Contact: Jon Pittam, ext 7400

1. Summary

1.1 This report sets out the current projection of the outturn for 2003/04, prior to work commencing on producing the final accounts for 2003/04, and provides an update on budgetary issues, mainly as a result of the Chancellor of the Exchequer's recent budget. The following decisions are sought:

· that no specific action is required on 2003/04's projected outturn in advance of the consideration of the final accounts in June

· to note the implications of the Chancellor of the Exchequer's budget for the County Council's indicative budget plans for 2005/06 and 2006/07

· to send a letter from the Leader on behalf of the County Council thanking the officers of the Council involved in the Dibden Bay inquiry for their considerable efforts.

2. Reason

2.1 Budget monitoring reports are submitted regularly to the Cabinet, to review whether any action is required to deal with variations between planned and actual spending. The Chancellor of the Exchequer's recent budget announcement will enable the assumptions in the County Council's financial plan for 2005/06 and 2006/07 to be reviewed. Consideration of the report supports all the aims of the Corporate Strategy.

3. Other options considered and rejected

3.1 Not applicable.

4. Conflicts of interest declared by the decision maker or Executive Member 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: (signature) Date: (date of decision)

Councillor T K Thornber

Contact: Jon Pittam, ext 7400

1. Introduction

1.1 This report sets out the current projection of the outturn for 2003/04, prior to work commencing on producing final accounts for 2003/04. The report also provides an update on a number of issues affecting the County Council's medium term financial planning for 2004/05 to 2006/07, in particular arising from the Chancellor of the Exchequer's recent budget announcement.

1.2 Service cash limited spending in 2003/04 is likely to be slightly below the revised budget, mainly because of a reduction in the projected overspending on Education. Underspendings against non cash-limited expenditure of around £2.1m are anticipated, though there remain some outstanding issues to be resolved in closing the accounts which could reduce the scale of the eventual underspending.

1.3 The Chancellor's March 2004 budget contained no new spending proposals affecting the County Council's 2004/05 budget, although the announcement of a one-off payment to pensioners aged over 70 of £100 towards their council tax bills will more than cover the increase in council tax for most older pensioners in 2004/05.

1.4 Government announcements relating to the Spending Review 2004, the public sector efficiency review, and the introduction of the local authority business growth incentive scheme, will affect the indicative budget plans for 2005/06 and 2006/07 approved in February.

1.5 Budget monitoring and reviewing budget plans for future years support all the aims of the Corporate Strategy:

· Maximising life opportunities

· Stewardship of the Environment

· Achieving economic prosperity

· Building strong and safe communities

· Improving services

· Developing councillors and staff.

2. 2003/04 Budget monitoring - Service cash-limited expenditure

Education

2.1 The revised budget was based on a projected overspending of £1.0m in 2003/04, mainly as a result of pressure on budgets relating to special educational needs and excluded pupils. The Cabinet agreed that the Education budget for 2004/05 should be constructed on the basis that the overspending would not be carried forward to 2004/05, providing continued efforts were made to keep the overspending to a minimum. The latest Education monitoring report, based on spending to the end of January, indicates some success in bringing down the projected overspending to £734,000, mainly as a result of lower spending on home to school transport and lower take up of early years places than estimated. Management action has continued to limit the extent of any overspending at the year end.

Environment

2.2 Spending is expected to be close to the cash limit following some further allocations made for highway maintenance in the revised budget to utilise projected savings on management and support services.

Policy and Resources

2.3 The revised budget was set at the cash limit although savings of £117,000 had still to be identified. The latest monitoring report indicates that spending is likely to be contained within the cash limit and that a small underspending of £131,000 is projected.

Recreation and Heritage

2.4 Recreation and Heritage's outturn is also expected to be very close to the cash limit.

Social Services

2.5 Successive budget monitoring reports have indicated that management action taken to reduce budget pressures in 2003/04 is being successful in bringing projected spending closer to the cash limit. The last monitoring report reported to the Executive member for Social Care in February indicated a budget pressure of £1.3m at the end of December 2003, but identified management actions to contain £1.1m of that pressure. This is before considering a possible transfer of £0.5m of unallocated capital programme provision to increase the revenue budget cash limit. Good progress has been achieved in implementing the plans contained in the report to limit spending to the cash limit.

