Contact: Jon Pittam, ext 7400

With the concurrence of the Chairman under Section 100 (B) (4) (b) of the Local Government Act 1972 this matter is included on the agenda to report the effect of the updated consultation announced on 10 December 2003.

1. Summary

1.1 The Chancellor of the Exchequer announced on 10 December 2003 that an extra £340m would be added to the provisional local government finance settlement 2004/05.

1.2 This results in a £7.5m increase in grant for the County Council which reduces the projected council tax increase from 6.7% to 4.7%.

2. Revised proposals

2.1 The additional support announced by the Chancellor is unprecedented and must reflect concern at the potential underlying council tax rises for 2004/05. The extra support will be distributed to local authorities as revenue support grant and will not be ring-fenced in any way.

2.2 Local authorities with education and social services responsibilities will now have a grant floor of 4% and a ceiling of 7.5% (compared with 3.5% and 5.8% in the provisional settlement). Those authorities already at the ceiling have gained most from the extra £340m, with a further grant increase of 1.6%. Those at the floor, like East Sussex and West Sussex receive little or no benefit. Hampshire County Council remains in the middle between the floor and the ceiling and receives the full effect of the £340m, less the scaling factor applied to the grant increases received by the "middle authorities" to help pay for the floor. Hampshire's additional grant increase is 1.2%, or £7.5m.

2.3 The floor for shire district councils has been raised from 2.2% to 3%, but police and fire authorities do not receive any more formula grant over that announced in the provisional settlement.

2.4 The impact of these changes on grant distribution between regions and classes of authority is illustrated in revised graphs 5 and 6.

2.5 There have been some changes in the rank position of individual County Councils, and Hampshire now has the 5th lowest grant increase amongst counties, as shown in the revised graph 7.

2.6 The amount of grant has increased but there are no changes to the Formula Spending Share (FSS) and there is no increase in the amount expected to be passported to the Schools budget.

2.7 Because of the scale of the change, the consultation period has been extended by a week to 9 January 2004. Detailed allocations to individual authorities may still change as data on council tax base and capital allocations are updated. The proposed response to the consultation in the previous report will now need to be amended to reflect this increase in grant.

2.8 The Minister for Local Government, Regional Governance and Fire (Nick Raynsford) in his statement said:

"Given the scale of the investment in local services and the scope for efficiency improvements in local government, the Government believes next year local authorities must aim to deliver council tax increases in low single figures. Unreasonably large council tax increases will neither be justified nor acceptable.

So the Government is prepared to use targeted capping powers next year if that proves necessary.

When considering whether to cap authorities, the Government will look at a range of factors including the level and increase in the council tax and the level of the budget. In areas where there is a combined fire authority, budgets for 2004/05 will not be comparable with 2003/04 because the combined fire authority is precepting for the first time in 2004/05."

2.9 The Office of the Deputy Prime Minister (ODPM) has also issued a consultation document which sets out the proposed methodology and the notional budget figures as a result of the change in Fire. The approach and the figures are the same as anticipated in the previous report, the budget fire levy adjustment is £40.9m for 2003/04 (see Table 5) and the adjusted total budget for 2003/04 is then reduced to £991.2m. However the adjusted budget for capping purposes only takes account of the fire adjustment and not those for flood protection and quality protects which makes the total £993.9m. The County Treasurer will confirm this higher figure with ODPM as the `proposed alternative notional amount' to be used for capping purposes as far as the County Council is concerned (although it is very unlikely that the Government will wish to consider capping the County). Otherwise the total adjusted base for capping for 2004/05 will be £2.7m to low.

2.10 It should be noted that capping of the Fire Authority is a significant risk based on the Authority's provisional budget plans and the Government's `proposed alternative notional amount' for the Fire Authority, which is as previously calculated in Table 5.

3. Revised Hampshire figures

3.1 The updated grant figures are shown in the revised Table 3:

Table 3: Change in grant and council tax support implied by Government in the 2004/05 provisional settlement

	2004/05 2nd consultation	Change from 2003/04	Change from adjusted 2003/04
	£m	%	%
Government grant	332.1	12.4	14.5
Non domestic rates	313.8	-5.7	-2.0
Revenue Support Grant	645.9	2.9	5.9
Council tax payer	361.6	-1.4	3.9
Formula Spending Share	1007.5	1.3	5.2

3.2 The table shows that:

· grant is now £645.9m, £7.5m more than the previous figure of £638.4m

· the total grant increase is now 5.9%, more than the FSS increase of 5.2% which remains unchanged

· the Government now expects the council tax payer to contribute a further 3.9% (previously 6.1%) towards the County Council's spending increase in line with the 5.2% rise in FSS.

3.3 There are no changes in the budget forecast as a result of this additional grant and it is assumed that the Cabinet will wish to use the extra grant to reduce its projected council tax rise in line with the Government's expectations for an increase in low single figures - which presumably means just under 5%.

