and steps required to develop the budget strategy and roll it forward from 2002/03 into 2003/04. It also begins the process of budget monitoring for 2002/03.

2. Chancellor's budget

2.1 The Chancellor's budget announcement in April set the overall framework for decisions to be taken later in the summer on the Government's review of public spending priorities to 2005/06 and the tax changes proposed in 2003/04 to finance increased Government spending. The budget's main focus was on new investment and reform of the National Health Service (NHS). The key spending decisions affecting health and, to a lesser extent, related social care spending were announced in the budget in advance of the main Spending Review 2002 (SR2002) announcement. As in previous years, some more immediate spending proposals in 2002/03 were also announced, together with changes in the spending plans for 2003/04, the last year of the Government's existing spending plans.

Spending announcements affecting the County Council in 2002/03

2.2 The Chancellor announced some additional spending proposals affecting education and Home Office services in 2002/03. However expenditure limits remain unchanged in 2002/03 so that the additional spending on education is either being financed from existing Department for Education and Skills (DFES) spending plans or as a result of further allocations from the central capital modernisation fund. The education proposals contain three main elements:

Devolved capital to schools

2.3 The Chancellor continued the recent practice of allocating further devolved funding to schools in the budget. This is the third increase in devolved capital allocations announced since SR2000. Decisions have been taken to increase devolved capital funding after the main education capital allocations have been made in each of the last three financial years. The increase in funding is welcome and good progress is being made in linking the use of centrally managed and devolved capital resources to priorities in the education asset management plan. Nonetheless the formula for determining the entitlement of individual schools has not yet been announced. This allocation of additional devolved capital resources during the course of the year is not the most effective way of ensuring that increases in public spending are seen to deliver improved outcomes.

Reducing bad behaviour in classrooms

2.4 The Government's well publicised proposals to target resources at tackling bad behaviour and truancy in schools is concentrated in three priority schools in each of 33 local authority `hot spots'. These are based on the 10 police areas included in the street crime initiative, comprising most of the metropolitan areas, and four county force areas. These proposals will not affect Hampshire.

Modernisation projects

2.5 So far the only announcement that has been made by the DFES relates to the allocation of £40m to establish 100 extra centres of vocational excellence based either in further education colleges or in the premises of private or voluntary sector training providers. There are no indications as yet as to whether any additional capital funding for the modernisation of schools is to be allocated.

Spending announcements affecting the County Council in 2003/04 and subsequent years

2.6 The Government have added £4.0bn to the previously planned departmental expenditure limits for 2003/04 and have announced how £2.8bn is to be allocated, with a £2.4bn increase in UK health spending and a £0.4bn increase in spending on personal social services. The allocation of the remaining £1.2bn will presumably be confirmed at the time of the SR2002 announcement, expected in July.

2.7 The details of the Government's spending plans for 2004/05 and 2005/06 are also due to be confirmed in July, but the budget set the overall envelope for the review and announced planned overall spending levels for health and social services. The main features are:

· health spending is planned to increase at an average of 7.4% per annum in real terms over the five years to 2007/08

· spending on personal social services in England is planned to increase by an average of 6% per annum in real terms over the three years to 2005/06 - the equivalent increase for the period to 2003/04 in SR2000 was 3%

· current spending, excluding spending on health, is planned to increase by 2.5% per annum in real terms in 2004/05 and 2005/06, and inclusive of health by an average of 3.3%. Planned increases in real terms in local authority spending in SR2000 averaged just over 3% for the three years to 2003/04

· public sector net investment is also planned to increase from 1.8% of gross domestic product (GDP) in 2003/04 to 2% in 2005/06.

2.8 The major tax change included in the budget is a proposed increase in the rates of national insurance contributions from 2003/04, of 1%, payable by employers, employees and the self-employed on all earnings above the national insurance threshold of £89 per week. There is currently an upper earnings limit of £585 per week above which employees pay no further national insurance contributions but in future a 1% rate will be applied to all earnings above the limit. The national insurance changes are forecast to yield £7.9bn in additional revenue in 2003/04.

