Contact: Jon Pittam (01962) 84 7400; [email protected]

With the concurrence of the Chairman under Section 100B (4)(b) of the Local Government Action 1972, this matter has been included on the agenda to bring the updated Capital Strategy to Members' attention

1 Introduction

1.1 The Cabinet in February, when approving the 2005/06 budget, also approved indicative budget plans for 2006/07 and 2007/08. Subsequently the accounts for 2004/05 have been closed, and the Government has confirmed its intention of proceeding with the introduction of three-year settlements for local government from 2006/07 which will complement Spending Review 2006 (SR2006).

1.2 Work now needs to proceed in developing and consulting on a medium-term financial strategy covering at least 2006/07 and 2007/08. Some parameters are proposed to enable consultation on the medium-term financial strategy and the provisional budget strategy for 2006/07 during this Autumn, and prior to budget guidelines for 2006/07 being set in December 2005.

1 Corporate Strategy and the Council's framework for planning and managing its finances

1.1 The Council's existing budget strategy fully supports the Corporate Strategy and all its aims:

· maximising life opportunities

· stewardship of the environment

· achieving economic prosperity

· building strong and safe communities

· improving services

· developing councillors and staff.

1.2 The strategy also underpins the Cabinets four short-term priorities. Efficiency improvements, workforce planning, assessments of risks, reserves and balances, prudential borrowing and treasury management are all considered fully when setting budgets and closing accounts, and are built into planning and forecasting.

1.3 All business planning is integrated with financial planning and additional proposals are subject to business cases and assessment for value for money. Further consideration will be given to a corporate business plan within the corporate strategy.

1.4 It is assumed that the Cabinet will continue with its existing budget strategy as a base, making any changes in allocations in accordance with its policies and priorities.

1.5 Financial management policies are reviewed twice yearly and were last reviewed within the report on the final accounts considered by Cabinet on
27 June 2005, (Item 8 Appendix 8) so are not repeated here, but will continue to inform:

· financial planning

· capital programming

· provision of financial services.

1.6 The Council's overall aims in its medium-term financial strategy are low council tax and high quality services (with council tax in lowest quartile of county councils and services at upper quartile)

1.7 Account is also taken of MORI and other stakeholder consultation exercises in setting priorities for improvement or reallocation of resources and these will be built into the strategy as it is developed into firmer plans for 2006/07. Similarly efficiency improvements and tough decisions on spending pressures, such as reviewing bus services, will affect final decisions on budget guidelines.

2 Indicative budget plans 2006/07 and 2007/08

2.1 Appendix 1 summarises the indicative budget plans for 2006/07 and 2007/08, compared with 2005/06. The budget projections are net of specific grant, as in most cases specific grant control totals have only been announced for one year, and the projections therefore focus on the decisions that the County Council makes on the level of spending and the allocation of resources between services. The proposed transfer of Schools funding, as defined by the Schools block within the Education formula spending share (FSS), to specific grant in 2005/06 therefore has a profound effect upon the size of the budget determined by the County Council's spending decisions, as represented in the budget requirement.

2.2 The assumptions underlying the resource projections are as follows:

· Government support has been forecast on the basis of the Government's declared position that the additional Government grant of £636m agreed by the Chancellor of the Exchequer in December 2004 is for 2005/06 only and that therefore the increase in council tax requirement in 2006/07 for increased spending in line with the Government's spending plans will increase significantly to 7.5%

· the Government will also have to direct part of the planned increase in revenue support grant (RSG) in 2006/07 and 2007/08 to provide funding for above average increases in dedicated schools grant (DSG)

· the combination of these factors suggests that unless the Government decides to redistribute grant between local authority tiers in 2006/07, the County Council's general level of Government support will fall in 2006/07 and 2007/08

· by comparison the Local Government Association (LGA) has shown that the relevant figures nationally for 2006/07 are:

	SR 2004 original	SR 2004 after RSG 2005/06	SR 2004 after RSG 2005/06 and DSG taken out
	%	%	%
FSS increase	5.5	5.6	4.5
Grant increase	5.5	4.7	1.7
Implied increase in locally financed element (council tax)	5.5	7.5	7.5

· the salient point is that after schools funding is moved to specific grant in 2006/07, the grant increase for all remaining services is only 1.7%, leading to national council tax rises of 7.5% (unless Government put more grant in to the pot as a result of the implications of its own policies)

· the current freeze on changes to the formulae used in distributing FSS between authorities ends in 2006/07. A consultation paper on possible changes to formulae is due to be issued this month. Irrespective of formula changes, the updating of data also has an impact on FSS distribution and consequently on the distribution of Government grant between authorities. For forecasting purposes, it has been assumed that there will be no significant distributional changes arising from formula or data changes and that therefore the County Council's FSS for each of the service blocks will increase broadly in line with the control total increases announced in SR2004. Given the experience of formula changes in 2003/04, this is an optimistic assumption. The table below compares the projected increases with the actual increases in the County Council's FSS for 2005/06

	% increase
	2005/06 Actual	2006/07	2007/08
Education
Schools	4.9	Not applicable
LEA	3.5	2.5	2.5
Social Services
Children	6.6	7.5	4.6
Adults	6.4	4.0	4.4
Highway Maintenance	-1.4	-	-
Environmental, Protective and Cultural Services	2.9	3.5	3.7
Capital Financing	18.3	6.0	6.0
Total	5.3	4.0	3.8

· no account has been taken either of the possible outcome of the Lyons Review on the structure of local taxation or of the effects of council tax revaluation. The latter will certainly have an impact on grant distribution and council tax increases in 2007/08 under the current funding system.

