Contact: Nick Gibbins, (01962) 84 7544; [email protected]

1 Introduction

1.1 The Cabinet approved a provisional budget for 2008/09 and 2009/10 alongside the approval of the 2007/08 budget in February. This formed the basis of the three year budget plan included in the medium term financial strategy approved by the Cabinet in May.

1.2 The announcement of CSR07 is not expected until mid-October. Until then, the Government has no published spending plans either for local authority spending or for the amount of grant it is proposing to pay to local authorities. The County Council's three year budget plan therefore makes assumptions about government grant increases and council tax capping intentions.

1.3 The development of budget options and budget consultation during the autumn will need to continue to be based on assumptions about the likely outcome of the spending review and the next three year grant settlement.

1.4 The CSR07 announcement may do no more than confirm the overall level of formula grant for the next three years. Decisions on the distribution of formula grant between local authorities will not be announced until the grant settlement in December and it is possible that there will be very little prior information available about the potential level of specific grants and the proposed new local area agreement grant, the level of the grant floor and guidance on council tax capping. It is also possible that the three year grant settlement may be announced in two phases in view of the tight timescale for carrying out the technical work with the formula grant distribution consultation period going into October as well as final decisions on the spending review.

1.5 For these reasons, the Cabinet agreed in May that Service Chief Officers and Executive members should review budget pressures and savings options (within the limits contained in the provisional budget for 2008/09 and 2009/10), value for money benchmark activity and performance forecasts. The outcome is due to be reported to Cabinet at this meeting to assist budget planning and consultation during the autumn. The review of benchmarking activity was to be linked to a fundamental service review assisted by consultants (South East Centre of Excellence (SECE) and Mott Macdonald RSe which are still in progress.).

1 Recommendations

1.1 To confirm the provisional budget limits for 2008/09 and 2009/10 agreed in February as the basis for consultation and for the development of budget options.

1.2 To agree the provisional budget limits for 2010/11 as set out in paragraph 4.1.

1.3 To agree the proposals for carrying out budget consultation as set out in paragraph 6.1.

1.4 To agree the provisional locally resourced capital programme guidelines for 2008/09 to 2010/11, as set out in paragraph 7.2.

2 Provisional budget for 2008/09 and 2009/10

2.1 The provisional budgets for 2008/09 and 2009/10 represent a continuation of the strategy underlying the 2007/08 budget, reflecting the priorities of the County Council's corporate strategy and the Council's financial management policies. The key assumptions are that:

· the increase in formula grant for floor authorities in 2008/09 and 2009/10 will be substantially lower than the 2.7% increase in 2007/08 in view of the tightening of the Government's spending plans. It has been assumed that the County Council's formula grant will be unchanged in cash terms in 2008/09 and 2009/10 and that no increase in specific grants for non-schools services is likely

· as a result of the demographic and legislative pressures and service improvement priorities targeted in the corporate strategy, in conjunction with an anticipated freeze on increases in government grant, that the County Council should plan on the basis that council taxes will increase by 4.9% in 2008/09 and 2009/10. This assumes that the Governments guidance on capping will be unchanged from 2006/07 and 2007/08

· that the council tax base will continue to increase by 0.5% per annum and that annual collection fund surpluses will continue at an estimated £1.5m per annum.

2.2 These resource assumptions would enable spending to increase by 3.9% in 2008/09 compared with 5.4% in 2007/08. The substantially lower rate of increase in 2008/09 is mainly the result of the assumption that collection fund surpluses will not continue at the relatively high level of £4.2m achieved in 2007/08, together with the effect of the assumed freeze in the level of Government grant. Without the effect of an assumed further reduction in collection fund surpluses in 2009/10, the spending increase is 4.4%.

2.3 Spending assumptions have been made as follows:

· that pay increases will be 2% in 2008/09 and 2009/10, consistent with Government policy, and that no further increases in employee pension contributions will be required following the 2007 actuarial review. An average increase of 2.5% for non-pay inflation has been assumed, broadly in line with the Government's forecast

· that the policy of not taking up supported borrowing in full, but instead limiting new borrowing to the level consistent with a 2.5% increase in the capital financing requirement, will be continued in 2008/09 and 2009/10, on the assumption that increased borrowing costs will not be `passported' in the calculation of floor grant and that supported borrowing will not be replaced by capital grant. The revised policy reduces borrowing costs by about £1.2m in 2008/09 and £2.1m in 2009/10 compared with anticipated cost of taking up supported borrowing in full.

· that further pay and benefit realisation savings of £0.5m will be required in 2008/09, which have been targeted at Adult Services, as the implementation costs are likely to be above average for social care staff.

