Contact: Jon Pittam, ext 7400

1. Summary

1.1 This report reviews the budget outlook for 2003/04 in the light of the uncertainties associated with the review of formula grant.

1.2 The following decisions are sought:

1. That the Cabinet note the latest budget projections and the range of possible council tax increases resulting from the formula grant options.

2. That no immediate decisions are made because of the uncertainties, but base budgets be prepared against which decisions on budget guidelines can be considered in December when the grant settlement has been announced.

3. That as a result of the potential grant loss from the consultation proposals, any service pressures or proposals beyond base budget level be offset by a equivalent redeployment of resources and be reviewed at the service budget briefing meetings already arranged between the Leader and executive members during the autumn.

4. That the Cabinet receives a further report of the impact on services if all the potential grant losses were met by service reductions instead of compensating council tax rises.

5. That executive members and chief officers prepare contingency plans of 1% and 1.5% for efficiency savings, cost reductions and other savings, protecting as far as possible front-line services.

6. That the media and public be made aware of the potential grant losses and the impact upon service levels and council tax.

7. That an early meeting be arranged with Hampshire's MPs to explain this budget outlook and the consequences of the Government's proposed grant changes so that they can lobby against those options which badly affect the County Council.

8. That the Government be urged to give an early indication of floors to assist budget planning.

9. That any improvements in budget consultation be considered in the light of these uncertain and difficult projections for 2003/04.

10. That new proposals for the council tax leaflet be brought forward after draft regulations become available.

2. Reason

2.1 Despite the uncertain budget outlook, consideration needs to be given to budget planning and consultation issues in preparation for the setting of budget guidelines later in the year.

3. Other options considered and rejected

3.1 Not applicable.

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 The budget outlook for 2003/04 depends very much on the outcome of the Government's proposals for changes in revenue grant support (July Cabinet report and item 4 on this agenda). A council tax rise of 7.8% was forecast if the Council increased its spending in line with its projected base budget (to maintain current service levels) and the Government's spending plans for Education and Social Services (in cash terms). Council tax rises of between 20% and 30% were indicated as quite likely in July, if current service levels were to be maintained as a result of the consultation options.

1.2 Since then the local government pay award has been announced which has the effect of a further net increase in the Council's budget projection of £0.7m (0.2% in the council tax), taking the underlying projected increase to around 8% to maintain current service levels.

1.3 It is not possible to be precise on the impact of the formula grant change, so this report presents a range of possible outcomes. Much also depends upon the extent of any "floor" to spread grant loss over a period of (uncertain) years. The loss of grant in the worst case could be up to £80m. At that level the underlying council tax increase to continue existing services and make good the grant loss would be over 30%. After the impact of the floor mechanism that could be reduced to around 15% for 2003/04, with the remaining grant loss wound out over successive years. At the mid-point of formula grant changes the underlying increase would be around 19%, but the floor could reduce this to the same level of around a 15% increase in 2003/04.

1.4 The use of the floor only delays the eventual loss of grant:

· council tax will have to rise by a compensating amount

· or cuts will have to be made in services of an equivalent amount

· or some combination of both council tax rise or cuts in service levels, targeted where possible at efficiency or cost reduction exercises, or in indirect or discretionary services with the aim of protecting as far as possible front-line services from the worst effects of these grant changes.

1.5 This would lead to a bleak three year period of high, possibly unsustainable council tax rises, with at best continuing service provision, but little or no room for service improvement or scope for flexibility to deal with unexpected changes or new pressures, other than by redeployment of existing resources.

1.6 A further report will be made to illustrate the impact of grant reductions of this size and scale upon service levels. It would be impossible to absorb a grant loss of up to £80m - or about 9% of the 2002/03 budget - without a very substantial impact upon all services. This would also be impossible for the public to understand in the context of the Government's spending plans to provide additional resources for services and Education in particular.

1.7 It is too early to take firm decisions. Not only are there potential formula grant changes to cope with but also there are uncertainties over the extent of transfer of specific grants into the formula grant and the scale of the resources and liabilities transferred with them, especially for Social Services. This also applies to Education which is further complicated by the new arrangements for a schools block and a local education authority block. It is therefore recommended that the budget strategy remains unchanged, bearing in mind that passported cash increases for Education and Social Services might now be much lower than the cash increase identified in Spending Review 2002, because of the impact of the potential grant loss and floor mechanism. Base budgets only will be prepared at this stage, leaving flexibility to make final decisions in agreeing budget guidelines in December/January when the provisional formula grant announcement has been made, and the implications understood.

