Hampshire County Council
	Cabinet		Item 5
	29 October 2007
	Comprehensive Spending Review 2007 and the County Council's 2008/09 to 2010/11 Provisional Budget Strategy
	Report of the County Treasurer

Contact: Jon Pittam, (01962) 847544; [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 CSR07 was announced on 9 October 2007. Until then, the Government had not published spending plans either for local authority spending or for the amount of grant it proposed to pay to local authorities. The County Council's three year budget plan therefore made assumptions about government grant increases and council tax capping intentions.

1.3 The development of budget options and budget consultation during the autumn will take account of CSR07 and will continue to be based on assumptions from the spending review and the likely outcome of the next three year grant settlement.

1.4 The CSR07 announcement has only confirmed 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. There is very little information available about the potential level of specific grants and the proposed new area based 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.

1.5 For these reasons, the Cabinet agreed in May that 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 review of benchmarking activity was linked to a fundamental service review assisted by consultants (South East Centre of Excellence (SECE) and Mott Macdonald RSe) which is still in progress.

1 Recommendations

1.1 To update Cabinet with the main features of CSR07.

1.2 To confirm the provisional budget limits for 2008/09 and 2009/10 as the basis for consultation and for the development of budget options (paragraph 6.10).

1.3 To agree the provisional budget limits for 2010/11 as set out in paragraph 6.11.

1.4 To agree the proposals for carrying out budget consultation as set out in paragraph 7.1 and 7.2.

1.5 To agree the provisional locally resourced capital programme guidelines for 2008/09 to 2010/11, as set out in paragraph 8.2.

2 Comprehensive Spending Review 2007 (CSR07)

2.1 CSR07 sets out the Government's spending plans by publishing

· three-year departmental expenditure limits 2008/09, 2009/10 and 2010/11

· public service agreements (PSA) which define the key improvements expected over the same period.

2.2 The national headlines provide for

· Public spending annual average real terms increases of

Revenue 1.9%

Capital 4.4%

Total 2.1%

2.3 Within this overall total, greater amounts are provided for

· Health 4.0%

· Education 2.8%

2.4 All figures assume inflation at 2.75%.

2.5 However the average for local government is just 1% pa in real terms over the next three years, which is substantially lower than 3.3% pa in the previous spending review. A target for all local government has been set, realising net cash-releasing efficiency savings of £4.9bn by 2010/11 (3% pa).

2.6 The Government's intention in the spending review is that local government should deliver

· improved modern and personalised public services that meet rising individual expectations, with reforms to

- improve services for families in need & children in care

- promote independence for old and vulnerable people

- increase the rate of recycling and composting household waste to 40% by 2010.

2.7 In addition strong local leadership in economic development and neighbourhood renewal is expected, for example by utilizing a reformed local authority business growth incentive scheme (LABGI)

2.8 The Government contends that it has provided greater flexibility to meet local priorities and to improve local areas by

· removing ring-fencing for £5bn of specific grants by 2010/11 (although in practice many of these specific grants were already not ring-fenced to specific spending)

· by reducing the number of performance indicators to a single set of 198 including 35 mandatory indicators, together with a further 17 for Education.

· new powers to promote economic development, primarily new infrastructure, through business rate supplements.

Schools and Children's Services

2.9 Schools are the main winners. The Spring budget set Education increases of 2.5% pa, but CSR 2007 has raised this to 2.8% pa in real terms

2.10 Per-pupil funding will increase from £5,550 in 2007/08 to over £6,600 by 2010/11, which represents a real terms of 10% (because of falling pupil numbers).

2.11 In addition the extra investment in Schools capital has been maintained and expanded

· 2008/09: £6,669m

· 2009/10: £7,024m

· 2010/11: £8,035m

2.12 New resources have been added

· £250m over the CSR period, mainly for personalised services in the primary sector, but programmes are still to be announced

· £200m investment in the Primary capital programme, to enable a new school to be built in each local education authority over the three-year period.