Implications for the County Council

2.9 As far as the County Council is concerned there will be a direct impact on the cost of employers' national insurance contributions, which will in general result in contributions being paid at 9.3%, rather than 8.3%, on pay between the lower and upper earnings limits and at 12.8%, instead of 11.8%, on pay above the upper limit. The additional cost is estimated at around £3m. In addition there will be an indirect impact on the cost of supplies and services, to the extent that suppliers are able to pass on the effect of the tax increase in their prices. This is more difficult to quantify, but will affect most contracted services including the social care market.

2.10 The County Council has already agreed a contingency to meet price increases in the social care market in its 2002/03 budget. It would be expected that the national insurance increase would be absorbed within the passported standard spending assessment (SSA) cash increases for Education and Social Services in 2003/04. This will be at the expense of any other flexibility unless the control totals are increased in SR2002, which the Local Government Association (LGA) is arguing should occur.

2.11 The overall impact of the Government's review of its spending plans will not be clear until the announcement of SR2002 in the summer. The outcome of the Government's review of the grant distribution system is also critical. It is anticipated that progress reports on the education funding review and the review of the revenue grant distribution for other services will be published this summer for consultation in advance of final decisions being taken on the revenue grant settlement for 2003/04. Though a high level decision on spending levels on social services has been taken, the implications of the spending review for local education authorities are less clear, though it is expected to remain a relatively high spending priority for the Government with the Chancellor pledging "to increase significantly the share of national income directed to Education over the course of this Parliament".

2.12 The increase in planned personal social services spending in 2003/04 is welcome in view of the inadequate allowance for spending pressures affecting social services in the existing plans. However the Department of Health's publication of `Delivering the NHS plan' on the day after the budget makes it clear that the Government expects the additional resources for social services to be used to extend the range of services and to raise standards of care, with older people amongst the principal beneficiaries. There is also a recognition that increased resources will be required to stabilise the care home market as well as to finance more care home places. In addition, in order to encourage better integration of health and social care, the Government has indicated that it intends to legislate to introduce a system of cross-charging which would require social services to cover the cost of beds blocked in hospitals through delayed discharges. NHS hospitals would similarly be responsible for bearing the cost of emergency hospital readmissions, to ensure that there is a disincentive to premature discharge.

2.13 Though the Government have been impressed by the operation of a similar system in Sweden and Denmark, there must be doubts about the practicality of this more confrontational approach to the integration of health and social care, and the County Council will no doubt wish to comment on these proposals once they have been formulated. The paper on delivering the NHS plan also refers to the introduction of further incentives to encourage the voluntary take-up of care trust status, and to keep open the option for more radical change to the relationship between health and social services if outcomes do not improve.

2.14 All the indications therefore are that there will be strong pressure from the Government to channel the additional resources announced in the budget into services which will reduce the pressures on the NHS of providing services to the elderly. The additional resources are unlikely therefore to relieve the funding pressures associated with meeting the demands of other client groups for social services. The Government appear to have only partially recognised the pressures on social services budgets, in the area where the capacity of social care services has most impact on health services.

2.15 It is not yet clear whether additional resources for social services in 2003/04 will be reflected in the general grant via standard spending assessment (SSA) or in specific grant. There is no evidence of any increased direct Government support for capital investment in social services being made available either in specific grant or borrowing approval or by means of an increased sum earmarked for private finance initiative (PFI) credits. On the assumption that the additional funding for social services in the budget is added to the social services SSA, Hampshire's share on the basis of the current SSA formula would be approximately £5.5m to £6m.

2.16 Though the extra funding is above a base line which includes the current building care capacity grant, the grant itself only covers a two year period ending 31 March 2003 and may not continue in its current form following the grant distribution review. The grant is skewed towards areas, such as Hampshire, where the social care market is particularly unstable, and if it was consolidated within SSA in 2003/04, Hampshire might lose approximately £1.5m.

2.17 So for social services the question is how much of the real terms increase of 6% will be absorbed by the bed blocking requirements (including covering the cost of any new charges payable to hospitals), transfer of specific grant to revenue support grant (RSG) and other liabilities not met by grant (for example preserved rights).

2.18 The cost of employers' national insurance contributions for the County Council is estimated at £3m and allowing for the indirect effect on the cost of contracted in goods and services, the overall cost could be around £4m. As the table below indicates, the overall effect on the County Council of the Chancellor's budget measures could be broadly neutral. But it would involve a transfer of resources from education (which will bear the majority of the cost of increased national insurance contributions) and other services to social services, or to the NHS if the increase in social services spending is required to pay bed blocking charges. This assumes the continuation of the existing spending plans, compared with the cash position before the changes were announced.

