Appendix 9

Budget Plans for 2006/07 and 2007/08

1. Introduction

1.1 This appendix reviews the budget plans for 2006/07 and 2007/08, which are based on forecasts produced in conjunction with the preparation of the 2005/06 budget.

1.2 The purpose of these plans is to:

· provide a medium-term resource framework for the development of service plans

· identify risks and uncertainties which need to be reflected in setting firm spending plans for 2005/06 and agreeing the level of reserves and balances

· identify major issues to provide the focus for member consideration and public consultation in advance of the 2006/07 budget

· set a basis for the prudential indicators for 2006/07 and 2007/08, dealt with in Appendix 13 of this report.

1.3 The Government published its Spending Plans for 2006/07 and 2007/08 last summer in SR2004. However, despite the Government's proposals to introduce a firmer basis for three-year financial planning from 2006/07, which are discussed elsewhere on the agenda, in the short term the basis for planning ahead for 2006/07 and 2007/08 is more than usually uncertain:

· The Government revised its assumptions about the provision of grant support to local authorities in 2005/06 in December, only four months after the publication of the spending review. The additional grant of £436m made available to local authorities in 2005/06 was broadly a continuation of the additional support of £340m in 2004/05, but was again a one-year decision. In the absence of any indication that this additional grant will continue, budget plans for 2006/07 have to be made on the basis that a larger increase in council tax has been merely deferred from 2005/06 from 2006/07. On this basis the Government's spending plans imply an increase in the council tax requirement of 7.4% in 2006/07, but given the history of the last two years this is an uncertain basis for budget planning.

· The Government's spending review contained Formula Spending Share (FSS) and grant totals for 2006/07 and 2007/08 which assume the continuation of the current basis of school's funding. However the Government is proposing to move to a system of specific grant funding of the school's block from 2005/06, which is bound to create turbulence within the local government finance system. It raises issues of how the Government will deal with the competing objectives of stability and equity during the transitional period, whether the distribution of grant between tiers of authority will change to reflect the impact on the balance of funding and how planned increases in Government grant and council tax contribution in 2006/07 and 2007/08 will be affected by the transfer of the school's block out of FSS.

· The current formula freeze ends in 2006/07. Though the County Council is likely to benefit from the updating of census related data from 1991 to 2001, which has been deferred during the freeze, other less favourable formula changes might also be introduced.

· The outcome of the Lyons review on the balance of funding and the revaluation of council tax is due to be implemented from 2007/08, so that, factors other than the County Council's plans for 2007/08 will have a major impact on local taxation and are impossible to forecast at this stage.

1.4 Consequently, the forecasts for 2006/07 and 2007/08 are purely indicative.

2. Basis of 2006/07 and 2007/08 indicative budgets

2.1 Indicative budgets for 2006/07 and 2007/08 have been prepared within the framework of the County Council's current medium-term financial planning strategy, which is summarised in Annex 1. In addition, a number of other specific assumptions have been made.

Formula Spending Share (FSS) / Government grant

2.2 Projections for 2006/07 and 2007/08 are based on the following assumptions:

· that the County Council's FSS for each of the service blocks will increase in line with the control total increases announced in the 2004 spending review. This assumes that the effect of data and methodology changes are broadly neutral

· no allowance has been made for future funding and function changes, other than the major change in school's funding. Spending forecasts are presented net of specific grant as Government departments have not in general provided control totals for specific grants beyond 2005/06.

· it has been assumed that the calculation of floors and ceilings for 2005/06 will have regard to the effect of excluding school's funding from FSS and that because the County Council's school's budget is above FSS that the County Council is unlikely to be protected by the grant floor. Allowance has been made for continued damping of the Local Authority (LEA) FSS on the basis of a minimum increase of 2.5% in 2006/07 and 2007/08

· the increase in Government grant has been calculated on the assumption that the increase in the council tax requirement in 2006/07 will be 7.4%, based on the spending review increase of 5.5% adjusted for the one-off increase in grant in 2005/06, and 5.1% in 2006/07 based on the spending review

· no account has been taken of possible changes in the distribution of Government grant between tiers or of the effects of council tax revaluation and the balance of funding review.

2.3 Inflation assumptions in 2006/07 and 2007/08 are based on the medium term pay agreement for teachers and local government staff costing 2.95% in 2006/07 with an equivalent pay increase assumed in 2007/08. Allowance has been made for a phased increase in employers' contributions to the Local Government Pension Scheme on the basis of the provisional outcome of the actuarial review, resulting in an employers' contribution of 295% in 2007/08. Non pay increases are forecast at 2.5%.