2.13 Other improvements were confirmed for

· £400m by 2010/11 in one-to-one support for children underachieving in English and Maths

· £217m by 2010/11 for two hours a week extended schools activities for pupils receiving free school meals

· £35m in total to improve access to childcare for families with disabled children

· £280m in total for short breaks for severely disabled children

· 3,500 Sure Start centres by 2010

· 15hrs free early years education for three and four year olds.

Adult Services

2.14 Despite the demographic trends and other pressures on adult services only £190m growth is available in Department of Health funding to support new policy initiatives, in particular:

- expansion of care for independent living

- expansion of the partnership for older peoples project

- phasing out of national health service residential accommodation for those with learning disabilities, to be replaced by support to live at home. This transfer of responsibilities to the County Council will need to be monitored closely to ensure that resources are made available to cover the costs by the Hampshire Primary Care Trust or through a new specific grant from the Department of Health.

Flooding

2.15 Nationally flood and coastal erosion risk management is set to rise from £600m in 2007/08 to £800m in 2010/11.

Waste

2.16 Sustainable waste management private finance initiative (PFI) funding is rising from £280m in 2007/08 to £700m in 2010/11, totalling £2bn over the CSR07 period.

Transport

2.17 Most of the transport annual real term increases of 2.25% per annum is targeted at Crossrail (£5bn), with £15bn Government funding over the rest of the rail network over 5 years for

· longer trains in and around major cities

· Thameslink upgrade in London

· removal of pinch points on key inter-urban lines.

2.18 Road pricing will not be pursued on motorway and trunk roads but will apparently be an option for congestion pinch points in urban areas.

2.19 Free off-peak bus travel from 1 April 2008 for the over 60s to be confirmed, and this will be funded by a transitional specific grant to district and unitary councils.

Local authority business growth incentive schemes (LABGI)

2.20 A new LABGI scheme will be introduced from 2009/10 (£50m in 2009/10 and £100m in 2010/11). This is much lower at only £150m over CSR 2007 compared with £1bn over SR 2004. There will be no scheme in 2008/09. `Building Better Incentives for Local Economic Growth' is a consultation paper seeking views on the redesign of LABGI and a draft response will be reported to Cabinet in November.

Supplementary business rates

2.21 The Government has also published `Business Rates Supplements - A White Paper'. There is no consultation, with the aim to bring in powers for local authorities to raise and retain local business rate supplements by 2010/11. Only the highest tier authority in any area is entitled to levy supplements to reinvest in specific infrastructure projects. A limit of 2p in the pound of rateable value (compared with Lyon's recommendation of 4p) has been set. Consultation is required for all projects, but a ballot of business is also necessary where a supplementary rate is contributing more than one-third of the cost of a project. There is an exemption for properties with a rateable value less than £50,000 which excludes 90% of business properties to protect small businesses.

2.22 A report will be made with the LABEI report to November Cabinet exploring the practical scope and limitations and its potential application or not in Hampshire.

Planning-gain Supplement (PGS)

2.23 Cabinet will welcome the replacement of the proposed planning gain supplement by a tariff system, and proposals will be contained in a Planning Reform Bill which will allow local authorities

· to apply standard planning charges for new development

· to negotiate contributions for site-specific matters

· to fund infrastructure of regional or sub-regional importance (although the County Council will be concerned about the degree that resources are sucked away to projects elsewhere)

· to continue with Section 106 agreements, but further details of the revised proposals are awaited.

Specific grants

2.24 As part of its commitment to reduce the amount of ring fenced specific grants, Government has transferred £4.9bn into

· formula grant (£0.8bn)

· a new area-based grant (£4.1bn)

2.25 The distinction appears to be that

· formula driven specific grants should be transferred into the general/formula grant

· specific grants which are not predominantly formula driven and vary between different local authority areas should become area based grant

· remaining specific grants which are ring fenced for certain activities should remain as now.