2.3 Spending projections have been proposed within the context of the County Council's current medium-term financial planning strategy approved by the Cabinet in February. Specific assumptions are as follows:

· inflation assumptions are based on pay increases of 2.95% in 2006/07 and 2007/08, in line with the national local government pay increase agreed for 2006/07. Non pay increases are forecast at 2.5%. Allowance has been made for the statutory requirement for a phased increase in employers' contributions to the local government pension scheme. This is based on the outcome of the 2004 actuarial review and assumes that the Government's decision to revoke the new regulations introduced in April 2005 will either be matched by other changes having an equivalent impact on the cost of the scheme or additional Government funding

· cost projections for services make no allowance for the outcome of the pay and benefits review, but allow for a continuing contribution of £8.7m to the modernisation, restructuring and efficiency reserve, to cover: the outcome of the review; transitional costs of implementing the Children Act; other potential legislative pressures; as well as investment required for modernisation, restructuring and efficiency

· further use of the grant equalisation reserve to phase in the impact of losses in Government grant in 2006/07 and 2007/08 are assumed. Allowing for the loss of the additional grant received on a one-off basis in 2005/06 and further reductions in local education authority (LEA) FSS damping, and phasing those losses over the three years, results in use of £7.7m of the reserve in 2006/07 and a further £4.7m in 2007/08, leaving £2.6m for use in 2008/09

· the spending projections allow for forecast increases in the base budget arising from implementation of the capital programme, increased waste volumes and the impact of non-recurring spending in accordance with current policies. For both adult social care and children's services, where robust indicators of inescapable demand pressures are unavailable, the forecasts assume continuation of the strategy of passporting increases in FSS

· the projections assume that any cashable efficiency savings made against the base budget are redeployed within the relevant service.

3 Updating the three year plan

3.1 Since the preparation of the three year budget plan in February, various events and developments have occurred which will have an impact upon the provisional budget strategy:

· following the appointment of new Directors of Children's Services and Adult Social Care, the budget strategy for 2006/07 needs to be framed in the context of the new configuration of services

· the Government has announced, following consultation, its intention of proceeding with the introduction of three-year grant settlements for local government as a whole, as well as for schools from 2006/07. The initial settlement will be for a two-year period covering 2006/07 and 2007/08, the two remaining years covered by SR2004 and for which therefore Government spending plans are available (or given the uncertainty of revaluation in 2007/08, the first three-year settlement may in practice be just for 2006/07!) The County Council, while supporting the principle of three-year settlements, suggested that 2006/07 was not an ideal year to introduce three-year budget settlements because of other changes taking place or being contemplated in 2006/07 and 2007/08 which would limit the scope to set a firmer financial plan for 2007/08 than under current arrangements. Nonetheless the County Council in order to demonstrate that it is complying with best practice should consider setting indicative budget limits for 2007/08 as well as setting a budget for 2006/07

· the closure of the 2004/05 accounts and the provisional assessment of the results, reported elsewhere on the agenda, of the first local public service agreement provide some additional non-recurring resources in 2005/06 and 2006/07 both at service and corporate level to meet one-off pressures or to phase in savings targets. These may also be required to mitigate the immediate effects of grant loss in 2006/07

· the submission of the 2004/05 backward look and 2005/06 forward look efficiency plans indicate the progress that the County Council is making in demonstrating that efficiency is being improved at least in line with the Gershon review targets. However the majority of the cashable improvements are taking the form of higher costs avoided rather than of savings within the budget that could be redeployed.

4 Issues for provisional budget strategy

4.1 The key issues that were highlighted in the indicative budget plans for 2006/07 and 2007/08 remain largely unchanged:

· the rate of growth in planned public spending is slowing in 2006/07 and 2007/08 and this is reflected in lower planned increases in local authority spending. This is particularly evident in lower rates of increase proposed in adult social care from 2006/07 and in children's social services and adult social care from 2007/08 as compared with rates of growth in recent years. The loss of one-off additional specific grants in 2005/06 for both children's services and adult social care will also need to be accommodated. The highway maintenance FSS control total is frozen in 2006/07 and 2007/08 at the 2005/06 level in cash terms

· the effect of the Government's decisions to provide additional one-off grant to local authorities in 2004/05 and to continue it in 2005/06 is to defer council tax increases that would otherwise have occurred in 2004/05 and 2005/06 to 2006/07, unless the Government agrees to consolidate the 2005/06 increase in its spending plans

