Contact: Jon Pittam, 7400; e-mail: [email protected]

1 Introduction

1.1 The Cabinet in July 2005 agreed a budget planning strategy for 2006/07 to 2008/09 as the basis for the discussion of budget options between the Leader and Executive Members. The basis of the strategy was:

· schools budgets increased by the new dedicated schools grant but with no additional top up funded by council tax payers

· base budget increases for other services but with no allowances for any new service developments or service spending pressures other than volume changes allowed for in the base budget

· all other pressures and additional priorities absorbed by cash efficiency savings, or other savings and redeployment as necessary

· use of grant equalisation reserve balance pro rata to anticipated grant loss

1.2 Budget forecasts were prepared on the basis of this strategy including the extent to which further growth in Social Care spending of an extra £3.4m above the base budget might secure acceptable service levels.

1.3 Two budget options were prepared for consultation:

	Budget	Council tax increase
	£m	%
Option 1 - maintain services with an extra £3.4m for Social Care	556	6.7
Option 2 - no extra resources for Social Care and a further 1% reduction across all services	548	4.7
Difference	-8	-2.0

1.4 The aim was to reduce budgets and council tax rises to below the expected capping level of 5% on council tax, assuming a national 1.7% increase in grant, before further anticipated formula grant changes.

1.5 A community workshop was organised by MORI with a representative sample of all Hampshire residents by age, gender, socio-economic group and geographical area. The full MORI report will be made to the informal Cabinet meeting on 19 December 2005, but the principal findings were that the higher council tax rise should be supported, but reluctantly.

1.6 Consultation on the same options has taken place with representative groups of:

· business interests

· Hampshire Strategic Partnership

· residents' and council tax payers associations

· voluntary sector

· workforce

1.7 Broadly similar conclusions were drawn with a general view that cuts in services, particularly for the vulnerable should be avoided. Residents' associations opted for the 4.7% council tax rise; business to push as close to 5% as possible; and the others supported a rise up to 6.7% to protect services.

1.8 Further consultation was arranged with Is It Fair, the pressure group campaigning for the replacement of council tax. They suggested an increase in line with inflation, assessed as 2.7%, or the retail price index inflation in September 2005, which determines the increase in pensions for 2006/07.

1 Provisional local finance settlement 2006/07 and 2007/08

1.1 A two year provisional settlement was announced on 5 December 2005 giving allocations of formula grant and grant for the Supporting People programme, with specific grants announced later. The Government says that `sensible planning for service delivery needs a stable and predictable funding environment. Freezes on grant distribution changes have helped. But the time has come to go further, and give councils firm forward financial allocations. There is no reason why councils cannot now provide similar certainty for their local taxpayers when setting their council tax for 2006/07, by providing an indicative council tax for 2007/08'. This is not attempted at this stage in setting budget guidelines but can be considered - within certain ranges, depending upon external factors, not least further changes by Government - when Cabinet makes its final budget decision in February 2006.

Summary of provisional settlement

1.2 The main points nationally are:

· headline increase of 4.5% in aggregate external finance in 2006/07 and 5.0% in 2007/08 (this includes schools). This is lower than the increase of 6.2% in 2005/06. Dedicated schools grant (DSG) is increased by 6.4% in cash terms in 2006/07 leaving a much lower increase for other services

· increase in formula grant, beyond the figures in Spending Review 2004, of £305m in 2006/07 and £508m in 2007/08. This is about half the amount of one off grant dropping out of the settlement in 2006/07

· total increase of 3.1% in formula grant for 2006/07 and 3.8% for 2007/08 (after adjusting for DSG and other transfers)

· further relief of spending pressures by: funding the net cost of new burdens; absorbing cost pressures arising from the temporary reinstatement of the 85 year rule in the local government pension scheme without cost to taxpayers; and an agreement to work together to explore ways of managing pressures on pay, waste and adults social care for the future as part of CSR2007 (the Comprehensive Spending Review), for which the County Treasurer is the co-ordinator for the Local Government Association.