2.26 A hierarchy of grant funding has therefore emerged, the first two of which are not ring fenced and are available to meet each authority's priorities in delivering its performance targets within the local area agreement. Local area agreement grant, which emerged in 2007/08 and was targeted towards performance targets, has now been quietly dropped. Most of the grants paid as local area agreement grant in 2007/08 are now included in area based grant with the exception of children's services grant and the waste performance and efficiency grant which instead both become part of formula grant.

2.27 There will be revenue and capital area based grants. The former revenue specific grants included in area based grants have been announced and include for example

Table 1: Examples of main specific grants which are now area based grant

	National 2007/08 £m	Hampshire 2007/08 £m
Preserved rights	275.2	6.0
Carers	185.0	3.3
Adult Social Care Workforce	157.7	1.7
Mental health	132.9	2.3
CAMHS	90.5	1.3
Rural bus subsidy	55.6	1.5
Detrunking	44.0	0.4

2.28 Area based grant will be paid as a single 'pot' to the County Council. Budgets and spend will therefore need to be rebased so that the revenue budgets affected are grossed up for the loss of specific grant funds received in these budgets (in line with the cash variations in the underlying specific grants over the three year period). The budgets will then be financed by a single area based grant which will be treated centrally like formula grant

2.29 The precise amounts for the CSR07 period have not been announced, nor have the growth and amounts to be included in area based capital grant.

CSR National total

2.30 The starting point for the local government formula grant settlement is the announced control total for 2007/08

Table 2: CSR totals 2007/08 Settlement	2007/08 £m
RSG	3,107
RSG specified bodies	58
NNDR	18,500
Total	21,665

2.31 The next stage is to add in the specific grants that have added into formula grant together with additional revenue private finance initiative support.

Table 3: CSR totals - Specific grants and PFI added	2007/08 £m
Total, before rebasing adjustments	21,665
Specific grants
· Access and systems	546
· Delayed discharges	100
· Children's Services	201
· Waste Performance etc	45
PFI support	563
CSR Baseline for 2007/08 - Net AEF¹	23,120
¹ Net AEF is net aggregate external finance (grant)

2.32 Having made these adjustments to the base it is then possible to see the national total of Net AEF, and the percentage increases in cash and real terms for each financial year of CSR07. The gross domestic product (GDP) deflator is the Government's measure of inflation, which when deducted from the cash increases gives the real terms increase. The real terms increase averages 1% over the CSR07 period. The increase is more in 2008/09 and reduces over the next two years to 0.63%.

Table 4: Net AEF over CSR07

	2007/08	2008/09	2009/10	2010/11	Average
	£m	£m	£m	£m	pa
Net AEF	23,120	24,081	24,920	25,763
Increase		4.42%	3.48%	3.38%	3.67%
Less GDP Deflator		-2.75%	-2.75%	-2.75%	-2.75%
Real terms increase		1.67%	0.73%	0.63%	1.01%

2.33 The real term increase of 1% pa on average however is over stated if the additional PFI commitments are included over the three year period. As shown in the next table only 0.3% pa on average is left for all other spending (above inflation).

Table 5: Net AEF excluding PFI support

	2007/08 £m	2008/09 £m	2009/10 £m	2010/11 £m	Average pa
Net AEF	23,120	24,081	24,920	25,763
FI Support	-563	-677	-853	-1,069
Net AEF excluding PFI support	22,557	23,404	27,067	24,694
Increase		3.75%	2.83%	2.61%	3.06%
Less GDP Deflator		-2.75%	-2.75%	-2.75%	-2.75%
Real terms increase		1.00%	0.08%	-0.14%	0.31%

2.34 Taking into account the reduction in LAGBI, as well as PFI commitments, the real term change is actually a 0.15% pa reduction on average over the three year period. So the national settlement is in reality inflation only. All other costs and pressures will need to be met by efficiency savings (or higher council tax rises or cuts in services). The Government has indicated again that the capping limit for council tax will be set at a maximum 5% increase.