1.8 Meetings have been arranged in the Autumn between the Leader and Executive members to help in the preparation of budget guidelines. The uncertain outlook and tight constraints mean that pressures or increases beyond the base budget level can only be brought forward if offset by equivalent redeployment or savings proposals. Some changes in service provision may still be needed, but priorities and existing spending will need to be reassessed to accommodate substantial changes over and above base budgets - or the increase will further add to the projected council tax increase of 15% for 2003/04.

1.9 It would be prudent also to identify options for savings of 1% and 1.5% to provide some contingency plans to help alleviate the potential council tax increase which might arise. It is suggested that executive members and chief officers should begin to prepare these plans concentrating on efficiency and cost reduction measures, protecting as far as possible front-line services.

1.10 The report also develops the budget consultation proposals put forward in July and the information process required for the media to understand the consequences of the interaction of the Government's spending plans with the potential detrimental impact of its proposed funding formula grant change options.

2. Budget format and decision-making structure

2.1 Changes to the format of the budget were made in 2002/03 to align the budget with the new Executive member responsibilities, and no fundamental changes are proposed in 2003/04. Some changes will be required however in the way that central services to schools are dealt with in the budget, to recognise the changes in the Education Act 2002, involving the creation of a schools forum in an advisory role and the requirement to notify the Department for Education and Skills (DfES) and all schools of the proposed aggregate schools budget by the end of January.

2.2 Changes were also made in the decision-making structure last year in conjunction with the introduction of the new constitution and the same general framework will also apply in 2003/04. This involves the Cabinet making decisions on overall strategy, Executive members on service priorities and the Policy Review Committees having the opportunity to comment on the development of the budget proposals prior to executive recommendations being made to County Council. Meeting dates have been set in the latter part of January 2003 for Policy Review Committees and Executive members based on this approach.

3. Budget strategy for 2003/04

3.1 The Government announced the national Standard Spending Assessment (SSA) control totals for 2003/04 in July. For services run by the County Council the increase averages 7%, slightly higher than the 6.1% previously planned for 2003/04. However the formula grant review options exemplified by the Government would on a worst case basis result in a redistribution of spending need between authorities which would reduce Hampshire's SSA by more than the potential increase derived from Spending Review 2002. Though the operation of the floor mechanism could be expected to result in the impact of the change in grant being phased over a period of years, it would provide no longer-term protection of the County Council's financial position.

3.2 2003/04 forecasts were reported to the Cabinet in February and May based on a continuation of the current year's budget strategy - `passporting' of forecast Education and Social Services SSA increases, allowance for base budget changes but no other service developments, for increases in national insurance and pension contributions, pay increases at 3% and price increases of 2.5%. These assumptions produced a forecast spending increase of £6.6m more than the increase in SSA, before allowing for any changes in the grant formula, resulting in a projected council tax increase of 7.8%.

3.3 The uncertainties associated with the formula grant review raise three main issues for the current budget strategy:

· the implications for Education and Social Services if, even after allowing for the floor in the form of a protection grant, cash increases in passported SSA amounts might be less than base budgets or even cash inflation

· whether current base budget levels for other services can be sustained, if this would require substantial council tax increases over a number of years' to replace Government grant transferred to "high need, low resource" metropolitan and urban areas

· how to engage in public consultation on budget options, given the short time between the announcement of the outcome of the grant review and the need to take budget decisions.

3.4 Decisions on passporting and the balance between council tax rises and continued service levels cannot be made until more certain information is available, with the announcement of the provisional formula grant settlement for 2003/04 in late November. Options for budget consultation are considered in paragraph 16.

3.5 Meetings have been arranged between the Leader, Executive members and Policy Review chairman with relevant officers to discuss budget issues in October and November. A further note will be sent on the proposed framework for the preparation of briefing papers in advance of the meetings subject to any views expressed at this Cabinet meeting. Initial decisions on budget guidelines are likely to be made by the Cabinet in December. In the meantime, work on preparing a base budget for 2003/04 needs to commence.

