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

(With the concurrence of the Chairman under Section 100 (B) (4) (b) of the Local Government Act 1972, this matter was included on the agenda to enable provisional budget and capital programme guidelines to be set at this meeting)

1 Introduction

1.1 The Cabinet reviewed the 2006/07 budget position in July and agreed a number of measures to increase the level of balances given the risk of a further significant overspending on Adult Services in 2006/07. This report proposes a provisional basis for setting budget guidelines for service budgets in 2007/08 and for setting indicative budget guidelines for 2008/09 and 2009/10. These will be subject to public consultation during the Autumn and will provide Executive members with a longer timescale to consider their budget options than has been possible previously.

1.2 The opportunity to set provisional budget guidelines for the following year in September has arisen as a result of the Government announcing a two-year grant settlement for 2006/07 and 2007/08 in December 2005. This also made it possible to set a provisional budget for 2007/08 at the time the 2006/07 budget was approved in February 2006.

1.3 In setting provisional guidelines for 2007/08 the issue for the Cabinet to determine is how far the existing provisional budget should be amended to reflect changed circumstances or new priorities that have emerged since February.

1.4 As in the past, for 2007/08 the determination of the council tax taxbase and collection fund surplus or deficit will not be made until January 2007, so that final decisions on the budget will be made in February 2007.

1.5 Guidelines for 2008/09 and 2009/10 can only be set on an indicative basis both because the overall quantum of grant and the basis of allocation between local authorities will not be determined until after the comprehensive spending review 2007 (CSR07), probably in November/December 2007. For the County Council the critical issue is the setting of the grant floor, which will determine the rate at which the County Council loses grant relative to other local authorities.

1.6 Nonetheless the sensitivity of the Government formula grant settlement to the Council Council's overall financial position has been reduced following this year's schools funding changes, which result in council tax in 2006/07 funding 79% of the County Council's reduced budget requirement.

1.7 It is proposed therefore that indicative budget guidelines should be set for 2008/09 and 2009/10 to provide a medium-term framework for financial and service planning in conjunction with the County Council's partners.

1 Links with Corporate Strategy

1.1 The County Council approved a revised Corporate Strategy in July, containing an overarching priority and two supporting priorities:

· Hampshire safer and more secure for all

· Maximising wellbeing

· Enhancing our quality of place

1.2 The revised Corporate Strategy will be accompanied by a corporate business plan which is being developed during the autumn in relation to the three priorities and will identify key corporate actions and performance measures. A key aspect of the integration of service and financial planning will be to ensure that departmental service plans support the priorities of the Corporate Strategy, contribute towards the achievement of targets in the corporate business plan, and are linked to the proposals in the budget.

2 2007/08 provisional budget, February 2006

2.1 The provisional budget for 2007/08 approved in February 2006 was based on the following principles:

· the budget was constrained by a maximum council tax increase of 4.9% (within an assumed capping limit)

· increases for all services in accordance with the County Council's base budget rules

· additional increases for adults' and children's social care to reflect the Government's spending plans for those services in 2007/08 in the Spending Review 2004

· redeployment within each service of any further cashable efficiency improvements identified in 2007/08 towards new priorities or pressures

· capital financing costs included on the basis that supported borrowing would be taken up in full in 2007/08, but subject to review in the light of the Government's response to representations on the operation of the grant floor

· no provision for any new service developments unless funded by cashable efficiency savings. However an unallocated item of £4.9m was included in the provisional budget, mainly a continuation of the budgeted contribution to balances of £2.3m in 2006/07. This was left to provide some flexibility in finalising the 2007/08 budget.

2.2 The key assumptions on which the base budget was constructed were:

· inflation based on 2.5% for pay together with the planned increase in the employers' contribution to the Local Government Pension Scheme from 275% to 295% of employees' contributions. Price increases are also assumed to average 2.5% with income assumed to increase in line with average inflation on the related gross expenditure. (The latest retail price index annual increase is 3.4% and the consumer price index rise is 2.5% as at August 2006).

· interest rates - contingency provision made for short-term interest rates to increase from their then current level of 4.5% to 5%.

· other variations incorporated within the current definition of the base budget - allowance for the full year effect of mid-year pay increases, the exclusion of non-recurring expenditure in the 2006/07 budget, revenue effects of approved capital schemes and specific changes which directly and unavoidably affect the volume of spending.

· changes in spending to reflect increases/reductions in specific grants - mainly in 2007/08 for anticipated reductions in Adult Services specific grants.