2.19 It can also be assumed that council tax payers would be expected to contribute towards the financing of the increased spending on social services, which might add about 0.6% to the council tax in 2003/04. This would take the predicted council tax increase for 2003/04 from around 7% to nearer 8%.

3. Local Government White Paper implementation plan

3.1 The Government published a White Paper implementation plan in April, giving some indication of the likely timescales for implementation of the finance proposals. No decisions have been taken about when any of the measures which require primary legislation will be timetabled, including:

· the introduction of the new prudential capital finance regime

· the proposal to give combined Fire authorities precepting status.

3.2 These may not come into effect until 2004 or possibly 2005.

3.3 The first proposal in the White Paper to be implemented was the decision to abolish the council tax subsidy limitation scheme for 2002/03.

3.4 In April a first step in the reforms proposed to the capital finance system was implemented, when it was announced that the `Receipts taken into account' (RTIA) mechanism would be abolished in determining the single capital pot in 2003/04. This decision can be welcomed by the County Council. Although it will result in reduced single capital pot allocations to services (by about 15% nationally based on 2002/03 data), authorities are free to determine the use of 100% of all their capital receipts, not just those that can be made subject to the in/out regulations. Abolition of RTIA ensures that an individual local authority derives the full benefit from realising under-utilised assets. It is possible that the effect of abolition could be offset by the capital pot reduction - broadly neutral on the basis of current capital receipt projections. (If there was a small net gain, the County Council would need to consider the service distribution of capital resources in reviewing guidelines for the 2003/04 to 2006/07 locally resourced capital programme, or in utilising any small increase in additional spending power to reduce revenue contributions to capital if that is required to assist the budget position in 2003/04). A decision is not required until much later in the year.

3.5 The other key elements of the implementation plan relate to the timetable for SR2002 and changes in the revenue grant system. The main milestones are as follows:

·	publication of Spending Review White Paper	July 2002
·	consultation on options for new revenue grant formulae	Summer 2002
·	publication of paper on the spending review outcome for local government, including details of the level of revenue and capital ring-fencing funding	October 2002
·	announcement of provisional grant settlement for 2003/04	November 2002

3.6 The implication of this timetable is that although the main announcement is likely to take place in July, it may leave more questions than usual unanswered about its impact on Government spending plans for local authorities. In previous reviews in 1998 and 2000, SSA spending control totals were announced as part of the spending review announcement, but it seems unlikely that this will happen this year, partly justified by the fact the Government may still be considering whether it wants to present its spending plans for local authorities in a different form in future, as one outcome of the grant distribution review. It seems fairly certain that SSAs will be `abolished' even if what replaces it is similar in substance. There will be a separate schools' budget with a special reserve power to ensure that this is passed to schools.

3.7 Whether a delay until October in being able to make much sense of the spending review leaves the County Council in a worse position to plan its budget strategy than in other years is debatable. Unresolved function changes and specific grant allocations have had a material effect on the Council's financial position, but have not been usually transparent until much closer to when final budget decisions are required. It has not been prudent to make firm plans either for one year or a three year period on the basis of spending review announcements in the past and this position seems likely to continue for 2003/04, although it should then be possible to provide better medium-term plan forecasts for 2004/05 and 2005/06.

3.8 The uncertainties will be compounded by the possible changes in grant distribution methodology, which the County Council has not been exposed to since 1999/00.

4. Other issues for 2002/03

4.1 When cash limits for 2002/03 were approved by the County Council in February, a contingency sum of £10.1m was retained centrally for subsequent allocation to services as a number of uncertainties are resolved as the year progresses. The following comprised the main items for which a central provision was retained:

4.2 An allocation from the pay, recruitment and retention contingency was made to education prior to the commencement of the financial year both in order to demonstrate the passporting of the education SSA increase and to meet the timescale for setting school delegated budgets. The allocation provided an additional provision of 1% above the 3% pay increase assumption built into the budget for non-teachers' pay to cover pay, recruitment and retention pressures. It is proposed that a decision on the allocation to other services of the remaining contingency provision be deferred until after the national local government pay settlement has been determined. Union members are currently being balloted following the rejection of a 3% pay offer.

