Contact: Jon Pittam, ext 7400

1. Summary

1.1 This report outlines the main elements of the 2004/05 and 2005/06 financial forecasts and the particular impact on the schools budget for 2004/05 as grant reductions occur.

1.2 The following decisions are sought:

· note the difficulties of financial forecasts without advanced notice of the floors and ceilings, and the protection applied to schools budgets

· continue to develop options for consideration during the budget consultation process

· engage Hampshire MPs in making representations to Government about the need to protect schools budgets from further Government grant loss in 2004/05 and 2005/06.

2. Reason

2.1 The County Council will continue to lose Government grant in 2004/05 and 2005/06.

2.2 It needs to develop its budget strategy in relation to the potential loss of grant and its effect upon council tax rises and service levels.

2.3 The Cabinet has agreed the outline of the proposed public consultation process on the budget strategy.

2.4 There is an opportunity with current Government concern about the level of funding in schools budgets in 2003/04 (which do not apply in Hampshire) to make the case for further grant protection for schools budgets in 2004/05 when the effect of the current planned grant loss will otherwise effect Hampshire schools.

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. Reasons 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. Introduction

1.1 This report outlines the main elements of the 2004/05 and 2005/06 financial forecasts, the underlying assumptions, especially the impact upon schools budgets, and the broad issues on which consultation might be focussed.

1.2 The report also considers the recent national concerns about the adequacy of schools budgets in 2003/04.

1.3 Although the County Council's schools budget allowed for real growth of £2.8m in 2003/04 this was at the expense of the 15% council tax rise. This level of increase is probably not sustainable in 2004/05. As more of the transitional grant protection is lost in 2004/05, there will be real pressures on schools budgets, unless the Government either reverses these formula funding changes for Education or sets a much higher floor than anticipated in 2004/05 to reduce its grant more gradually over a much longer period.

2. 2004/05 and 2005/06 forecasts

2.1 The total loss of Government grant for the overall formula changes was £48m, over the three years from 2003/04 to 2005/06. The floor prevented all that grant being lost in 2003/04. £21m was lost, leaving £27m to be withdrawn during 2004/05 and 2005/06. Total grant protection in 2003/04 was therefore £27m of which £22m underwrote the schools budget increase, equivalent to the 3.2% per pupil increase for all schools. The overall grant increase was £6m less than the DfES target for increasing schools budgets.

2.2 Assumptions therefore have to be made about the rate of grant loss in 2004/05 and 2005/06, and its impact upon schools budgets.

2.3 The forecasts presented to the Cabinet in February are set out in Appendix 1, together with the assumptions made, but in summary were as follows:

Table 1: Forecast increases

Summary	2004/05	2005/06
	%	%
Budget	4.1	4.6
Formula spending share (FSS)	3.5	4.3
Government support	2.5	2.9
Council tax	6.3	6.7

2.4 Despite the fact that national formula spending share (FSS) control totals for services run by the County Council are expected to increase by 5.3% in 2004/05 and 5.2% in 2005/06, the forecast increases in the County Council's FSS are significantly lower at 3.5% and 4.3% respectively. The lower increases reflect the assumptions made about the removal of the damping element within the County Council's Education FSS (EFSS).

2.5 If it is assumed that the floor increase is set at 2.5% per pupil in 2004/05 and 2005/06, the main impact on EFSS will be in 2004/05 with a lesser impact in 2005/06. A higher floor at 3.2% per pupil would result in a more even impact over the two years.

2.6 The position in 2004/05 is made worse by the Government's plans to end a number of further standards fund grants. Even the national control total increase is therefore less generous than it appears and locally the County Council may need to absorb spending of up to £7m currently funded by standards fund grant within the lower cash increase in its EFSS. This is not currently included in the budget forecasts.

2.7 Using the assumption set out in paragraph 2.5, and comparing the result with the base budget assumptions used in the current budget forecast, would mean

· a reduction of £4.2m in schools budgets in 2004/05

· but a cash increase of £4.8m in schools budgets in 2005/06

2.8 The assumptions and calculations used to derive this analysis are set out in Appendix 2, but the results can be summarised as set out in Table 2.

Table 2: Forecast increase in passported change for schools

2.9 These comparisons are with the base budget only. Budget increases (and consequent council tax rises) would be required to fund an extra £15.5m (2004/05) and £8.3m (2005/06) to be in line with the national passported amounts (5.5% and 5.8% respectively).