2.4 Building on these resource and spending assumptions, the main elements of the budget strategy are:

· increases above inflation for adult and children's social care in recognition of demographic and legislative pressures and to support the safety and security of vulnerable members of the community. Increases of £6.5m in 2008/09 and £6.7m in 2009/2010 for adult services are sufficient with no increases in specific grants to achieve a 4.3% annual increase in spending which is equivalent to a 5.5% increase in County Council funded spending in 2008/09 (Table 1 below)

· for all other services, any new service developments and increased demands will have to be matched by efficiency savings and by redeploying resources from lower priority services

· savings required from all other services to fund the additional resources for Adult Services - totalling £1.125m in 2008/09 and £1.150 in 2009/10 (consistent with the £1.1m reduction in 2007/08)

· a contingency provision of £4.6m in 2008/09 and £5.2m in 2009/10, in recognition of potential risks within the budget associated with inflation levels, the ability to manage demographic and legislative pressures, the achievement of targeted levels of capital receipts , government grant assumptions and the acceptability of further above inflation increases in council tax.

· in addition the contingency provides scope to consider a higher take up of supported borrowing than assumed within the budget strategy

· the creation of earmarked reserves to deal at least partly with the risks associated with equal pay compensation and formula grant loss.

2.5 The table below summarises the 2008/09 and 2009/10 provisional budgets and the respective % increases in spending as they affect the budget requirements. Figures are adjusted for changes in specific grant, transfers between services and changes in the use of reserves.

¹ Based on 2007/08 Dedicated Schools and other schools specific grants

3 2010/11 provisional guideline

3.1 To provide a provisional basis for three year budget planning it is proposed that provisional budget guidelines be set for 2010/11 based on continuing the assumptions underlying the 2009/10 budget guidelines. On this basis the relevant provisional service guidelines are as follows, with % increases calculated on the same basis as in Table 1.

Table 2

4 Review of 2008/09 and 2009/10 provisional budgets

4.1 The provisional budgets for both 2008/09 and 2009/10 include a contingency sum £4.6m in 2008/09 and £5.2m in 2009/10 to provide some flexibility in making final decisions on the budget. Those decisions could involve setting a lower council tax, acknowledging that the risk assessment requires an increase in general balances, taking up more supported borrowing in setting the capital programme or changing the provisional budget guidelines to recognise alternative inflation assumptions or additional service pressures. This section of the report reviews potential factors for consideration in reviewing the potential budget guidelines.

Waste Contract

4.2 The provisional budget for 2008/09 and 2009/10 includes an allowance for increased waste management contract costs of £2.6m and £2.1m respectively. This assumed that the rate of landfill tax would continue to increase annually at a rate of £3 per tonne from £24 per tonne in 2007/08 to £27 per tonne in 2008/09 and £30 per tonne in 2009/10. However it was announced in the Chancellor of the Exchequer's 2007 budget that the rate of increase would accelerate to £8 per tonne from 1 April 2008, so that the rate will be £32 per tonne in 2008/09 and £40 per tonne in 2009/10. This supports the objectives of the landfill directive by making higher cost recycling and waste avoidance options more competitive relative to landfill, at the expense of higher waste management costs. This adds approximately £0.7m to waste management costs in 2008/09 and a further £0.7m in 2009/10. The use of the LATs reserve could assist in cushioning the impact of these increased costs.

Interest rates

4.3 The current three year budget plan is based on short term interest rates averaging 5.5%, slightly higher than the rates in place at the time the budget was set. Base rate has now increased to 5.75% and though it is unclear whether UK interest rates may have further to rise, there is no consensus that they are likely to fall in the short term. Each increase of 0.25% adds approximately £0.3m to the budget, net of the impact on interest on balances.

Pension contributions

4.4 Employer contributions to the Hampshire Pension Fund for the next three year period 2008/09 to 2010/11 will be set later in the autumn following an actuarial review of the Pension Fund as at 1 April 2007. No allowance has been made in the provisional budget for further increases in employer rates in 2008/09 and 2009/10 above the 2007/08 rate of 17.7%. However the decisions made by the Government to incorporate some improvements in benefits in the new look scheme due to commence from 1 April 2008, the successive extensions granted to the number of existing members protected against the abolition of the rule of 85 and the effects of increased pensioner life expectancy put further pressure on employer rates. It is likely therefore that some further increases in employer contributions may be required over the next three year period, although not on the same scale as over the past three years. Based on the actuary's initial assumptions, further increases of up to 0.8% per annum might be required, adding up to £1.4m to the pay-bill each year.