3. 2003/04 Budget monitoring - Expenditure outside service cash limits

Business rates

3.1 Further success has been achieved by the Estates Practice in appealing against business rate valuations. A number of refunds have recently been received on library premises some dating back to 1995, and an underspending of £0.4m is anticipated.

Capital financing costs and interest on revenue balances

3.2 Though base rate increased by 0.25% to 4% in February, the anticipated upward trend in short term interest rates has not had a major impact in 2003/04. Meanwhile cash flow trends have continued to be favourable and interest savings of around £1m are forecast.

Winter maintenance

3.3 This winter has been colder than the last four years average on which the budget is constructed, including periods of snowfall in January and February. As a result, the cost of snow clearance and salting is likely to exceed the budget by approximately £800,000.

Waste management contract contingency

3.4 Waste volumes have fallen since the corresponding period last year, by 2.5% for household collections and by 4.7% for waste recycling centre collections. The contingency had been calculated however on the assumption that waste volumes would continue the upward trend of recent years. A saving against the contingency of up to £1.3m is forecast as a result of lower waste volumes.

Hampshire Fire and Rescue authority (HFRA)

3.5 The HFRA has issued a revised levy for 2003/04 of £41.5m, £625,000 higher than the original levy for 2003/04. However further additional spending as a result of higher levels of operational activity was also forecast, and contingency provision of £161,000 was made for the County Council's share of the projected higher spending. The latest monitoring of the HFRA's budget suggests that some offsetting underspendings are likely to occur and that therefore the contingency provision may not be required.

Insurance

3.6 The contribution to or from the insurance provision included in the final accounts is based on the value of claims paid in the year and the assessed value of outstanding liabilities. This has still to be assessed at the year end. Trends in employers and public liability claims during the year have been generally encouraging but a further major school fire has occurred so that fire reinstatement costs arising from fires in 2003/04 are again likely to exceed the `premium' charges included within service revenue budgets.

3.7 A decision on the level of the insurance reserve carried forward into 2004/05 to reflect the value of outstanding fire reinstatement work will need to be made when the final accounts are reported and this will have a bearing on the final revenue account position.

Revenue contributions to capital

3.8 The overall capital financing position in 2003/04 has still to be finalised. Capital payments are forecast to be close but possibly slightly below the revised forecast of £159.6m for 2003/04. However in view of the planned use of £9.3m from the capital reserve to supplement revenue contributions to capital, planned revenue contributions to capital are likely to be required in full in 2003/04.

Summary

3.9 Latest monitoring of the 2003/04 revenue budget indicates a generally satisfactory position, with budget pressures in Education and Social Services being managed successfully and despite the effects of a colder than average winter, a net underspending of £2.1m being forecast on budgets outside service cash limits. Nonetheless there are outstanding issues relating to insurance and the financing of the capital programme, which could reduce the scale of the projected underspendings. It would therefore be prudent to await the reporting of the final accounts in June before making any decisions arising from 2003/04's outturn.

4. Budget update

2004/05 budget

4.1 Unlike recent Budgets the Chancellor of the Exchequer's budget announcement on 17 March contained no new spending announcements relating to national priorities within local authority budgets for the new financial year. However the Government announced that all households containing one or more persons aged 70 or over would receive a £100 payment in 2004/05 to help with their council tax bills. Though there is no guarantee that this payment will continue beyond 2004/05, it more than covers the increase in overall council taxes in Hampshire in 2004/05 except for households with two or more persons in the top two council tax bands, bands G and H.

4.2 The recognition of the impact of increases in council taxes at well above the rate of inflation on pensioner households is welcomed. However this is essentially a short-term measure and still requires the Government to deal with the more fundamental issues of reform of the council tax and benefit system and the overall balance of local authority funding.

Repairs to heat damaged roads

4.3 Since the capital programme was prepared and as announced at the budget meeting of the County Council, the Government has agreed to support borrowing to finance additional capital expenditure of £1m in 2004/05 on repairs to heat damaged local roads in Hampshire. The overall national allocation was £14.2m and was allocated on the basis that up to 15% of the maintenance element within the Local Transport settlement could be deployed to fund these repairs, with a supplementary allocation of supported borrowing to meet any excess. The County Council has been allocated the maximum amount available on the basis of its proposed programme of £3m.