2.4 An earmarked reserve has been established to deal with transitional costs arising from the pay and benefits review and a modernisation, restructuring and efficiency plan reserve is proposed in 2005/06. It has been assumed that any additional costs arising from the pay and benefits review will be accommodated within the existing budget strategy supported by the transitional cost reserve together with a possible allocation from the modernisation, restructuring and efficiency plan reserve.

2.5 The indicative budgets for 2006/07 and 2007/08 include forecasts of variations in the base budget and for both children's and adult Social Services, where robust indications of inescapable demand pressures are unavailable, the forecasts assume continuation of the strategy of passporting increases in FSS. No other allowance has been made for new service developments.

2.6 The forecasts make no allowance for the County Council to
top-up the level of school's funding in Hampshire supported by specific grant.

2.7 No reduction in the budget forecasts has been made in respect of further cashable efficiency savings. It has been assumed that these would either be redeployed within the relevant service or to support budget pressures affecting other services.

2.8 The main increases other than for inflation and Social Services passporting and 2007/08 affect the waste management contract and capital financing costs:

· waste management contract - cost increases of £2.2m per annum in 2006/07 and 2007/08 are estimated, as a result of further increases in landfill tax, increased volumes of waste and increases in the inflation index within the contract

· capital financing costs will continue to increase and Government supported borrowing is increasing faster than the minimum revenue provision for the repayment of debt. Increases are estimated at £3.8m in 2006/07 and £2.2m in 2007/08.

2.9 The forecasts assume the continuation of the policy of phasing in the impact on council tax of losses in government grant. Allowing for the loss of the additional grant received on a one-off basis in 2005/06 and further reductions in LEA damping and phasing in the impact of these losses over three years, the proposed use of the balance of the grant equalisation reserve in 2006/07 and 2007/08 is £7.7m and £4.7m respectively.

3. 2006/07 and 2007/08 projections

3.1 Based on the assumptions outlined in paragraph 2, budget projections for 2006/07 and 2007/08 are set out below:

3.2 In summary, increases in projected FSS, budget, Government, support and council tax are as follows:

3.3 Increases in spending from 2005/06's adjusted budget are estimated at £21.6m and £25.4m respectively, analysed as follows:

4. Issues arising from 2006/07 and 2007/08 projections

4.1 The summary of projected FSS, budget, council tax and grant increases from 2006/07 illustrates the uncertainties surrounding the changes in school's funding. If the Government retains the assumptions about council tax increases contained in the spending review, makes no changes in the distribution of grant between tiers, the likelihood is that the County Council's grant will be lower in 2006/07 than 2005/06, and marginally lower again in 2007/08. This is because the Government will have to support the increase in schools' budgets in 2006/07 and 2007/08 wholly from Government grant and in order to so within existing spending plans will have to divert part of the planned increase in Revenue support grant. The County Council's balance of funding will also change fundamentally from around 60% Government grant, 40% council tax to 80% council tax, 20% Government grant. Though in % terms the gearing ratio between spending and council tax will be much lower, this does not necessarily mean that pressures to increase spending by more than FSS will have a reduced impact on council tax. Every extra £1m of spending will continue to have a council tax impact of about 0.25%, and though the Government's schools passporting policy has restricted local authority budgetary flexibility it has also reduced the pressures on local authorities to increase their schools' spending at a faster rate than FSS.

4.2 The lower increases in FSS in 2006/07 and 2007/08 than in recent years, are partly a reflection of the exclusion of school's funding which continues to be a high government priority but also of the planned lower rate of growth in public spending beyond 2005/06. This particularly affects highway maintenance, for which the national control total is frozen at its 2005/06 level for the following two years, and Social Services. Planned increases in Social Services spending fall to a lower level than in recent years for adult services in 2006/07 (4.0%) and for children's services in 2007/08 (4.6%). The effect in 2006/07 is compounded by the effect of reductions in non-recurring specific grants, as a result of one year increase in grant which formed part of the Government's package to reduce pressures on council tax in 2005/06. There are no major policy or legislative developments or changes in demographic trends which are likely to reduce spending pressures on social care budgets significantly in 2006/07 and 2007/08.

4.3 The implication is that the achievement of efficiency improvements in line with the targets in the Spending Review will become increasingly important not only to demonstrate that effective use is being made of resources, but also as a means of generating savings to enable service levels to be maintained to accommodate a slower rate of growth in public spending. This is a major issue that will need to be addressed not only in the context of the authority's efficiency plan, but also of the County Council's planning and consultation on the budgets for 2006/07 and 2007/08.

Annex 1

Draft medium-term Financial Planning Strategy 2005/06-2007/08