2.10 Therefore the outlook for schools budgets is much more constrained in the forward budget forecasts, depending on the extent and the speed of the withdrawal of transitional grant protection (the overall floor) received by the County Council. The County Council will need to increase its budget forecast by £4.2m in 2004/05 for the schools budget to be in line with its base budget requirement and prevent cuts. That is another 1% on the council tax increase. £15.5m is required to provide schools with the same passported increase as the national passported amounts. That is equivalent to another 3.9% on the council tax. So for Hampshire to provide its schools with the expected national cash increase requires either

· additional Government support of £15.5m in 2004/05

· or an additional council tax rise of 3.9% in 2004/05 (over current forecasts, so that total council tax increase in 2004/05 would be over 10%)

· or cuts in schools or other budgets

· or some combination of all three

2.11 It is therefore imperative to continue lobbying DfES and Government on the implications of their formula funding changes and the severe impact on schools budgets and/or council tax increases if the grant losses are continued, or the grant protection wound out too quickly.

3. School budgets in 2003/04

3.1 The assumptions in the previous section of the report relating to 2004/05 and 2005/06 are the ones included in the forecast presented to the Cabinet in February. Guidance from the DfES on setting three year school budgets was drawn upon in framing those assumptions. Subsequently the actions of the Secretary of State suggests that Education ministers may not have fully understood the implications of the grant settlement for schools, when looked at in conjunction with changes in specific grants. Initially a 2003/04 transitional grant was announced in March to be delegated to schools, based upon revising the calculation of the floor to take account of specific grant movements. Subsequently following the round of Easter conferences and the allocation of budget shares to schools the DfES appear to have become more generally concerned about the implications of the new funding arrangements for school budgets in 2003/04.

3.2 Much of the recent publicity about the `missing £500m' has been disingenuous, and it is now clear from the data produced by the DfES that the substance of the issue is about the extent to which some elements of the schools budget (mainly relating to standards fund grants in Hampshire) have still to be allocated to individual schools. Though the DfES have highlighted the 19 local authorities who appear not to have passported FSS increases to schools, less publicity has been given to the 112 local authorities (including Hampshire) who have increased their schools budgets by more than the DfES target.

3.3 All education authorities have also been asked to explain and justify the basis of a number of decisions over the allocation of the schools block between delegated schools budgets and other forms of direct Education provision. The primary concern is avoidance of redundancies from any general funding problems. The Secretary of State has written so that he can be clear about the extent to which increases in FSS in 2003/04 have reached schools budgets. Appendix 3 shows the detailed letter from the DfES and the reply which was required by 12 May.

3.4 The introduction of the Schools Forum was specifically intended to ensure that schools representatives were consulted on the setting of the overall budget for the schools block and it is disappointing that the Secretary of State for Education and Skills has had so little confidence in the effectiveness of the new consultation arrangements.

3.5 It is also totally in conflict with the freedom and flexibilities associated with being an excellent authority under the Comprehensive Performance Assessment.

3.6 The DfES do need to understand the implications of the new funding system (schools and LEA block, sums delegated to schools or not) and the effect of the changes in formula distribution. However the County Council will be disappointed, that these detailed questions were sent to it having passported 105% of the sum expected by the Secretary of State to its schools, at the expense of a 15% council tax rise.

3.7 The most significant piece of information that has emerged over the last few weeks is the Secretary of State's acknowledgement that of the total increase of £2.7bn in planned education spending in 2003/04, all but about £250m was required to maintain existing levels of service in schools. £250m represents about 1% of education spending. If therefore it was the Secretary of State's intention that the changes in the Education grant formula should not result in any cuts in school budgets in areas adversely affected by the new formula, then this suggests that the scope for using the new formula to redistribute resources between areas was very limited, allowing no authority to have an increase more than 1% below the average increase. If this was the intention, the floor and ceiling within the Education FSS were set too widely in the 2003/04 grant settlement. The overall increase in Education FSS per pupil was 5.2% in 2003/04, with a floor at 3.2% per pupil and a ceiling of 7% per pupil. This suggests that the floor should have been set at no lower than 4.2%, which would either have required a correspondingly lower ceiling, or a larger increase in Education funding to implement the formula changes.

3.8 It is the realisation that there was not enough additional funding in Education FSS in 2003/04 to enable the changes in grant distribution to be introduced without turbulence at school level in some areas, that appears to be the real issue about the adequacy of school budgets in 2003/04. Because of the impact of the changes to the funding of places for 3 year olds, the County Council was largely insulated from the effect of the Education formula changes in 2003/04 by the grant protection arrangements. This grant protection will disappear over the next few years. The impact of recent events raises doubts about how quickly the redistribution of grant within the Education formula will be pushed through, and therefore whether a higher floor (and by implication a lower ceiling) will be set in 2004/05 and 2005/06 than previously assumed. This is particularly the case in 2004/05, when the increase in EFSS estimated at 5.5% is again expected to be offset by the termination of existing standards fund grants, so that the overall increase is not particularly generous by the standards of recent years. This serves to emphasise the importance of securing an early indication from the ODPM and the DfES of anticipated floors and ceilings in 2004/05 to enable more meaningful budget planning to occur.