4. Base budget 2003/04

4.1 The base budget is a means of establishing a common starting point for 2003/04 based on the County Council's current financial policies. No significant changes to the `rules' are proposed in 2003/04 and in particular:

· no allowance is made for past inflation in excess of the levels allowed in the 2002/03 budget or for the net cost of salary increments. This will mean that the full-year cost of pay increases in 2002/03 in excess of 4% will have to be absorbed within the base budget though the implications of this policy can be reviewed when budget guidelines are set

· any one-off increases added to the 2002/03 budget, including those supported from past years' underspendings, do not form part of the base for 2003/04

· as in 2002/03 it is proposed that the budget should initially be prepared on the basis of current pay and price levels (a November 2002 price base) with assumptions about future inflation being determined when budget guidelines are set in December. This is despite the fact that this year some increases due in April 2003 are already known, such as the increase in national insurance rates, pensions costs and the local government pay offer.

4.2 The development of budget preparation for 2003/04 beyond the base budget is dealt with in paragraph 16.

5. Revised budget/budget monitoring process

5.1 As in 2001/02, there will not be a separate exercise reporting a revised budget in the autumn. Instead service budget monitoring arrangements will continue and the latest amended budget for each service will be reported in January.

5.2 The Audit Commission's financial element of the Comprehensive Performance Assessment judgement places particular emphasis on the importance of regular and robust reporting on budget monitoring to executive members. It is proposed that reports should continue to be submitted to executive members at least on a quarterly basis including monitoring of the implementation of the capital programme.

5.3 The Comprehensive Performance Assessment process also suggests that greater linkage should be made between variations in resource allocation and performance outcomes, in particular for Social Services, to show how increased resources have produced improvements in services and outcome for clients. More work is required on this, but the principle will be a useful focus in determining priorities for any scarce resources that can be redeployed within base budgets.

6. 2004/05 and 2005/06

6.1 The Government's three year spending review announcement and a further planned freeze in grant methodology once the new formula grant has been introduced in 2003/04, provides the opportunity to develop a three year medium term financial plan, as part of the framework associated with the introduction of the new prudential approach to capital finance. Service accountants will be asked to assess potential base budget variations for 2004/05 and 2005/06 during the autumn as the first stage in the development of the plan. However any projections made in advance of the changes in formula grant would be unreliable.

7. Timetable

7.1 Information on formula grant and on borrowing approvals for 2003/04 is not expected until late November at the earliest, so that the timescale for assimilating the implications of the announcements and for completing a report by 6 December for despatch to the Cabinet on 16 December will be tight.

7.2 Consideration may need to be given to rearranging the Cabinet meeting to 23 December 2002. This will delay the issue of budget guidelines for the sequence of planned meetings in January, but is the most realistic assessment of timing possible to meet the access to information requirements and to cope with the complexity of the settlement for 2003/04.

7.3 Essential work on preparing the base budget for 2003/04, incorporating amendments to the 2002/03 budget and providing information for 2004/05 and 2005/06 forecasts needs to be completed by early in November.

8. Capital programme 2003/04 to 2006/07

8.1 Decisions about the level of the capital programme will be taken at a later stage to fit in with decisions on budget limits for 2003/04 and Government announcements on borrowing powers and capital grants including the outcome of the 2003/04 single capital pot.

8.2 In the meantime, information on the progress of current schemes and forecasts of financing resources need to be updated, and guidance on this process has already been issued.

9. 2003/04 budget projections

9.1 The rest of this report summarises initial forecasts by modelling the implications of

· the formula grant review options looking at best, mid-point and worst cases for the County Council

· the revised SSA control totals announced in SR2002

· the two year local government pay offer on which consultation is taking place, on current spending projections

· the possible impact of the floor in phasing in any loss of grant.

9.2 The report concludes with the development of the budget consultation process for 2003/04.

10. Formula grant review options

10.1 There are 47 options for possible changes in revenue support grant. Some are specific to services, others cut across the existing SSA service blocks. Assumptions therefore have to be made about assigning area cost adjustment and population change for example against individual service blocks.

10.2 There is also a need to differentiate between the proposals that involve changes in the distribution of SSA between authorities and the resource equalisation proposals, which by re-basing SSA change the distribution of Government grant support between authorities.