2.35 The settlement is therefore the lowest for a decade. Cash remains king, but barely at inflation level. This is as anticipated when the provisional budget guidelines were set with the 2007/08 budget. There is no reason at this stage to change the 0% cash grant increase assumption made for the County Council as a floor authority.

Efficiency savings

2.36 The Government's assumption is that the 3% efficiency target set for local government as a whole will balance the books. This is unlikely as the adult pressures alone are adding over 5% to the County Council's budget. There is no requirement to make these reductions as they have already in effect been targeted in the cash grant increase, although the County Council will be required to demonstrate broadly how it has contributed towards the total national requirement by way of an annual return.

2.37 Local government has performed well in the past, but

· the target is 67% more (from £3bn to £4.9bn) than in SR04

· the easier savings have been delivered

· not all `cashable' savings reduce budget

· there remain difficulties in re-negotiating long-term contracts

· there is insufficient evidence that savings can be delivered

· investment is needed for the cost of change and transformation, which has not been provided for in the settlement.

2.38 Expected efficiency savings are split between revenue and capital

Table 6: Revenue and capital split of efficiency savings

	2008/09		2009/10 cumulative		2010/11 cumulative
	£bn		£bn		£bn
Revenue	1.1	73%	2.4	75%	3.8	78%
Capital	0.4	27%	0.8	25%	1.1	22%
Total	1.5	100%	3.2	100%	4.9	100%

2.39 The (government anticipate) that the £4.9bn of efficiencies will be found as follows

· £1.8bn (37%) from business process improvement and collaboration

· £0.3bn (6%) from asset management

· £2.8bn (57%) from procurement.

2.40 This Government has published "Delivering Value for Money in Local Government: Meeting the challenges of CSR07". The Government states that councils work best when given flexibility to determine for themselves how and when to deliver and re-invest efficiency gains. Individual councils will no longer have an efficiency target unless agreed as one of the local area agreement (LAA) targets, while achievement will be monitored by a single measure in the national indicators set. The Regional Improvement and Efficiency Partnerships (RIEPS) will be "the focal point for support for councils", and have been allocated £150 nationally in CSR07

2.41 Examples illustrated by Government include

· business process improvement (a structure approach to diagnose what needs to change, for example working practices, jobs, attitudes, technology, structure and contracts) to make an operation more efficient and effective

· collaboration between public bodies

· use of technology

· workforce planning

· enhanced competition and smarter procurement

· asset management

2.42 None of these approaches are new and the County Council has been making savings from most, if not all of these approaches in the past. Examples given for adult services illustrate the themes, and have featured in the County Council's Modernisation and Recovery programme for adult services during 2006/08 and 2007/08:

· reablement

· assessment and care management

· process improvement planning and buying activities

· electronic monitoring of home care

· collaboration on community equipment

· market shaping

· reduction in costs of agency staff

2.43 The County Council has therefore set cash limits which require all services to meet new pressures and practices by efficiency savings and from specific proposals which may be added when the consultants looking at the fundamental service review report before the budget is set.

Information awaited

2.44 CSR07 only provides an overall picture of total (limited) grant support. No service spending plans for local government services have been set (as they used to be before the 4 block grant model). Also not known at this stage are

· distribution of formula grant

· floors (and scaling factors for authorities gaining grant)

· area based grant

· specific grants

· capital limits (except for schools)

· capital area-based grant

· supported borrowing

2.45 A Green Paper is promised on the reform to the care system with a focus on older people, but this will not impact upon the CSR07 period.

2.46 It is likely that

· dedicated schools grant will be announced in late October or November

· but formula grant, specific grants, and the level of floor will not be announced until the provisional local government finance settlement in the first week of December.

3 The County Council's budget strategy in the context of CSR07

Summary of the current financial position

3.1 Spending will need to increase by around 5% per annum, after allowance for efficiency savings, in order to avoid the need for further rationing of, or reductions, in service.