4.3 The current position on other contingency items is:

· the repair and maintenance of buildings contingency has been allocated in full to revenue repairs, mainly as a result of the increased cost of term maintenance contracts

· base rate has remained at 4% since November 2001. However, rates are still forecast to increase during the course of the year. The contingency assumption is based on short-term rates averaging 5% in 2002/03

· flood protection levies for 2002/03 were fixed after the budget recommendation had been approved by the Cabinet in February. Mainly because of an amendment to the originally proposed Hampshire Flood Defence Committee levy, the increase in levies in 2002/03 at £0.4m is £90,000 less than assumed in the budget.

4.4 Further adjustments to cash limits from contingency sums can be considered in July with the report on the 2001/02 final accounts.

5. Other issues for 2003/04

5.1 The budget forecast for 2003/04 based on a continuation of the current budget strategy indicated that expenditure was likely to increase by £6m more than SSA, assuming no losses from the changes in current grant methodology. The forecast allowed for the passporting of education and social services SSA increases, which using the current government spending plans, allowed for increased spending above the cost of inflation in 2003/04 of £13.5m on education and £4.8m on social services.

5.2 The changes in the Chancellor's budget to planned spending on social services and on national insurance contributions are forecast to:

· reduce the scope for growth in spending on education within the passported SSA increase by £2.4m

· result in an increase of between £5.5m and £6m in the social services SSA, but after allowing for potential loss of building care capacity grant and higher national insurance costs, providing scope for additional spending of between £3.0m and £3.5m. This increase is expected by the Government to accommodate charges for bed blocking

· increase national insurance costs on services other than education and social services by about £0.6m

· increase spending by £6.6m more than the increase in SSA, subject to adjustment should it not be necessary to budget for an addition to balances in 2003/04

· result in a council tax increase of up to 7.8% rather than the 7% forecast in February.

5.3 These forecasts are however more than usually subject to a significant margin of error for the reasons outlined earlier in the report concerning both the SR2002 and the review of the Government grant funding system. Further work will be done in refining these forecasts as further information emerges over the summer.

5.4 It will also be necessary to develop further existing budget consultation processes with representative groups (business, residents and council tax payers, voluntary organisations, teachers and governors, and the workforce) and with the community through the citizens' panel and other processes.

6. Conclusion

6.1 Though the announcement of increased resources for social services in 2003/04 in the budget is welcome, there are likely to be strings attached. These will limit the extent to which existing social services budget pressures can be met.

6.2 The timetable for implementation of the White Paper proposals for the grant distribution review suggests that the Government is struggling to meet its aspirations to introduce a system that is demonstrably "fairer" than the current system for 2003/04. This means that timescales for reviewing the implications of SR2002 and the new grant system in advance of decisions being required for the 2003/04 budget will be tightly constrained. A timetable and more detailed proposals for reviewing the implications of the spending/grant distribution review, preparing a three year medium-term financial plan and for consulting on a proposed short and medium-term budget strategy will be brought to the Cabinet in July.

7. Recommendations

7.1 To welcome the announcement of additional resources for social services in the budget, but to express concern about the principle of introducing charges for bed blocking and to comment further when details of the proposed legislation are known.

7.2 To welcome the abolition of the `receipts taken into account' mechanism but note that the effect may be broadly neutral (or otherwise to review the implications for locally resourced capital programme guidelines when considering the 2003/04 to 2006/07 capital programme and in the light of pressures on the 2003/04 revenue budget).

7.3 To defer making any further decisions on the allocation of the pay and recruitment contingency in the 2002/03 budget until the national pay settlement has been agreed, and decisions taken locally on employment in Hampshire.

7.4 To give further consideration to other adjustments to cash limits from the contingency sum in the 2002/03 budget in conjunction with the reporting of the final accounts for 2001/02 in July.

7.5 To consider a timetable for developing and consulting on a short and medium term budget strategy in July.

Section 100 D - Local Government Act 1972 - background papers

The following documents disclose facts or matters on which this report, or an important part of it, is based and has been relied upon to a material extent in the preparation of this report.

NB the list excludes:

Published works.

Documents which disclose exempt or confidential information as defined in the Act.

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