10.3 The results are shown in the next table, taking the best and worst cases of the exemplified options in the Government's consultation paper (the impact of each option was shown in the July paper). A mid-case change is also shown - this is not the arithmetic mean because many of the options are skewed more to greater rather than lower levels of grant loss as far as the Council is concerned.

Table 1 - Formula grant options - changes in distribution of SSA
	Best		Mid		Worst
	£m	%	£m	%	£m	%
Education	7.6	1.5	-13.8	-2.6	-35.0	-6.7
Social Services	8.4	5.0	2.1	1.2	-4.2	-2.5
Fire	-	-	-0.8	-2.3	-1.5	-4.4
Highways maintenance	0.7	1.5	-0.5	-1.1	-1.4	-3.1
Environmental, protective and cultural services (EPCS)	0.4	0.7	-5.4	-9.1	-11.9	-20.1
Capital financing	7.1	19.2	-1.7	-4.6	-4.8	-13.1
	------	------	------	------	------	------
Total SSA change	24.2	2.8	-20.1	-2.3	-58.8	-6.8
	------	------	------	------	------	------

10.4 Changes in SSA would therefore range from a loss of £59m (7%) to a gain of £24m (3%). Using the mid-point the overall reduction in SSA from the proposed grant changes might be around £20m (2%). Losses would be most severe on EPCS services and capital financing, but a reduction in Education SSA of 2.6% would be significant. The Social Services options are the least worst for the Council.

10.5 On top of these changes must be added the loss of grant support from resource equalisation. This is illustrated in terms of grant loss and the consequential council tax change in the next table.

Table 2 - Formula grant options - changes from resource equalisation
	Best	Mid	Worst
Grant loss	-£8.4m	-£15.3m	-£21.1m
Council tax rise as a result	2.4%	4.4%	6.1%

10.6 This shows the potential importance of rejecting the options for resource equalisation. At the worst this could shift £21m of grant to elsewhere in the country, increasing Hampshire council tax payers' bills by 6.1%, but without any improvement in any services in Hampshire. Hampshire residents will also be adversely affected by the equivalent effect on district council and Police council taxes.

10.7 Overall grant loss - from SSA changes and from resource equalisation are therefore as summarised in table 3.

Table 3 - Formula grant options - total grant loss
	Best	Mid	Worst
	£m	£m	£m
SSA	24.2	-20.1	-58.8
Resource equalisation	-8.4	-15.3	-21.1
	------	------	------
Total	15.8	-35.4	-79.9
	------	------	------

10.8 The maximum grant loss under the exemplified options is therefore £80m. This is equivalent to a 14% reduction in the current grant support (revenue support grant (RSG), plus national non-domestic (NNDR) or business rates) of £570.3m.

11. Revised SSA control totals

11.1 It is anticipated that the new formula grant system will still have service blocks similar to those currently within SSA. The next step is therefore to project likely SSA control totals for the Council.

11.2 These will be affected by

· changes in SSA distribution from the formula grant changes (as set out in para 10)

· increases in SSA control totals nationally by re-basing SSA to implement the resource equalisation proposals. If SSA totals are increased nationally to reflect higher actual spending above SSA this will also increase this Council's SSA totals. The Council's position on spending over or under SSA will depend upon its relative overall spend over SSA compared with the overall national increase. Whereas low resource authorities will have more grant to increase the spending in line with the uplift in SSA, Hampshire County Council will not as this burden will switch to its council tax payers

· increased SSA control totals in SR2002.

11.3 Estimates have been made of these effects in arriving at the projections. No account has been taken of

· the effect of relative data changes on the SSA distribution

· any further changes or transfers of function into or out of SSA

· redistributive effects of transferring specific grants into SSA

· and the effect of the observed past pattern of more than the Council spends being transferred out with function changes, and less than the amount required being transferred in with specific grant to match future liabilities (these transfers will be particularly important in Social Services - for example nursing care to the NHS, preserved rights into Social Services)

· the consequences of splitting the Education SSA block into a schools and an LEA block (no prizes for guessing which might be more than the Council spends, and which might be lower than the Council spends).