3.2 The County Council's grant is determined by the grant floor and was increased by 2% in 2006/07 and 2.7% in 2007/08. Despite the achievement of efficiency improvements in excess of the targets set in the Gershon report, above inflation increases in council tax and some reductions in service were required to balance the budget.

3.3 With the prospect of lower increases in formula grant in the CSR07 period, the County Council's financial position will become more difficult if the minimum increase in grant for authorities at the floor is significantly lower than in 2006/07 and 2007/08 and is subject to a taper as outlined in the recent formula grant consultation

3.4 Despite the protection from the grant floor, the County Council already receives the second lowest level of formula grant support compared with equivalent county councils, with formula grant per head in 2007/08 of £96 compared with the average of £154.

3.5 The main budget pressures are caused by significant demographic and legislative changes:

· an ageing population and an increasing number of young people with disabilities living into adulthood are adding progressively to the demand for care

· waste disposal cost pressures as a result of national policies to increase taxes to encourage recycling and high cost waste treatment methods and to reduce the use of landfill

· increasing numbers of children needing to be looked after by the Council, often with complex needs, despite a declining child population

3.6 In addressing these pressures there has already been a strong focus on reviews to improve working practices. A Value for Money Strategy has been established and annual efficiencies have been delivered in excess of the Government's Gershon target of 2.5% per annum, and the Council has continued to improve performance against the majority of key performance indicators. A modernisation and recovery programme has been put in place and will bring Adult Services spending back in line with budgets after the unprecedented increases in commitments in 2005/06.

3.7 Major change is underway:

· the development of a contact centre (Hantsdirect) to deliver improved call handling across all services

· the Pay and Benefits programme to address equal pay issues and modernise the pay framework

· modernisation of domiciliary and residential care services putting more emphasis on fostering, reablement and extra care housing

Service pressures - adult services

3.8 The issues with adult services have been well documented and the demographic and service pressures existing nationally reflect the situation in Hampshire. By 2026 a quarter of Hampshire's population is expected to be of pensionable age, and half of those will be aged over 75 years.

3.9 Currently a high proportion of social care for older people is provided by family members. The increased number of divorced and never married people, coupled with small family sizes will have consequences on the amount of such care that can be provided by family members, creating a future burden on care agencies. More frail elderly people are requiring care and more of the responsibility for providing that care is falling on the public sector.

3.10 Specific pressures on the 2007/08 budget, expected to continue into the CSR07 period include the costs of modernising day care and services for clients with greater dependency, needing more hours of care per package. The costs of caring for increasing numbers of people with early onset dementia add to the general demographic pressures on residential and nursing care costs.

3.11 The underlying key drivers and pressures are demography and the impact of an ageing population, changes in national policy, the need to maintain and improve performance, and the need to achieve savings to bring current levels of spending into line with the budget.

Service pressures - children's services

3.12 The main pressures are an increasing number of high cost children and various national initiatives including children's centres, extended schools for children by 2010, 14-19 year old changes and improved outcomes for children in care.

3.13 Home to school transport for increased numbers of children with special needs or excluded from school have added pressure to this budget, despite contract reviews achieving savings.

3.14 Pressures on non-county placements and independent fostering agencies, residential children's homes and in-house fostering continue.

Service pressures - environment

3.15 Responding to heavier than usual rainfall will require rescheduling of delayed routine surface dressing. Longer term remedial works to highways including road edge damage due to erosion, drainage works and repairs to culverts and bridges including capital structural maintenance, will also have an impact upon the highway maintenance budget.

3.16 Substantial increases in the cost of maintaining bus service levels have been incurred due to service deregistration, increases in tender prices and the ending of short term grants.