· adoption of the `four block' system for formula grant, as consulted upon in July. This means that total assumed spending and formula spending shares no longer exist

· increase in specific grants to over 50% with the introduction of the ring-fenced dedicated schools grant in 2006/07

· formula changes on the lines consulted upon in the consultation document; including new formula for personal social services and a further resource equalisation change

· floors of 2% and 2.7% (2006/07 and 2007/08 respectively) for authorities with education and social services responsibilities. These are paid for by scaling down the grant increases to authorities within the same class above the floor

· publication of draft alternative notional amounts for capping purposes

· responses required by the ODPM by 11 January 2006

New four block model

1.3 The new system of formula grant consists of four blocks:

· relative needs

· relative resource

· central allocation

· floor damping

1.4 The relative needs amount is assessed though relative needs formula (RNF). These are equivalent to formula spending shares (FSS) in the current system, with similar splits, but expressed as a fraction of total assessed need rather than given a monetary value . The formula for each service remains based upon a per client amount with top-ups (often more than the basic amount) for deprivation and additional costs (including the area cost adjustment).

1.5 The relative resource amount takes account of the different capacity of local authorities to raise income from council tax. This is a negative amount (some more negative than others - both relative needs and resource amounts continue to represent Hampshire as a relatively low needs and high resources authority - less need to spend and more taken from the council tax payer to support that spending).

1.6 The central allocation amount is allocated on a per capita basis. The allocation is the balance of the national total for formula grant available after relative needs and resources have been equalised. The floor damping amount ensures that all authorities receive a minimum grant increase. The four block model allocates both formula grant and police grant.

1.7 The new figures for Hampshire, relative to the national amounts, in 2006/07 are:

1.8 The Government has now said that the formula is simply a means of distributing grant. `National spending (that is FSS amounts) and taxation figures (that is assumed national council tax) are being misunderstood and misused for a variety of purposes, such as spending or tax targets, for which they were neither intended nor suitable'. Of course the Government did not advance that argument in 2005/06 when they required `passporting' of Schools FSS increases to Schools.

1.9 The Council, in line with the LGA, argued that the proposed four block system would be less transparent than the previous FSS system and harder to explain as it will not now be possible to show how much of the Government's own spending plans are supported by grant and that assumed to be supported by council tax.

1.10 The Government is now proposing a system `that deals in honest currency - cash grant - not fanciful assumptions about spending'. The new system is deemed by the Government to retain the strengths of the old:

· it takes into account relative needs and relative ability of councils to raise council tax

· includes an element that is distributed on a per head basis

· and a grant floor is retained

Capping

1.11 The Government expects `to see average council tax increases in each of the next two years of less than 5%. There is no excuse for excessive increases'. Notional amounts are being set to enable comparison between 2006/07 and 2005/06 budgets for this purpose.

Specific grants

1.12 Schools spending is no longer financed through formula grant but through the 100% ring-fenced dedicated schools grant (DSG) together with some existing specific grants. The national cash increase in DSG is 6.4% in 2006/07, and 6.3% for Hampshire. Non-schools education is still financed through formula grant. Teachers pay grants will be transferred into DSG. Grants within the standards fund are being combined and match funding will no longer exist for school based grants.

1.13 Safeguarding children grant ends, and access and system capacity (bed blocking) grant is reduced. Adjustments are made to the formula grant baseline for residential allowances, preserved rights and training support within social care. Supporting People grant continues to be cut - in Hampshire's case a 1.5% cash reduction in 2006/07 and a further cut of up to 5% in 2007/08.

Formula changes

1.14 Despite the Council's representations, particularly around the impact of the revised formula for personal social services and the proposals for further resource equalisation, the Government has still gone ahead and made these and other less significant formula changes. The impact of these changes is however deferred by additional damping for the next two years.

1.15 Full details of the underlying formula changes will be reported to the February Cabinet, and implications will be picked up in the response to the consultation.

1.16 The Government says that it proposes to increase resource equalisation `because to do so will make the system fairer for those authorities with relatively low ability to raise council tax locally'. But this is on top of the

redistribution that occurred in 2003/04 and `cherry picks' certain services only.

Damping

1.17 Damping arrangements will continue to operate so that every authority will get at least the grant floor for that class of authority. This will be paid for by scaling back the grant increase above the floor for other authorities in that class.

1.18 There will be a fairly narrow range of grant increases in 2006/07. Hampshire is at the grant floor of 2% for authorities with education and social services (excluding the increase for schools). This is below inflation, but more than anticipated.

1.19 Although there is a floor there is no ceiling for grant increases. However to pay for the floor, the extent of scaling-down of grant increases above the floor for Education and Social Services is very large - 87%, suggesting that the Government prefer stability over the logic of its formula changes redistributing grant more quickly to gaining authorities.