2.3 On the basis of the principles set out in paragraph 3.1 and the base budget assumptions in paragraph 3.2, the provisional budget for 2007/08 totalled £592.7m, made up as follows:

Table 1: Summary of 2007/08 provisional budget

2.4 The provisional budget requirement for 2007/08 represented an increase of £24.3m (4.3%) and Tables 2 and 3 provide an analysis of the increase.

Table 2: Analysis of planned 2007/08 increase

Table 3: Service analysis of 2007/08 increase

3 Review of 2007/08 provisional budget

3.1 A review of the assumptions underlying the base budget and of forecast spending on non cash-limited budgets has been undertaken.

Pay increases

3.2 This year's national local government pay increase of 2.95% was the final year of a three-year settlement. The provisional budget for 2007/08 allows for a 2.5% increase in pay, based on the two-year teachers' pay award of 2.5% per annum operative from September 2006 and September 2007. However the Chancellor for the Exchequer has indicated that the Government expects to see a downward movement in the level of public sector pay increases in 2007/08 based on the Government's inflation target for the consumer price index of 2%. An intermediate assumption would be to budget for pay increases of 2.25%, which would reduce the base budget by £0.4m, and the overall projected budget by £0.2m, assuming that any reduction in the allocation for inflation on social care is retained within the passported sum as additional growth.

Interest rates

3.3 Base rate increased to 4.75% in August, and given the possibility that the next movement in short-term rates may also upward, it is proposed to retain the assumption that short-term interest rates will average 5% in 2007/08.

Take up of supported borrowing

3.4 The Cabinet agreed in July to reduce the provisional capital programme for 2007/08 by £12.5m to restrict the take up of supported borrowing in 2007/08, in order to limit the annual increase in the capital financing requirement to 2.5%. This decision was taken because the mechanism within the grant system which previously provided funding for the marginal cost of additional supported borrowing will not be restored in 2007/08. This will have a minor impact on capital financing costs in 2007/08 and a more significant impact on borrowing costs of about £1.1m in 2008/09.

Waste management contract

3.5 Contingency provision will need to be made for higher costs arising from inflation, further planned increases in landfill tax, increased waste volumes and legislative changes which are borne by the County Council under the terms of the contract. The assumptions on the impact of legislative change are still under discussion but it may be necessary to provide for increased costs of up to £2.9m in 2007/8, compared with £2.2m allowed for in the provisional budget, mainly dependent on the arrangements for implementing the WEEE directive, relating to electrical goods.

Overall effect

3.6 The net effect of the changes outlined in the previous paragraphs on the provisional budget for 2007/08 is unlikely to be significant. The decisions taken by the Cabinet in July on the acceleration of benefit realisation from the pay and benefits review and the funding of Hampshire Direct will also have an impact on service budget guidelines.

Pay and benefits realisation savings

3.7 Further work is still required to allocate the target savings between services in accordance with the additional costs of the pay and benefits review. At this stage the required savings have been allocated on a proportional basis, but the basis of allocation will be refined prior to the budget for 2007/08 being set.

Hampshire Direct

3.8 Further work has been carried out on call volumes and on the length of calls since the proposed Hampshire Direct budget transfers were reported to the Cabinet in July. The proposed transfers in 2007/08 in respect of services initially transferring to the contact centre and the full-year transfers in 2008/09 are set out below, compared with the previously reported transfers.

Table 4: Budget redeployment and efficiency savings for Hampshire Direct

Other changes

3.9 Further changes to the provisional service guidelines are dependent upon the extent to which:

· re-balancing of service guidelines is required in recognition of adult services spending pressures, to meet the priority of maximising well being

· the unallocated contingency of £4.9m in the provisional budget is retained to recognise other inescapable priorities not allowed for in the provisional budget

· further planned additions are made to balances in the light of the significant risks associated with the implementation of the single status agreement, the management of the recovery plan for adult services, and the capital receipt assumptions on which the capital programme is based.

Adult services

3.10 The provisional 2007/08 budget for Adult Services (including spending met by specific grants) is only 1.4% above the 2006/07 budget in cash terms. The increase is low mainly because of the one-off use of balances of £2.7m in the 2006/07 budget, and because of further anticipated reductions in specific grant in 2007/08, largely relating to supporting people. The 2007/08 allocation for supporting people is now £1.5m more than budgeted, which increases the percentage rise in the adult services budget from 1.4% to 2%. Though projected spending in 2006/07 is currently above the level of the provisional budget in 2007/08, the adult services' recovery plan is targeting savings in 2006/07 and 2007/08 which would bring the base level of spending into line with the 2006/07 budget. It is therefore crucial to the budget guidelines that the recovery plan is achieved in full by the end of 2007/08.