· if the Government does not consolidate the 2005/06 grant increase, taken in conjunction with the schools funding transfer, there is likely to be a reduction in Government support payable towards Hampshire's budget requirement in 2006/07, in contrast with an increase in council tax well above the rate of inflation

· there are no major policy or legislative developments or changes in demographic trends which are likely to reduce spending pressures on the County Council in 2006/07 or 2007/08. Quite the contrary, the expectations associated with the implementation of the Children Act, the publication of the adult social care green paper and the extension of local area agreements to include the County Council all involve improved services and/or extended choice. Implementation of the single status agreement for employees and maintaining the solvency of the pension fund also involve an upward pressure on costs in the short-term

· the Gershon efficiency savings targets are intended both to demonstrate that local authorities have made effective use of the additional resources allocated in recent years, but also to identify savings to be released to support improvements in front-line services. Unless a significant proportion of the cashable savings are useable, achievement of the Gershon targets does not necessarily ease the pressures on the budget.

5 Parameters for provisional budget strategy

5.1 The background to next year's budget is therefore difficult and there remain uncertainties about the level of Government support which are unlikely to be resolved before the grant settlement in December 2005. Nonetheless given the issues involved it is clear that the County Council needs to undertake some form of public consultation, as well as consultation with specific stakeholders, before taking decisions on the budget. Some parameters are required both for the purpose of consultation and for reviewing in more detail the budget options available to the County Council, in the context of the corporate strategy.

5.2 Past experience suggests that grant changes in 2006/07 will not favour the County Council and it would again be prudent to aim for a relatively high council tax rise to mitigate the worst effects. But this may not be acceptable politically and will not be sustainable as far as council tax payers are concerned.

5.3 Capping at or around a 5% council tax rise, may also be threatened.

5.4 However to get below a 5% council tax rise, on these assumptions, may also require reductions in services as well as efficiency savings, to have the required impact over a three-year period.

5.5 Two options for lower spending and council tax options than the base projections in the three year budget plan follow. For 2006/07, the ready reckoner is £4.2m to achieve a 1% variation in council tax.

Option 1

5.6 Restrict increases to base budget only, or alternatively require cashable efficiencies across all services to fund children's services and adults social care spending in excess of the base budget. The LEA increase is likely to be low with the introduction of dedicated schools grant and it is quite possible the base budget increase might exceed the FSS increase.

5.7 Applying this policy in 2006/07 and 2007/08 would result in:

	% Increase
	2006/07	2007/08
Budget	3.4	4.0
Council tax	5.9	4.6

Option 2

5.8 To reduce spending by a further 1% by requiring useable cashable `efficiencies' or other reductions of 1% which would be used to reduce the spending and council tax increase.

5.9 This would result in:

	% Increase
	2006/07	2007/08
Budget	2.4	3.1
Council tax	4.7	3.5

5.10 Budget and council tax rises in 2006/07 from the various options in 2006/07 can be summarised as follows, compared with the 2005/06 increase:

	% Increase 2006/07
	Budget	Council tax
· 2005/06 budget	4.7	3.5
· current strategy, before use of grant equalisation reserve	5.4	8.5
· current strategy, after use of grant equalisation reserve	4.0	6.7
· base budget increases only across all services (option 1)	3.4	5.9
· reduction in spending by a further 1% to produce a council tax rise of less than 5% (option 2)	2.4	4.7

5.11 Service reductions and expectations may also be unacceptable with this move to a lower council tax rise.

5.12 Consultation and provisional planning around these options is therefore necessary before a final strategy and budget guidelines are set by Cabinet in December 2005.

5.13 Options and implications can be explored during the autumn round of meetings between the Leader and Executive members.

5.14 The options can also be referred to the Policy and Resources Scrutiny and Review Committee for consideration.

5.15 Stakeholder meetings could be arranged on the options with business, council taxpayers and residents associations, and with the Hampshire Strategic Partnership, workforce and voluntary organisations.

5.16 The Government and MPs will also need to be lobbied in the Autumn on the underlying position and on expected worsening of the starting point if further adverse formula changes are consulted on over the summer. The County Council is well placed to take these issues up through the Local Government Association or the County Councils Network.

5.17 Further more informed consultation with the public will be necessary this year using a community workshop and the citizens' panel to get views from a complete cross section of Hampshire council tax payers. The website can also be used together with targeted e-mail or letters to opinion formers and users of the council's services.

5.18 It is recommended that the Leader agree with the Chief Executive and County Treasurer over the summer the appropriate consultation arrangements for the Autumn, before decisions are made in the December 2005 to February 2006 period.

6 Equality impact assessment

6.1 An impact assessment has been made on the proposals in the paper and shown that they are not discriminatory.

Recommendations

The recommendations are contained in the summary decision sheet.

Section 100 D - Local Government Act 1972 - background documents

The following documents discuss facts or matters on which this report, or an important part of it, is based and have been relied upon to a material extent in the preparation of this report.

NB the list excludes:

1. Published works.

2. Documents which disclose exempt or confidential information as defined in the Act.

None

Appendix 1

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