3.17 Waste volumes, price increases, and higher landfill tax continue to be a local and national issue.

Efficiency savings

3.18 For CSR07, the local authority target for efficiency improvements is 3% all of which has to be cashable, compared with 1.25% cashable improvements required by Gershon. Substantial additional investment will be required to deliver efficiency improvements at a faster rate, and Government support for this investment is vital to enable services to be transformed. There are three broad types of efficiencies being identified:

· cashable efficiencies that produce a budget saving

· cashable efficiencies relating to the avoidance of costs not allowed for in the budget

· non cashable efficiencies

3.19 Planned and reported efficiency gains towards the Gershon target to the end of 2007/08 are estimated at £65.2m, equivalent to an average of 3.5% per annum, well in excess of the 2.5% Government target. However this included non cashable efficiencies averaging 0.8% per annum and efficiencies in the form of unbudgeted costs avoided equivalent to 1.6% per annum. 1.1% was available to be redeployed to support front line services or to reduce the impact on council tax.

3.20 Examples of efficiency gains achieved include:

· restructuring and redesign of services to cover increasing demand and complexity of needs without equivalent increases in spending, particularly in Adult social care.

· control of employee costs through the absorption of the cost of incremental progression within existing staff budgets, as a result of increased productivity

· benefit realisation programmes related to IT investment

· use of capital receipts and developer contributions to reduce capital programme financing costs

· robust corporate procurement and purchasing through joint purchasing with other public bodies

· more efficient procurement of housing related support services to vulnerable people enabling reductions in Supporting People grant to be accommodated while maintaining service levels

· development of new services, such as arts development in schools and work with young people in disadvantaged areas, and absorbing additional workloads, such as dealing with children's admissions or freedom of information requests, without increasing overall spending

· economic benefits of reduced accidents, injuries and fatalities achieved through the safety camera partnership

Conclusion

3.21 The County Council faces a similar situation to many local authorities for the CSR07 period, with cost and demographic pressures, combined with the expected low grant settlement adding to the strain on council tax, which is becoming progressively more unsustainable.

4 Provisional budget for 2008/09 and 2009/10

4.1 The provisional budgets for 2008/09 and 2009/10 continue the 2007/08 budget strategy which in turn reflected the priorities of the County Council's corporate strategy and the Council's financial management policies. The key assumptions made in May were:

· 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 because 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 Government's 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.

4.2 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 applying in 2009/10, the spending increase is 4.4%.

4.3 Spending assumptions were 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. However these assumptions now need to be revised, see paragraphs 6.4 to 6.6. An average increase of 2.5% for non-pay inflation has been assumed, broadly in line with the Government's forecast

· supported borrowing will not be taken up in full, but instead new borrowing will be limited to the level consistent with a 2.5% increase in the capital financing requirement, (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 the anticipated cost of taking up supported borrowing in full.

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

4.4 Building on these resource and spending assumptions, the main elements of the budget strategy were:

· 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 (after allowing for the revised inflation assumptions in paragraph 6) with no increases in specific grants to achieve a 4% annual increase in spending which is equivalent to a 5.9% increase in County Council funded spending in 2008/09 (Table 7 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

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

5.1 The provisional budgets for both 2008/09 and 2009/10 agreed in May included some unallocated inflation contingency to provide some flexibility in making final decisions on the budget, especially around updated inflation assumptions or additional service pressures. This section of the report recommends some changes to these assumptions in reviewing the potential budget guidelines.

Waste Contract

5.2 The provisional budget for 2008/09 and 2009/10 included 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 to £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 reserve for the landfill allowance trading scheme could assist in cushioning the impact of these increased costs but it is assumed that the extra costs will now be added to the inflation contingency, prior to final budget decisions in February 2008.

Interest rates

5.3 The three year budget plan was 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 significantly in the short term. Each increase of 0.25% adds approximately £0.3m to the budget, net of the impact on interest on balances, and it will be prudent to add the current 0.25% rise to the inflation contingency, subject to final decisions in February 2008.

Pension contributions

5.4 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 as well as interest costs on the existing past service deficit. 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 a maximum of 1% per annum might be required. This has been added to the inflation contingency, again subject to revision when the actual rates are certified.

Pay awards and price increases

5.5 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 (2.25%) in the 2007/08 provisional budget.