3.11 Nonetheless even if the target savings in the recovery plan are achieved, an increase of only 2% in 2007/08 to recognise inflation and the continued impact of demographic factors is probably not realistic, given the pattern of much higher spending increases in recent years.

3.12 Therefore it is proposed to increase the adult services budget in line with the overall increase in the 2007/08 provisional budget, i.e. by 4.3%. This would add another £6m to the cash limit, and is at the limit of affordability with the expected capping limit, without decimating other services.

3.13 If the unallocated sum of £4.9m included in the provisional budget was utilised that would have a number of consequences

· there would be no contingency left against the risk of adults or children's services overspending in 2007/08

· the cash limits would have to be adhered to, all budgeted savings achieved, and the recovery plan for adult services met in full

· a shortfall of £1.1m (£6m - £4.9m) would still result and it is proposed that this be applied across all other service budget guidelines (with the exception of the waste management contract) as a contribution towards rebalancing the budget increase for adult services.

4 Revised 2007/08 budget guidelines

4.1 Taking all these factors into account, the provisional budget guidelines for 2007/08 would be as set out below:

Table 5: Revised 2007/08 service budget guidelines

4.2 The impact of these changes is to provide budget increases as set out in
Table 6, and an overall council tax rise of 4.9%.

Table 6: Budget increases in service guidelines (including specific grants)

5 Budget consultation

5.1 The proposed guidelines are based on levying a council tax increase of 4.9% in 2007/08. In carrying out a public consultation on the budget it is proposed to consult on alternative options of a 2.5% or 7.5% council tax increase, as well as 4.9%. A 2.5% council tax increase would require reductions in service budgets of £10.7m from the guidelines, while a 7.5% council tax increase would increase spending by £11.2m, enabling further redeployment to adult services without corresponding reductions in other service budgets.

6 Efficiency improvements

6.1 The County Council will again be required to identify efficiency improvements of at least 2.5% in the 2007/08 annual efficiency statement, of which at least 1.25% must be cashable. To the extent that these efficiency improvements are additional cash budget savings, as opposed to being already reflected in the base budget assumptions, the identification of further efficiency improvements will assist in meeting the budget guidelines

7 2008/09 and 2009/10 Indicative guidelines

7.1 Indicative budget guidelines for 2008/09 and 2009/10 are proposed based on the following assumptions that:

· pay increases following the 2007 Spending Review will be restricted to an average of 2% and that no further increase in employers' LGPS pension contributions will occur following the next actuarial review at 31 March 2007. Price inflation is assumed to average 2.5%

· the increase in formula grant at the national level will be lower than in 2006/07 and 2007/08 and that therefore the minimum increase for floor authorities will also be correspondingly lower. Grant has been assumed to remain unchanged in cash terms in 2007/08 and 2008/09

· the policy of limiting increases in supported borrowing in order to restrict the increase in the capital financing requirement will be continued in 2008/09 and 2009/10. The impact of this policy will depend upon whether the Government choose to place more emphasis on paying capital grants or alter the basis of the floor calculation to take account of new borrowing costs

· the overall budget is constrained by a maximum assumed council tax increase of 4.9%

· based on the guidelines for 2007/08, that the adult services indicative guidelines for 2007/08 and 2008/09 be based on a cash increase of 4.3% and that an allowance be made for increased spending on children's social care based upon 2007/08 passporting assumptions

· the guidelines are also based on retaining a contingency sum of around £3m to provide some flexibility to support new service developments or to enable additional supported borrowing to be taken up

7.2 Proposed indicative service guidelines based on the assumptions outlined above are:

Table 7: Indicative service guidelines 2008/09 and 2009/10

8 Capital Programme guidelines

8.1 As discussed in paragraph 4.4 the Cabinet in July agreed that under current circumstances the County Council should no longer automatically take up supported borrowing in full, and agreed that the provisional capital programme guidelines for 2007/08 should be reduced by £12.5m.