3.4 The revised projection as the result of the additional grant is now for a 4.7% council tax rise compared with 6.7% previously. The budget increase remains the same at 5.7% and is now below the grant increase of 5.9%. Table 11 is updated as follows:

Table 11 : Effect of changes on 2004/05 budget

3.5 The formula grant changes still result in an estimated £8m grant loss. There are no changes to FSS or to the grant formula, and the additional £7.5m now announced is a recognition by the Government that the strain on the council tax needs to be reduced. It has changed its assumed national council tax (ANCT) assumption to bear more of the cost of the 2004/05 FSS increase from central rather than local taxation. The current spending plan projections for 2005/06 imply a bounce back to a 6% or 7% council tax rise unless a similar injection is made to grant support in 2005/06 by an equivalent reduction in ANCT.

3.6 Similarly the table showing the projected 2004/05 council tax rise can now be updated for the revised forecast.

Table 12: Projected 2004/05 council tax rise

3.7 The revised table 12 shows that:

· the council tax rise of 4.7% is broadly consistent with the Government's assumed increase of 3.9% in council tax income at Band D for spending at FSS

· the County Council's increase in its precept results in a council tax of £840.15 for 2004/05 which is an increase of 4.7% over 2003/04. This is based on its underlying budget increase after the cessation of the Fire levy for 2004/05. It is this increase which will be relevant for all comparisons and for capping purposes as it is the tax increase resulting from the County Council's budget decisions for 2004/05.

3.8 There appears to have been some confusion about the effect of the Fire Authority becoming a precepting body from 1 April 2004. This simply means that £42.17 of the County Council's 2003/04 council tax will no longer be required by it in 2004/05. The sum will still be collected by the district councils and paid over to the Fire Authority in 2004/05 instead of to the County Council. There will be no windfall revenue to the County Council in 2004/05 (£42.17 on Band D is equivalent to income of £20m for the County Council in 2003/04), nor will any other adjustments be made by Government to grant in 2004/05 or 2005/06.

3.9 After adjusting for the Fire separation, Hampshire's precept on the district council still accounts for 75% of the council tax payable. Therefore the overall increase on each council tax bill in the Hampshire County Council area will be heavily influenced by the County Council's precept. This is illustrated in the new table below, making assumptions about Police and Fire increases and at this stage assuming a notional 5% increase on average for district councils.

Table 12a: Provisional council tax bill for 2004/05

	2003/04 Band D	2003/04 Adjusted Band D	2004/05 Band D	Increase
				Actual	Apparent
	£	£	£	%	%
Hampshire County Council	844.56	802.39	840.15	4.7	-0.5
Hampshire Police Authority	97.29	97.29	106.81	9.8	9.8
Hampshire Fire and Rescue Authority	0	42.17	51.53	22.2	-
Average District and Parish	141.51	141.51	148.59	5.0	5.0
Average Band D in Hampshire	1,083.36	1,083.36	1,147.08	5.9	5.9

3.10 Table 12a shows that:

· the overall bill, subject to final decisions by all the authorities, is currently projected to go up by just under 6%

· this is more than the County Council increase of 4.7% because of the higher projections for Police and Fire in percentage terms

3.11 However because the amount paid over to County Council in 2003/04 included the Fire levy there will be an apparent reduction of 0.5% in the Council Council's bill. This is not a real reduction for the reasons explained.

3.12 The Government have now issued the statutory instrument which confirms the wording required on the council tax bills for 2004/05. "The figures comparing the amount of council tax calculated by Hampshire County Council for your dwelling for this financial year and the previous financial year are not direct comparisons because this year the combined fire authority has issued a precept which is shown separately on your bill."

4. Audit Commission

4.1 The Government's decision to increase its grant for 2004/05 came a few days after the Audit Commission's review of council tax increases in 2003/04.

4.2 The Audit Commission noted that the average increase of 12.9% in council taxes in 2003/04 was the highest since council tax replaced the community charge (poll tax) in 1993/94. The Commission identified a variety of factors for the increases but concluded that there were two principal reasons:

· spending by councils went up by more than had been allowed for in the grant settlement

· the `gearing' effect which nationally results in a 4% council tax rise for every 1% councils added to spending above the fixed grant increase.

4.3 The Commission also reported that "grant redistribution - which moved grant from London and the South to the Midlands and the North - led to some councils putting up council tax more than others. We found a clear association between the size of grant increase a council received and their increase in council tax".

4.4 Recommendations for changes for councils include:

· to improve processes for delivering efficiencies in service delivery

· to carry out longer-term financial and service planning

· to ensure that council appointees to non-elected precepting bodies (ie Police and Fire) exercise their duty to protect taxpayers' interests effectively

· to communicate and consult with the public more effectively about council tax and spending decisions.

5. Conclusions

5.1 The additional grant is designed to moderate the council tax rise to "low single figures".

5.2 It does not affect the budget projections, budget guidelines or decisions sought on the report which was circulated prior to the announcement on 10 December 2003.

5.3 Adjustments to grant and council tax are covered in this supplementary report.