Release of contingency sums

4.4 The County Council's budget for 2004/05 approved by the County Council on 25 February includes provision of £6.7m for new developments, which were included within the contingency provision. The release of these sums from the contingency is subject to approval arrangements which are set out in the Leader's letter to Cabinet colleagues of 5 April 2004 (Appendix 1).

Community strategy

4.5 The proposals in the budget are closely linked to the themes and priorities in the community strategy and Appendix 2 highlights the linkages.

2005/06 and later years

4.6 The remainder of the report deals with the most significant elements of the Chancellor's Budget statement for local authorities

· the preview of the 2004 Spending Review

· the Government's public sector efficiency review

· the introduction of the Business Rate Growth Incentive scheme.

4.7 The Budget Statement set the overall framework for the 2004 Spending Review and announced in advance details of local authority formula spending share control totals for Education and Children's Social Services. The overall spending review outcomes will be announced in the Summer. The limits for the 2004 Spending Review allow for:

· no increase in 2005/06 spending plans above the level set in the 2002 spending review

· current spending to increase by an average of 2.5% in real terms in 2006/07 and 2007/08 in line with the minimum assumed rate of economic growth

· public sector net investment to rise from 2% to 2.5% of GDP by 2007/08.

4.8 It is likely that real terms increases have been calculated on the basis of the 2% inflation target for the consumer prices index (CPI).

4.9 Because of the priority the Government attributes to education and skills as well as to health (for which spending plans until 2007/08 have already been agreed), firm spending plans have been agreed in the budget for the Education and Skills departmental expenditure limit and for Education and Children's Social Services formula spending shares. The relevant increases are as follows:

4.10 In real terms, the average increase in total Education spending from 2004/05 to 2007/08 is estimated at 4.4% compared with 6% for the 2002 Spending review period 2002/03 to 2005/06.

4.11 In addition, the Government has announced that funds for early education and childcare will rise by £669m between 2004/05 and 2007/08 an annual average real growth rate of 17.3%, designed to deliver a children's centre in all of the 20% most disadvantaged wards in England by 2008. There are five wards in Hampshire within this classification.

4.12 An initial view of the implications of the Spending Review announcement in the budget is as follows:

· the slow down in the rate of growth of public spending in 2006/07 and 2007/08 is less severe than earlier statements by the Chancellor had suggested

· despite the smaller increase in overall Education spending than in the previous spending review, the rate of increase in Education FSS in 2006/07 and 2007/08 is at a similar level to 2004/05 and 2005/06. General funding for schools in 2006/07 and 2007/08 is being given a relative higher priority within Education spending than in the recent past, when much of the increase was focussed on specific grant and capital approvals

· whether Hampshire will benefit in the short term is less clear because Hampshire's current Education FSS entitlement is below the floor and is protected by transitional damping. The spending review announcement increases the likelihood that Hampshire's damping will have been eliminated by 2007/08.

4.13 The overall implications of the 2004 Spending Review will not be clear until the summer and given the higher increases already announced for Health, Education and Children's Social Services, much smaller increases than 2.5% in real terms can be expected for other services.

Efficiency Review

4.14 The Government plans to ensure that the rate of increase in spending on `front line services' is maintained in 2006/07 and 2007/08 by setting a target of 2.5% efficiency gains across the public sector, which it believes can be achieved in the following areas:

· procurement savings by greater use of shared purchasing strategies, electronic purchasing and improved supplier management

· the corporate `back office' by adopting existing best practice, simplifying processes and procedures and standardising and sharing support functions

· transactional services can be made more cost effective by maximising the benefits of investment in more efficient communication channels such as web interfaces and call centres.

4.15 The County Council is already targeting efficiency savings in all three of these areas in conjunction with its investment in SAP through the Enterprise Project. A further report will be made on the Gershon efficiency review when its implications are known for local government. But gains will also arise from economies of scale which this County Council has previously exploited as well.