4. Schools budgets

4.1 The conclusions from these projections are that:

· the main issue for the County Council in 2004/05 and 2005/06 in setting the schools budget will not be whether it is possible to meet the Government's expectations on schools `passporting', but on the extent to which the County Council is willing to exercise its discretion to protect schools from the implications of projected low increases in schools block FSS, by increasing school budgets by more than the increase in the County Council's FSS and move in line with the national increases in FSS.

· schools could be asked to plan for reductions of £4.2m below base budget in 2004/05 but offset by a £4.8m increase above base budget in 2005/06.

· the budgeted reserve contribution of £7.9m in 2003/04 provides some scope to protect schools budgets in 2004/05 together with meeting some of the impact of loss of standards fund. Unless this loss is recognised in the floor for 2004/05, it suggests that the Council will no longer be able to support continued spending as the specific grant is withdrawn without adding up to 2% to current council tax forecasts.

· the use of the budgeted reserve contribution also has to be balanced against other pressures or cost increases on all other services which cannot be contained within the tight forecast assumptions. Beyond this level the one-off use of the grant equalisation reserve balance can help defer the impact on other budgets or the council tax. But ultimately a balance will have to be struck between possible increases to school budgets in excess of FSS, higher council taxes and reductions in other services as use of one-off reserves is exhausted

· the recent controversy over school budgets in 2003/04 offers the opportunity for the grant formula changes in Education to be implemented more gradually than previously assumed.

5. Social Services

5.1 In considering the implications for other services, the Social Services funding position is also critical and uncertain.

5.2 The Department of Health has confirmed that FSS control total increases announced in SR2002, (which initially seemed quite generous particularly in 2005/06), need to absorb discontinued or reduced specific grants. These will include children's services and deferred payments (in 2004/05) and preserved rights and training support (in 2005/06).

5.3 The estimated underlying increases in Social Services FSS are 6.5% in 2004/05 and 5.3% in 2005/06 which will need to meet base budget growth, and all other pressures and new demands.

5.4 The Government is also intending to introduce a formula for allocating the supporting people grant from 2005/06, the distributional effect of which is also uncertain.

5.5 There was a substantial increase in funding for Social Services in 2003/04, with a budget increase of £8m in excess of the FSS increase. The success of the strategy for managing the loss of Government grant in 2004/05 and 2005/06, depends upon the increased Social Services resources in 2003/04 being used in a way that will be sustainable over a three year period, at a time when schools budgets will be under considerable pressure.

6. Use of contribution to reserve

6.1 There are too many uncertainties and imponderables not least about how the floor will be set, to make it worthwhile at this stage to work up specific alternative spending and council tax assumptions. A £4m variation in spending has a 1% effect on the council tax. Given that overall grant loss is projected to be £14.4m in 2004/05 and £12.7m in 2005/06 this suggests that the use of the budgeted contribution to the grant equalisation reserve of £7.9m in 2003/04 should be spread roughly evenly over the two years, as a way of absorbing grant loss without increasing the council tax. However the forecast of the rate of grant loss is highly dependent upon the floor assumptions.

7. Conclusions

7.1 In the County Council's position of being heavily protected by the Education floor arrangements in 2003/04 and with no definite information about the criteria for setting floors in 2004/05 and 2005/06, budget consultation cannot be based on any great certainty about the effect of alternative spending levels on the council tax in 2004/05 and 2005/06.

7.2 Though part of the purpose of the consultation will be to highlight the nature of the dilemma facing the County Council, particularly in respect of school budgets, it will also be necessary to offer some options for spending and council tax increases, even if they are based on unconfirmed assumptions. One option would be to look at alternative spending levels estimated to generate council tax increases of 5%, 7% or 9%. These options would make assumptions about increases in school budgets at or above the level required to passport the EFSS increases, together with assumptions about recognising either cost pressures or making cuts in other services.

7.3 Such options will be worked up for a further report to the Cabinet, alongside the promised report on the detailed budget consultation arrangements and, before the process starts with the community workshop to be held in the summer.