Pay awards

4.5 The 2007 Local Government pay offer, which has been rejected by the trade unions, would increase pay by 0.25% (£0.6m) above the level assumed in the 2008/09 provisional budget.

Summary

4.6 Changes to the assumption made about landfill tax, interest rates, pension contributions and pay awards could therefore have a significant impact on the availability of the contingency sum within the provisional budget to deal with other service priorities or to reduce the level of the council tax increase.

Growth and redeployment proposals

4.7 Chief Officers and Executive members have also started the process of reviewing their 2008/09 and 2009/10 growth and redeployment proposals with a view to establishing the likely scale of savings required to comply with the limits in the provisional budget. Given the government's new efficiency savings target for the CSR07 period of 3% `cash releasing' efficiency savings per annum, the onus will be on seeking to identify efficiency savings that will enable any new budget pressures to be absorbed within existing provisional budget limits.

4.8 The provisional budget limits allow for increased spending above inflation on adult and children's social care, but with part of the increase in adult social care being funded by savings on other services. The proposed guidelines provide for the following increases and reductions compared with the base budget.

4.9 The review of service growth and redeployment proposals is not sufficiently well developed to be able to draw any firm conclusions on the scale of the overall service savings that will be required in 2008/09 and 2009/10. Some of the main themes are as follows:

Adult Services	-	full year implications of higher than budgeted costs of providing nursing care and of increased demand for domiciliary care for the physically disabled.
	-	alternative savings required to replace planned financial recovery plan savings which are not expected to be achieved.
Children's Services	-	demand pressures beyond 2007/08 still to be assessed.
Environment	-	main pressures associated with potential for passenger transport and term maintenance costs to increase by more than corporate inflation assumptions
	-	increase in winter maintenance formula in 2008/09 based on four year average.
Policy and Resources	-	final planned phase of SAP benefit realisation savings in 2008/09
	-	longer-term savings required to offset loss of income and higher costs on property related budgets
	-	review of longer-term requirements for additional democratic services and remuneration and benefits staffing, currently supported by non-recurring funding.
Recreation and Heritage	-	library restructuring, Discovery Centre and People's network programmes.

5 Budget consultation and review of budget options

5.1 Further work is required to develop budget options more fully during the autumn which will be reviewed by chief officers and executive members with the Leader. A series of stakeholder consultation meetings have also been arranged in November. Last year two community workshops were held during the autumn to provide a qualitative assessment of the community views of the budget strategy being pursued by the County Council. The provisional budget strategy for 2008/09 and 2009/10 represents a continuation of the strategy for 2007/08 consulted on last year and at this stage a further series of community workshops would not appear to offer good value. Some quantitative consultation possibly through the Citizens Panel would be valuable once the grant settlement has been confirmed and the implications of the provisional service guidelines are more certain.

5.2 The possible delay to the announcement of the second and third year of the three-year grant settlement means that it is unlikely that a meaningful medium term financial strategy can be developed alongside the 2008/09 budget for approval in February, and later approval of a revised medium term financial strategy would provide the opportunity for public consultation on key elements of the strategy.

6 Capital programme

6.1 The current capital programme covers the four year period 2007/08 to 2010/11. In view of the move towards three year grant settlements involving the allocation of borrowing approvals for three years and the implications of the County Council's policy of not automatically taking up supported borrowing in full, there would be advantages in limiting the capital programme to a three year period. Design and planning work on major transport schemes included in the Local Transport Plan could still proceed where those schemes were programmed beyond the three year period.

6.2 The current locally resourced capital programme guidelines for 2008/09 to 2010/11 are set at 2007/08 price levels. It is proposed to uplift the guidelines for inflation at 2.5% in line with the non-pay inflation assumption in the provisional budget. The revised guidelines are set out below:

	2008/09	2009/10	2010/11
Adult Services	2,283	1,029	683
Children's Services	128	128	128
Environment	14,795	14,800	14,803
Policy and Resources	11,162	9,221	9,172
Recreation and Heritage	636	636	547
Total	29,004	25,814	25,333

6.3 The provisional programme for schemes supported by capital grant and supported borrowing are unchanged at this stage, but will be amended to reflect decisions taken by Government departments on approved levels during the autumn and any implications for the County Council's policy on the take up of supported borrowing.

7 Impact assessment

7.1 The provisional budget strategy is based upon the County Council's medium term financial strategy, which was prepared in accordance with the County Council's financial management policy. This policy applies equally to all services and ensures consistent financial management decisions across all services.

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