Business Rate Growth Incentive Scheme

4.16 The Government issued a consultation paper last Autumn on a proposed scheme to give local authorities a direct financial incentive in business creation in their areas, by allowing them to retain a proportion of increases in local business rates for local purposes, from 1 April 2005. Currently all business rate revenues are pooled nationally. The Cabinet considered the consultation paper at its meeting in October and though supportive of the principle of giving local authorities direct access to business rate revenues, had reservations about the impact of the scheme on the more fundamental objective of returning business rates to local authority control.

4.17 The Government has now confirmed the intention to introduce a scheme from 1 April 2005 and has published details of the baselines that will apply for individual billing authorities which are based on categorising authorities into seven groups based on their average growth in business rates. An authority will need to achieve its baseline before retaining any part of increased business rate revenues. The Hampshire districts have been classified as follows:

4.18 This approach therefore places heavy reliance on the historic growth rates in business rate revenues as a measure of potential for further growth in business rates.

4.19 Further proposals on floors, ceilings and on the sharing of increases between the floor and the ceiling are expected over the next four months. The basis of sharing locally retained business rate revenues in two tier areas has also still to be determined. The Government expects the scheme to result in around £150m being retained locally in 2005/06 rising to £450m by 2007/08. A further report will be brought to the Cabinet once the details of the scheme have been published and its impact on the budget strategy can be more clearly assessed.

Recommendation

1. That no specific action is required on the projected outturn for 2003/04 in advance of the consideration of the final accounts in June

2. To note the implications of the Chancellor of the Exchequer's budget for the County Council's indicative budget plans for 2005/06 and 2006/07.

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

2004/05 budget - release of contingency items

1. You will recall that Cabinet on 12 February 2004 agreed that the growth items set aside in the budget would be allocated to contingency and released subject to further reports to me on the business case and performance improvements expected. (Recommendation 8 and 9, and Table 14 of the County Treasurer's report refers).

2. You may also remember that this approach was adopted because:

· precise amounts in many cases were not certain or specific (eg costs of restructuring Personnel and Training)

· some allocations require more definition on how the money will be spent and the precise outcomes expected (eg Recreation and Heritage)

· other sums are subject to agreement with external partners (eg affordable housing)

· some sums may only have a part year impact, or require set up costs, because of the lead-in time required (eg accredited community support officers).

3. It would not be appropriate simply to allocate the contingency sum without some further action.

4. For the purposes of good practice, external scrutiny (Audit Commission) and Comprehensive Performance Assessment we need to demonstrate clearly how extra resources are:

· linked to the corporate strategy and our four short-term Cabinet priorities

· expected to result in measurable improvements in performance and how these improve outcomes.

5. Not all the items in the contingency will require full business case analysis to demonstrate this. Having consulted the County Treasurer, the following approach is suggested:

· Executive Member, Environment receives a short report on:

- Environment public transport subsidy (£0.5m)

- local roads in Fareham (£0.1m)

and determines its allocation against the bullet points in (4) above.

· Executive Member, Recreation and Heritage similarly receives a report to determine the allocation against the same criteria for library opening hours and other initiatives (£0.3m)

· Executive Member, Policy and Resources, similarly receives and agrees reports on:

- pay and benefit review (£0.2m)

- personnel and training restructuring and pay and benefits transitional investment costs (£0.8m)

- IT and e-government investment (£0.5m)

- Grants to voluntary organisations (£0.3m).

6. Cabinet will receive reports to release the contingencies for the following items in April or May when the schemes have been worked up:

· accredited community support officers (£1m)

· short-term Cabinet priorities (modern apprenticeships etc, £0.3m)

· affordable housing schemes (£0.9m)

· targeted business improvement plans for children's services (£0.4m) and the corporate start up costs for Every Child Matters (£0.2m).

7. This will then provide the necessary audit trail to link resources to the corporate strategy and performance improvements expected.

8. As indicated earlier, this is a key feature of future assessment by the Audit Commission and in updating the Comprehensive Performance Assessment. It is therefore necessary for all Executive Members to review their budget plans and achievement against them during 2004/05 for all the proposed growth and redeployment proposals (these were set out in Appendix 4 of the Cabinet budget report on 12 February 2004).

Appendix 2

Linkages between Community Strategy Priorities and Themes with growth approved in 2004/05 budget