8.2 The position from 2008/09 onwards is dependent upon what decisions are taken in CSR07 about the level of support for local authority capital programmes, how that support is provided and how the revenue support grant system operates. The current provisional capital programme for 2008/09 and later years is primarily based upon the assumption for planning purposes that levels of supported borrowing announced for 2007/08 will continue in the following years. Based on this assumption and that the grant system continues as at present, further reductions in planned supported borrowing of £10.5m, £10.2m and £10m will be required to limit the annual increase in the capital financing requirement relating to supported borrowing to 2.5% in the following three years. A decision on whether to take up supported borrowing above these levels will be dependent upon assessing relative capital programme and revenue budget priorities, once the financial position is more certain.

8.3 The County Council's capital programme is based upon a locally resourced capital programme within guidelines set by the County Council, supplemented by programmes that are subject to Government support, either in the form of capital grant or supported borrowing. The new policy on supported borrowing primarily affects the Government supported programme but a small element of the locally resourced programme is based on Government supported borrowing through the single capital pot.

8.4 The provisional guidelines for the locally resourced capital programme take account of the decisions made by the Cabinet in July on supported borrowing and on the adults and children's services capital programmes and provide an uplift of 2.5% for inflation, in line with the non pay assumption in the revenue budget. The Environment guidelines include on a continuing basis a
ring-fenced sum of £3.1m for structural maintenance of minor roads and footways. The guidelines are set out in Table 8:

Table 8: Locally resourced capital programme guidelines (at 2007/08 prices)

	2007/08		2008/09		2009/10		2010/11
	£'000		£'000		£'000		£'000
Adult Services	2,161		2,266		1,012		666
Children's Services	125		125		125		125
Environment	14,674		14,697		14,702		14,705
Policy and Resources	13,614		7,418		6,396		8,448
Recreation and Heritage	619		620		620		620
	31,193		25,126		22,855		24,564

8.5 The Cabinet agreed in July that the Policy and Resources capital programme for feasibility studies should be increased from 2007/08, but an increase in the overall Policy and Resources guideline is dependent upon the availability of additional capital receipts to fund an increased capital programme.

8.6 Table 9 sets out the provisional limits for supported borrowing for the spend to 2010/11, to which can be added programmes supported by capital grant.

Table 9: Supported borrowing capital programme guidelines

	2007/08		2008/09		2009/10		2010/11
	£'000		£'000		£'000		£'000
Adult Services	241		-		-		-
Children's Services	10,215		10,843		10,952		11,028
Environment	14,364		15,362		15,654		15,890
Policy and Resources	6,412		6,828		6,897		6,944
Recreation and Heritage	-		-		-		-
	31,232		33,033		33,503		33,862

9 Conclusions

9.1 There is some scope to increase the cash limit for adult services in 2007/08. However this is restricted by the capping limit unless Cabinet are prepared to cut deeply into other services. It does mean that adult services will need to constrain spending within the cash limit, including the completion of its recovery plan to eliminate the over commitment incurred in 2006/07.

9.2 For other services there is a base budget increase (more for children's social care and for the waste management contract), plus a further 0.4% reduction on top of planned savings for benefits realisation from pay and benefits and redeployment of budgets and efficiency savings to implement Hampshire Direct.

9.3 Budget consultation on the three options (2.5%, 4.9% and 7.5% council tax rises) are planned for the autumn and the results of these will be reported to Cabinet in December 2006. The Leader will also review all budgets within the service budget guidelines during the autumn so that any issues can be identified prior to final guidelines being determined also at the
December 2006 Cabinet meeting.

9.4 The prospects for 2008/09 and 2009/10 are even tighter within the CSR07 regime. It is anticipated that cashable efficiency savings of at least 2.5% per annum will be required in these years and Executive members will need to build that into their forward budget plans.

9.5 The achievement of these service guidelines will be very difficult and it is likely that further reserves and contingencies will need to be created when the budget is set to guard against the risk of overspending, non-achievement of savings, or meeting new and unexpected pressures, together with the uncertain cash effects of implementing pay and benefits and dealing with possible equal pay claims.

9.6 Whilst some flexibility may exist from the final taxbase and surplus or collection funds when notified in January 2007, these will be required for contingency purposes, rather than be available to augment service guidelines.

9.7 Every effort therefore needs to be made to redeploy existing resources within service guidelines to meet higher or changing priorities. There has, however, been a shift in resources from the provisional budget set in February 2006 towards the priority for maximising well being by redistributing an extra £6m (2.3%) to adult services to meet the needs of the most vulnerable elderly adults and adults with disabilities.

10 Equality impact

10.1 The proposals contained in this report are not considered to be discriminatory.

Recommendations

1 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.