11.4 Paragraph 11.3 illustrates the potential problems and uncertainties which cannot yet be quantified. The Office of the Deputy Prime Minister (ODPM) has indicated that it will publish in October the existing specific grants and their values which it proposes to transfer in or out of SSA. The other factors are not likely to be available until the formula grant settlement in late November.

11.5 Making the best estimate of the factors set out in para 11.2 it is possible to project likely SSA totals for 2003/04:

11.6 The next step is to try and project the likely Government support (RSG plus NNDR) for each of the three possible options exemplified:

Table 5 - Projected Government grant 2003/04
2002/03		2003/04
		Best	Mid	Worst
£614.25	Council tax at standard spending	£706.04	£809.58	£761.43
£m		£m	£m	£m
292.9	Council tax income at standard spending	338.3	387.9	364.8
-------		-------	-------	-------
570.3	Projected Government support	625.9	571.3	523.6
-------		-------	-------	-------
	Projected percentage variation in Government support	9.7%	0.2%	-8.2%

11.7 It is possible to explain the variations in Government support as follows:

Table 6 - Analysis of variations in projected Government support
	Best £m	Mid £m	Worst £m
2002/03 SSA	570.3	570.3	570.3
Formula review grant changes	24.2	-20.1	-58.7
Resource equalisation grant loss	-8.4	-15.3	-21.1
SR2002 increase	39.8	36.4	33.1
	-------	-------	-------
Projected Government support 2003/04	625.9	571.3	523.6
	-------	-------	-------

11.8 At this stage it is possible to explain the effects of resource equalisation in terms of SSA increase, loss of Government grant and an increased burden on Hampshire council tax payers as follows:

11.9 The SSA forecast for 2003/04 for the mid-case is only about £5m less than the best case, but this is distorted by the resource equalisation options which raises the council tax income at standard spending by more than it raises SSA as table 7 above illustrates. This of course is making the new system simpler and more transparent!

12. Budget projections 2002/03 and 2003/04

12.1 The tight assumptions used in projecting a base budget for all services with passported SSA cash increases for Education and Social Services were reported to Cabinet in July.

Pay awards

12.2 Since then a settlement to the local government pay award has been proposed by the Arbitration Consultation and Advisory Service, but this is still subject to union ballot and employers' agreement - the results should be known by the time of this Cabinet meeting.

12.3 If accepted the core elements of the proposed pay settlement in 2002/03 are a 3% increase in April 2002, and a further 1% increase in October 2002. The increase in 2002/03 costs 3.5% this year and 4% in a full year. In addition a 3.5% pay increase in 2003/04 from 1 April 2003 is also proposed. Additional increases are also proposed for the lowest paid staff. These amount to:

· for staff on the lowest pay point

- a further increase of 1.2% from 1 April 2002 to bring the hourly rate up to £5 per hour

· for staff on the lowest two pay points

- a further 1% increase in October 2002

- a further 1% in April 2003.

12.4 The impact of these additional increases for the lowest paid staff on the County Council's pay bill is still being assessed but is not expected to be substantial. At a national level the lowest two pay points on the scale are estimated to account for about 5% of the pay bill, and the assumption is that it will add 0.05% to the cost of the award in 2002/03, and about 0.15% (including the extra 1% in April 2003) to the 2003/04 pay bill.

12.5 The budget for 2002/03 allowed for a 3% pay increase but included a contingency provision equivalent to 1% to cover pay recruitment and retention pressures, including the potentially higher cost of the pay award. This would enable an award likely to cost between 3.5% and 3.6% to be accommodated in 2002/03. The full year cost at around 4.1% would marginally exceed the provision in the current year's budget included in the contingency provision. Allowing also for the 1% excess cost of the Hampshire management grade pay award, the full year effect of 2002/03 pay increases exceeds the inflation contingency provided in the 2002/03 budget by £0.6m. This extra cost is not included in the construction of the base budget and would need to be absorbed within cash limits (£0.3m after absorption within passported cash increases).

12.6 There is now no scope for an additional local pay award this year, in terms of continuing funding, to assist recruitment and retention pressures although this may now be unnecessary given the outcome of the national pay award.