2 Hampshire's provisional settlement

2.1 Apart from the change to the new four block model it is also difficult to make comparisons of the grant for 2006/07 with 2005/06 because of the change in schools funding to a specific grant. This affects the underlying proportional support for other services between grant and council tax.

2.2 So nearly 80% of services other than schools will in future be supported by council tax. 1% raised on council tax is still equivalent to around £4m on spending. But the grant base is much smaller and therefore changes can be more volatile.

2.3 Formula grant still consists of redistributed business rates and revenue support grant (RSG) and the amounts for the next two years are:

2.4 For comparison purposes the Government has published adjusted 2005/06 formula grant amounts. For Hampshire this is £116m, so the cash grant increase in these terms is £4m or 3.5%.

2.5 However in setting the grant floor the Government has also allowed for changes in grant in amending reports for 2004/05 and 2005/06. The amending reports deal mainly with the data errors from the 2001 census. These result in a grant loss of £1.6m for Hampshire, but most of this had already been taken into account and budgeted for. Nevertheless after adjusting for the amending reports, the increase in grant in 2006/07 is £2.4m or 2%. The 2% increase is the Government's published grant floor for county councils.

2.6 Whilst this is better short-term news than anticipated, the grant consists of temporary damping of £21.6m in 2006/07 and £23.6m in 2007/08. As a proportion of total grant that is very high and this grant is only secure for the period of the two year settlement and could disappear with the introduction of the new CSR 2007 three year settlement from 2008/09.

2.7 In other words, apart from the damping in 2006/07, the grant would be £99m not £120m (rounded figures). This shows the extent of long-term grant loss from the formula changes currently protected by the damping at the grant floor. It is difficult at this stage to determine what has caused these losses because of the new system, but it is apparent that resource equalisation is the main cause because the south east as a region loses when damping is stripped out. Changes in personal social services formula are also likely to have been detrimental. Detailed analysis should be available for the February Cabinet meeting.

2.8 Amongst counties, without damping, grant ranges from a loss of 37% for Surrey to a gain of 28% for Dorset (Hampshire loses 17% in 2006/07, if damping is ignored). After damping, there is however very little variation in cash grant increases, from the floor of 2% to a maximum increase of 5.5% in Dorset, amongst counties. The County Treasurer will illustrate some of the changes with graphical presentations at this Cabinet meeting.

3 School funding settlement

3.1 This was announced on 7 December 2005. There is a minimum funding guarantee of 3.4% per pupil for secondary and special schools in 2006/07 and 4% for primary schools, to reflect the higher costs of implementing workforce reform. The guarantee is 3.7% per pupil for all schools in 2007/08.

3.2 The overall level of DSG will increase by 6.4% in cash terms in 2006/07 and by 6% in 2007/08. This shows the continuing Government priority to schools funding compared with the 3% cash increases for all other services funded by formula grant. Hampshire's increase per pupil is 6.7% in 2006/07 compared with the national average increase of 6.8% per pupil. There will be substantial real growth of at least 3.7% per pupil for allocation in 2006/07 to improvements in Hampshire schools. The Schools Forum will help determine how this is used, taking into account Government requirements set out in the next paragraph.

3.3 Having not only ring-fenced the new DSG the Government has now decided to distribute the available increase in funding above the minimum funding guarantee in both years to reflect the priority which it attaches to: meeting the costs of greater personalisation of learning (at Key Stage 3 and in primary schools, targeted particularly at authorities with the highest levels of deprivation and low prior attainment); more practical learning options for
14-16 pupils; workforce reform in primary schools; and the increased entitlement to early years provision from 33 to 38 weeks. This further reduces local discretion and to a certain extent redistributes resources towards more deprived areas.

3.4 The School Development Grant will be increased by 3.4% per pupil in 2006/07 and by 3.7% in 2007/08, as well as being expanded to combine previous separate funding streams within the Standards Fund. There will be a new formula for Schools Standards Grant (already paid direct to schools) which can be used to support the development of extended services.

4 Implications for Hampshire

4.1 When the budget strategy was set some of the following changes were expected, and others have now happened in 2006/07:

· one-off Government was expected to drop out; but Government has now found extra cash to reinstate about half of that loss.