Recommendations

That the Cabinet:

· note the difficulties of financial forecasts without advanced notice of the floors and ceilings, and the protection applied to schools budgets

· continue to develop options for consideration during the budget consultation process

· engage Hampshire MPs in making representations to Government about the need to protect schools budgets from further Government grant loss in 2004/05 and 2005/06.

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.

TITLE FILE

None

Appendix 1

1 The main assumptions underlying the budget forecasts were:

· the same inflation assumptions as 2003/04, based on 3.5% increases in pay, 2.5% for prices

· allowances for base budget changes, in particular for the effect of infrastructure, volume and landfill tax changes on the waste management contract

· continued passporting of Education and Social Services FSS increases

· no other new service developments, additional costs or savings

· possible function changes have been ignored in both FSS and budget projections, apart from proposed transfers already notified which have been taken into account in forecasting the underlying increase in FSS

· spending is shown net of specific grants

· no changes have been made to the reserve contributions in the 2003/04 budget

2 The FSS, government support, and council tax forecasts assume:

· that the general grant floor will be based on a 2.5% minimum increase and that the real terms guarantee to schools will be based on a minimum increase of 2.5% per pupil

· that after adjusting for the affect of Education damping, that County Council FSS increases match the increases in national control totals

· that there will be no further resource equalisation uplift to the control totals in 2004/05 and 2005/06, (although based on 2003/04 budgets there is the possibility of a further £1bn uplift, as compared with a £4bn uplift in 2003/04)

· that the council taxbase both nationally and within Hampshire will increase by 0.5% per annum.

3 2004/05 - 2005/06 Projections

4 Increases

5 Analysis of budget increase

Appendix 2

1. Grant loss and effect on schools budgets

1.1 Although the total grant protection in 2003/04 was £27m, the actual total cash increase in Government grant for 2003/04, compared with 2002/03, was only £23m. This was because the formula would have actually reduced the grant in 2003/04 by just over £4m. (The full explanation of the changes was given in the report on the final local government finance settlement 2003/04 to Cabinet on 10 February 2003, tables 7-11).

1.2 The damping of the Education FSS, in order to phase in the effect of changes in the Education grant formula on school budgets, represents the main element of the grant protection received by the County Council in 2003/04, as summarised below:

Table 1: Grant loss still to be incurred

	£m
Education FSS damping
Schools block	22.2
LEA block	2.7
	------ 24.9
General grant floor	2.2
Total estimated grant loss in 2004/05 and 2005/06*	------27.1 ------

* equivalent to transitional grant protection in 2003/04

1.3 The main mechanism therefore for the withdrawal of the transitional grant received by the County Council in 2003/04 will be through the phasing out of the damping element within the Education FSS (EFSS). The rate of withdrawal depends primarily upon the damping criteria adopted in 2004/05 and 2005/06. In 2003/04 all authorities received an increase in EFSS of at least 3.2% per pupil. The DfES has indicated that no school will receive a real terms reduction in funding due to the grant settlement. Based on the Government's current inflation assumptions, that would appear to guarantee an increase per pupil of at least 2.5%.

1.4 In 2003/04, the national minimum increase of 3.2% per pupil was applied to a pupil increase of 2.6% for Hampshire to produce a minimum increase in EFSS of 5.9%. The increase of 2.6% in pupil numbers reflected an increase of 29% in under 5's as a result of changes to the funding of 3 year old places, with pupil numbers in 2003/04 based upon an assumed 85% take up of places by three year olds. Primary and secondary numbers were slightly lower than in 2002/03. The increase is a one-off adjustment to pupil numbers which had the effect of enabling the County Council to increase budget shares per pupil for primary and secondary pupils by 6.6% in 2003/04, as compared with the assumed 3.2%. The overall passported cash increase for the schools block of £11.5m was used mainly to:

· replace terminated standards fund grants and provide the LEA share of new standards fund grants devolved to schools

· but leaving £2.8m for growth applied to staff costs.

1.5 The pupil number adjustment for three year olds had the fortuitous effect of largely protecting the Education FSS from the effect of formula changes in 2003/04.

1.6 Because of the high level of protection enjoyed in 2003/04 the main impact of the changes in the Education FSS formula has still to take effect. With no equivalent increase in pupil numbers in 2004/05 and 2005/06, the effects are likely to be felt over the next two years. Based on the assumption of a minimum increase of 2.5% per pupil in EFSS and assuming no increase in pupil numbers, Table 2 summarises the anticipated increase in the schools block FSS over the next two years compared with the reduction in damping that results.

Table 2: Estimated increase in schools FSS 2004/05 and 2005/06