12.7 The budget forecast for 2003/04 had assumed 3% for pay increases next year, so that an award costing just over 3.5%, would add a further cost pressure to those reported to the Cabinet earlier in the year This is £2.7m if allowance was made for other pay settlements at this level. The majority of this cost (£2.3m) could be absorbed within the passported increases for Education and Social Services assumed in the strategy leaving a net additional cost of £0.7m, for the combined affect of increases in 2002/03 and 2003/04.

12.8 The effect of these changes and assumptions is to increase the estimated budget requirement previously reported to the Cabinet from £985.4m (+7.0%) to £986.1m (+7.1%). This would result in an underlying council tax increase of about 8% instead of the 7.8% reported in July (before the impact of any formula grant changes).

12.9 The budget projection will almost certainly change as base budget figures are refined over the next few months. There remain other uncertainties, not least the impact upon the Fire levy of any settlement of the firefighters' claim of 40%.

13. Floors

13.1 There is as yet, despite Local Government Association requests, no indication of the level of the floor for 2003/04. This will now be of significant interest to the Council if the grant options are pursued. The higher the floors, the higher the cash budget increase possible, with some reduction in the potential council tax rises. However, the floor simply puts off the time at which the full consequences of the grant loss and its consequent impact on budgeted service levels and council tax rises work through.

13.2 There is a possibility of a separate floor for the schools block so that the Government will be able to say that no local education authority's schools will lose in real terms from any grant changes. But real terms in that context could mean the Government's underlying inflation assumption for SR2002 of 2.5% per annum, but would clearly be inadequate to cover increases in teachers' pay, national insurance contributions and pensions contributions.

13.3 It is assumed that the Council will be allowed a minimum increase of 2.5% in Government support at any grant change option finally chosen. In the worst case of £80m grant loss, this would result in an estimated protection grant of £60m in 2003/04. This also assumes that the variation is expressed as a percentage of Government support (-14%) rather than as a percentage of SSA (-9.3%). The existing Government support of £570.3m in 2002/03 would therefore increase to a floor of £584.6m (+2.5%) in 2003/04 - if this floor assumption is the one finally adopted.

13.4 At the mid-case option Government grant support would be £571.3m (Table 5) compared with a floor of £584.6m. In this case the estimated protection grant would be around £13m instead of £60m in the worst case option.

13.5 The implication of this is that the council tax effect of any particular assumption is likely to be identical in 2003/04 for any grant formula options which are equivalent to the mid-case or worst options illustrated in the previous tables.

13.6 The difference comes in the later years. If the floor is applied in this way, protection grant for the worst case would not wind out until 2007/08 and would add between 4 to 6% to the underlying level of council tax increase in each year for that five year period. In the mid-case, protection grant would only be paid for one year still resulting in a council tax increase of about 15% in 2003/04 and would add about 3.8% to the council tax in 2004/05, after which the County Council would be at its new long-term funding level.

13.7 As a result it shows how important any floor calculation will be in making any sensible forecast of council tax increases for 2003/04, if the Government, despite representations on its grant consultation proposals, still goes ahead with its detrimental options to the County Council.

13.8 The Government so far has resisted any attempt to get clarity on the size of the floor and its method of construction. It appears unlikely that it will announce the floor until the final grant settlement. It will take some time to work through the exemplifications and implications on the Council's own budget requirements - another reason for more time being required to set budget guidelines for 2003/04. It is recommended however that the Government be urged to release details of its proposals for floors as early as possible.

14. Council tax projections 2003/04

14.1 Assuming a £1m surplus on the collection fund, it is now possible to project possible council tax increases for 2003/04 under the various grant options assuming the relatively tight County Council budget forecast of £986.1m.

Table 8 - Projected council tax 2003/04
2002/03		2003/04
£m		Best £m	Mid £m	Worst £m
920.5	Budget	986.1	986.1	986.1
346.4	Precept on council tax payer	359.2	413.8	461.5
£734.67	Council tax per Band D	£757.84	£873.14	£973.85
	Underlying increase in council tax	£23	£138	£239
	Percentage increase in council tax	3.2%	18.8%	32.6%
	Council tax in 2003/04 after floor assumption	£757.84	£845.14	£845.14
	Increase in council tax after floor	£23	£110 £2 per week)	£110 (£2 per week)
	Percentage increase in council tax in 2003/04 after floor	3.2%	15.0%	15.0%

14.2 Whilst these assumptions work for the mid and worst case, it is apparent that the gain from positive formula grant change could be used to reduce the underlying council tax level from 8% to 3.2%. In the unlikely event that this occurs it would then be possible to passport the respective cash increases in SSA and grant above the base budget to Education and Social Services. That would increase the budget projection by about £14m to about £1,000m and result in a council tax rise of 7.2%.