· schools funding has changed as anticipated with the introduction of DSG

· grant formulae have changed - but the floor damping delays the worst impact of that until a new cliff edge is reached at the end of 2007/08

· new four block system now replaces FSS

· a two year settlement has been announced.

4.2 The run of national projections from the July spending plans to the settlement in Table 4 below shows the effect of adding extra grant which should again enable council tax rises of less that 5%.

4.3 The impact of these changes on the budget options considered in July are:

· to defer the planned withdrawal of about £8m from the grant equalisation reserve in 2006/07 and to retain the reserve to offset the much higher £24m grant loss anticipated from 2008/09

· extra grant enables a target council tax rise of less than 5% without having to make the 1% reduction in services, albeit efficiency savings will still be required to absorb all other pressures and this may still be difficult to achieve especially in adult social care.

4.4 This results in the ability to maintain the Council's current budget strategy of continuing all services at base budget level, allowing for some `growth' in social care in line with the national increase in spending plans, and seeking efficiency savings, but with the lower council tax rise. The trends are set out in the next table:

4.5 Taking this a step further, comparisons can then be made with the options and the recommended overall budget guidelines after the settlement. The next table illustrates the ability, at least for next year because of the floor arrangements, to deliver the option 1 service level with the option 2 council tax rise. £8m of cuts in services are not required now, but plans are needed to deal with the cliff edge after 2007/08. Efficiency savings will still be required to absorb new pressures or service developments, and to generate the minimum efficiency improvements of 2.5% required in the annual efficiency statement. To maintain its excellent rating the County Council will need to achieve more than 2.5% efficiency improvements from 2006/07, so the bar may need to be raised to say 3%. The requirement to seek additional efficiency improvements can be ascertained after the budget has been determined and before the 2006/07 statement is needed in April 2006. £8m is also retained in reserve to help dampen locally the eventual £24m loss of grant from 2008/09 onwards.

4.6 The underlying grant loss for the formula changes is £24m, more or less in the middle of the exemplified options as shown next:

4.7 Overall the Council needs to continue to plan for long-term grant loss of £24m or about 6% on council tax. £24m is 19% of the grant announced for 2007/08.

5 Budget guidelines

5.1 Against this background service budget guidelines can be set for consideration by policy review committees and executive members during January. The Leader and Cabinet can then determine a proposed budget at the February meeting of the Cabinet. The proposed guidelines are based on the budget strategy agreed in July, the results of the budget consultation, the review of budgets between the Leader and executive members, and the better short-term prospects in the settlement. The guidelines are based on the following assumptions:

· dedicated schools grant for schools

· base budgets for other services, adjusted for inflation on the same assumptions made in previous forecasts of 2.95% for pay increases, to reflect the national settlement, 2.5% for prices and a 1.5% increase in the employers' contribution to the Local Government Pension Scheme (the next phase from stepping-in increases from the last actuarial valuation). For 2007/08 the assumptions are 2.5% for pay (following the Chancellor's recent announcement to bear down on national pay awards - in line with the teachers pay settlement of 2.5%, which is 2.8% with incremental drift), 2.5% for prices and 1.2% rise in employers' pension contributions.

· An extra £3.4m for social care above base budget levels in 2006/07 and £3.9m in 2007/08 to recognise extra demographic and other pressures in line with the increase to national spending plans, although not reflected in the grant floor increase in Hampshire.

5.2 The provisional guidelines are set out below and they will be subject to further adjustment as estimates are completed with specific grant changes still to be notified.

· including provision for revenue contributions to capital for school capital repairs.

5.3 All pressures and services developments above the guidelines will need to be offset by redeployments, or cashable efficiency savings.

5.4 Where new spending is proposed it should be accompanied by a summary business case demonstrating how both performance and value for money will be improved in line with the new harder test for use of resources in the comprehensive performance assessment.

5.5 There is also a requirement to identify annual efficiency improvements of at least 2.5% for the annual efficiency statement. These need to be integrated into budget planning and a matrix will be developed to report back to Cabinet in February identifying which efficiency savings within the budget count towards the Annual Efficiency Statement and to distinguish between cashable and other efficiency improvements in Gershon terms. Cash savings will be required in budget terms for any redeployments or to meet new pressures and executive members will need firm plans showing how they will be delivered within their cash limits.