15. Trends in Government spending plans and support

15.1 All the assumptions made so far are just that, it is not possible to be precise at this stage in preparing the 2003/04 budget. Apart from variations in assumptions, the relationship between national SSA increases in spending reviews and the final SSA settlement at County Council level and its impact on budget and council tax increases is not always linear or consistent. Many factors affect the final outcome including the use of specific grants, changes in function and Council assumptions about inflation and use of, or contributions to, reserves and balances.

Table 9 - Trends in SSA, budget and council tax
	National SSA increase in spending review	County Council
		SSA increase	Budget increase	Council tax increase
	%	%	%	%
1999/00	5.3	3.9	5.2	9.4
2000/01	5.4	5.2	5.3	5.8
2001/02	5.3	5.8	5.9	5.5
2002/03	5.7	5.4	6.9	7.9
2003/04	*14.1	*11.1	*7.1	*15.0
* mid-case figures, assuming floor and resource equalisation

15.2 Even these seemingly inexplicable variations will seem consistent compared with the relationship in the figures with the proposed formula grant change and the distortion caused by resource equalisation.

15.3 The County Council has made strong representations against the merging of revenue support grant and national non-domestic rates into formula grant, both in its response to the consultation on the Local Government Bill in July and now in the suggested response to the formula grant consultation. The reasons have been given in previous reports but the next table clearly shows how the relative burden will continue to shift between Government support from central taxation into council tax payer and business rate payer support for its spending plans. The position will be exacerbated in 2003/04 by the extra burden on Hampshire council tax payers from resource equalisation.

Table 10 - Trends in Government grant support and council tax increases
	% share of budget requirement
	RSG	NNDR	Government support	Council tax
1999/00	29.0	34.8	63.8	36.2
2000/01	25.9	37.6	63.5	36.5
2001/02	28.3	34.9	63.2	36.8
2002/03	25.8	36.1	61.9	38.1
2003/04 worst	18.5	34.6	53.1	46.9
2003/04 mid	23.4	34.6	58.0	42.0
(no floors)

15.4 Although in principle a higher proportion of locally raised funding is helpful, it is not appropriate for the council tax payer to take all the strain of the increase in the Government's spending plans, or its possible redistribution of grant to elsewhere in the country.

16. Budget preparation 2003/04

16.1 The budget outlook for 2003/04 remains very uncertain because of the Government's proposals to change revenue grant support. The impact of the various formula grant options has been set out in paragraph 11.

16.2 The impact of the latest possible pay awards on the budget projections are set out in paragraph 12.

16.3 The unknown factors that remain were explained in paragraph 11.3 and the need to know the floor mechanisms to determine possible grant losses for 2003/04 and future years was explained in paragraph 13. The impact on council tax levels could be very harsh as set out in paragraph 14.

16.4 The budget projections at the mid and worst case options only assume base budget projections for all services plus passporting the full national cash increases in SSA to Education or Social Services. If the base budget was applied to Education and Social Services as well, the budget projection would reduce by between £10.6m and £17.2m.

16.5 These considerations all result in the suggested approach for budget preparation for 2003/04 set out in the summary from paragraphs 1.4 to 1.10 and in the recommendations to the report.

17. Budget consultation

17.1 New Government guidance on budget consultation was reported to the Cabinet in July. No specific decisions were made in July to deal with the particular problems of setting the 2003/04 budget by:

· explaining the formula grant changes to the media and public

· identifying the consequences in council tax rises, or the scale of potential cuts in services that would otherwise be required.

17.2 It is assumed that the usual round of structured meetings with representative business, council tax payers, governors, voluntary sector and the workforce will continue.

17.3 MPs will need to be briefed and asked to intervene to protect the Council's interests during debates on the formula grant consultation in October. These would cover:

· adequate basic entitlement

· opposition to resource equalisation

· protection of the area cost adjustment

· rejection of the merger of RSG and business rates.