5.6 When making its final decisions on the budget in February, Cabinet will wish to balance its targets for efficiency improvements against:

· business cases and performance improvement from additional spending proposals

· value for money

· capacity and starting point for each service taking account of previous year's budget growth, redeployment of resources, comparisons of relative spending position, and previous savings targets or benefit realisation plans.

5.7 Executive members are also requested to carry out their annual review of income charges seeking to maximise changes and introduce new income wherever possible in excess of the 2.5% price inflation assumption, taking account of the powers to charge for discretionary services in the Local Government Act 2003.

5.8 The County Council is committed to achieving closer links between performance, financial and workforce planning and executive members are also asked to report back on the workforce implications of their proposed budgets.

5.9 The Policy and Resources Scrutiny and Select Committee on 31 October 2005 received copies of the July Cabinet report on budget strategy and the September report on Government consultations on grant changes. In addition, they received a presentation based on that provided to the budget community workshop on 29 October 2005 as part of the overall budget consultation process. The idea was that the Committee could then make strategic recommendations to the Cabinet. There was a substantive discussion and the Committee decided to meet again on 14 December 2005 to receive and comment on a briefing setting out the budget position post-settlement. At this stage, therefore, the Committee wished to make only one recommendation to Cabinet, namely that the range of options considered should include one which led to a 2.7% increase in council tax in line with retail price inflation and increases in pensions, whatever the service reduction consequences of this.

5.10 £8m of cuts will be required to reduce the council tax rise from 4.7% to 2.7%. This in effect takes the Cabinet back to the second option consulted on during this Autumn. Cabinet is asked whether it wishes to ask executive members still to exemplify the ways of achieving such reductions in addition to presenting service budgets within the provisional guidelines set out in this report.

5.11 There will be some scope for flexibility in setting final cash limits and dealing with other budgets not within service guidelines. It is assumed that the costs of pay and benefits and job evaluation will be met on a continuing basis from existing contributions to reserves and a package of benefit realisation targets to be agreed in February. Resources will also be required to meet any projected cost of back pay or equal pay claims when making final decisions on reserves and balances in February.

6 Capital programme

6.1 The programme for each year is to be prepared in two parts:

· schemes supported by Government approvals, whether in the form of capital grants or Government support for borrowing

· schemes within the guidelines set by the Cabinet for locally-resourced schemes. These can be supplemented as appropriate by services' own resources including virements from revenue and contributions from developers, schools or other external bodies. Approved unsupported borrowing in accordance with the policies approved by the Cabinet, either on a temporary or permanent basis, and service funded, can also be considered.

6.2 Details of capital grants and Government supported borrowing for 2006/07 and subsequent years are in the process of being announced by individual government departments. Service guidelines will be determined once the relevant Government announcements have been finalised. At this stage the opportunities for possible development of private finance initiative (PFI) projects can also be reviewed in the light of the Government's decisions on the availability of PFI credits and any new policy directions identified.

6.3 The provisional cash limits at 2006/07 outturn prices for locally-resourced schemes over the four years from 2006/07 to 2009/10 are set out below:

6.4 The guidelines are based on the cash limits for the current programme, adjusted for virements to and from revenue, plus 2.5% for inflation in line with the non-pay inflation assumption in the revenue budget. Provision for capital repairs in schools will in future form part of the programme supported by Government approvals. The 2006/07 programme incorporates the Ashburton Court refurbishment project on the basis of the funding strategy approved by the Cabinet in October.

6.5 Executive members are requested to exemplify how 2.5% efficiency improvements are being achieved. As with new revenue proposals, new capital schemes added to the programme should be accompanied by an outline business case demonstrating how performance will be improved and value for money achieved.

6.6 Executive members may propose supplementing their capital guidelines from their services' own resources, including virement from their revenue budgets or by using their share of capital receipts not already allocated within existing programmes.

6.7 Executive members may also anticipate their share of capital receipts obtained in 2005/06 provided the receipt has actually been received and the share agreed.

6.8 Proposals for Executive members to retain more than the standard 25% share of capital receipts for `in and out' schemes should be put forward to the Executive member for Policy and Resources for consideration, in line with the current policy.

6.9 Within the guidelines, some flexibility between starts years is possible, provided the total four-year guideline for each service is not exceeded. Bunching of payments in any one year or front-loading must also be avoided.

Recommendations

1 These are contained within 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.