17.4 Sufficient work and evidence has been accumulated from MORI and other surveys about the public's priorities for services, including where they would suggest growth or savings should be targeted when necessary.

17.5 Further work will be done on developing the communications strategy to explain to the public the impact of the Government's spending plans and proposals for changes in revenue grant support on the County Council's budget and council tax for 2003/04. It is also suggested that an early meeting be arranged with Hampshire MPs to explain the consequences of these proposals and to seek their support in lobbying against these changes during their consideration by Parliament.

17.6 However it would be necessary to have a means to review and explain the formula grant change and the options for service reduction, base budget roll forward or even possibly service improvements, against the consequences in terms of service delivery and resultant council tax rises. The Communications Team suggest that this is best done in a workshop. Members of the workshop would be recruited broadly to match the profile of the County so that their opinions and conclusions will be strongly indicative of the population as a whole. The workshop will need time to consider and discuss the implications of the possible formula grant changes.

17.7 It is suggested that preparing research in this way would:

· demonstrate good practice in budget consultation

· introduce innovative research techniques

· provide robust quality information to inform the Cabinet in its decision making.

17.8 But such an exercise would be time consuming and absorb resources which are going to be very hard pressed anyway. If a workshop is held before the grant settlement it will remain uncertain for the reasons set out earlier in the report. If a workshop was held in January it would be even more difficult to fit in and feedback into the decision making process.

17.9 It may simply prove too difficult to have a meaningful public consultation on budget levels and council tax this year given the complexity of the potential changes and the very short time scale to deal with the issues. If this view is agreed with, the Council will need to state clearly that the Government's rush to change the system and the lack of time for proper consideration preclude any improvements in budget consultation over existing arrangements.

17.10 The Cabinet may wish to give more consideration to possible approaches at its next meeting, or agree not to consider further changes in budget consultation until the 2004/05 budget round when more stability should return to projecting grant and spending and the effect on council tax.

18. Council tax bills

18.1 The Government has recently announced that the detailed prescription of the information billing authorities (including the County Council) are required to send out to council tax payers with the council tax bill is to end. It also announced that people will be able to choose to receive or pay council tax and non-domestic rate bills electronically (applies to district councils).

18.2 Under the proposals billing authorities will have a general duty to provide information on their expenditure plans; how these are to be funded; their impact on the council tax payer; and the reasons why the level of council tax has varied from previous years. Councils can choose the best way to make this information available to their tax payers by use of leaflets (or on a website if sending bills electronically at district council level)

18.3 Councils will also be able to choose whether to integrate their best value performance plan summaries with the information provided for council tax purposes, or to send them as a separate document with the council tax demand notice.

18.4 Regulations are still required to bring these changes into effect and councils will have an opportunity to comment on the draft regulations. The Government intend that these proposals should be implemented for council tax bills issued for 2003/04.

18.5 This will require further work and development and proposals for change will be discussed with the Leader and brought to the Cabinet for approval when draft regulations are available.

Recommendation

11. That the Cabinet note the latest budget projections and the range of possible council tax increases resulting from this formula grant options.

12. That no immediate decisions are made because of the uncertainties, but base budgets be prepared against which decisions on budget guidelines can be considered in December when the grant settlement has been announced.

13. That as a result of the potential grant loss from the consultation proposals, any service pressures or proposals beyond base budget level be offset by a equivalent redeployment of resources and be reviewed at the service budget briefing meetings already arranged between the Leader and executive members during the autumn.

14. That the Cabinet receive a further report of the impact on services if all the potential grant losses were met by service reductions instead of compensating council tax rises.

15. That executive members and chief officers prepare contingency plans of 1% and 1.5% for efficiency savings, cost reductions and other savings, protecting as far as possible front-line services.

16. That the media and public be made aware of the potential grant losses and the impact upon service levels and council tax.

17. That an early meeting be arranged with Hampshire's MPs to explain this budget outlook and the consequences of the Government's proposed grant changes so that they can lobby against the formula grant options which badly affect the County Council.

18. That the Government be urged to give an early indication of floors to assist budget planning.

19. That any improvements in budget consultation be considered in the light of these uncertain and difficult projections for 2003/04.

20. That new proposals for the council tax leaflet be brought forward after draft regulations become available.

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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