5.6 Pay awards of 2% in 2008/09 and 2009/10 had been assumed in setting the provisional budget limits for those years, because of the then Chancellor's stated intention to reduce public sector pay rates to that level. Income Data Services recently reported private sector pay increases in the range of 3 to 4.5% as retail price inflation is expected to run at about 4% for the rest of 2007. It would be prudent therefore to increase the pay inflation assumption from 2.0% to 2.5% in the forward projections, adding about £1.2m in 2008/09 and £0.8m in 2009/10.

5.7 Retail price inflation was 3.9% for September 2007 and state pensions will increase by this amount in 2008/09. It would be plausible to increase the price inflation assumption further to reflect this as the consumer price index for all services is running at 3.4%, but at this stage the price inflation assumption has been held at 2.5% in line with pay inflation. These assumptions are lower than the Government's own assumption of inflation of 2.75% per annum in CSR07.

Service guideline redistribution

5.8 The 2008/09 and 2009/10 provisional budget limits continued the strategy set in 2007/08 to seek further efficiency savings of £1.1m across all services to enable a guideline redistribution to adult services to assist with future demographic service pressures. It is now proposed to withdraw this service guideline redistribution and meet the cost from the remaining flexibility in the unallocated inflation contingency contained in the original guidelines.

Summary

5.9 These changes remove the remaining flexibility in the unallocated inflation contingency (leaving £1.3m unallocated in 2009/10). The inflation provision is therefore firmed up as £21.5m in 2008/09 and £26.6m in 2009/10 (these are the cumulative increases over 2007/08).

5.10 The revised guidelines for 2008/09 and 2009/10 are therefore set out in Table 7 below.

Table 7: 2008/09 and 2009/10 provisional budget guidelines
	2008/09		2009/10
	£m	% increase	£m	% increase
Service cash-limited expenditure
Adult Services	276.6	5.9	288.4	5.7
Children's Services
Schools block¹	721.0	-	721.0	-
Other	140.9	4.0	145.2	3.8
Environment	106.9	5.2	108.0	4.2
Policy and Resources	51.9	2.4	52.6	4.5
Recreation and Heritage	32.6	3.2	33.3	3.0
	1329.9	4.8	1348.5	4.7
Capital financing	42.9	1.2	45.6	4.3
Revenue contributions to capital	27.2	4.5	30.6	2.7
Central inflation provision	21.5	-	26.6	-
Unallocated contingency	-	-	1.3	-
Other budgets	-1.0	-	-1.0	-
Specific grants	-807.4	-	-807.4	-
Transfers to/(from) reserves	8.2	-	4.3	-
Budget requirement	621.3	3.9	648.5	4.4

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

² The percentage cash increases shown assume that the central inflation provision has been allocated to the service cash limits

5.11 To add the third year for budget planning it is proposed that provisional budget guidelines set for 2010/11 should continue the assumptions underlying the 2009/10 budget guidelines. The relevant provisional service guidelines are shown in Table 8.

Table 8: 2010/11 provisional budget guidelines

	Provisional guidelines	% increase on 2009/10
	£m
Adult Services	300.8	5.7
Children's Services
- excluding schools block	149.7	3.8
Environment	109.4	4.2
Policy and Resources	52.9	1.4
Recreation and Heritage	34.0	2.9
Service cash-limited budgets	646.8	4.4

5.12 The provisional budget limits allow for increased spending above inflation on adult and children's social care and on the waste contract and broadly based budget or inflation only increases for other services. Any new service pressures or changed priorities will need to be met by increased efficiency and other savings to remain within the provisional cash limits set for each service.

Table 9: Above inflation increases in provisional guidelines
	Above inflation increases in social care	Pay and Benefits realisation savings	Net increase
	£000	£000	£000
2008/09
Adult Services	6,500	-500	6,000
Children's Services	1,200		1,200
Total	7,700	-500	7,200
2009/10
Adult Services	6,700	-	6,700
Children's Services	1,200	-	1,200
Total	7,900	-	7,900
2010/11
Adult Services	7,000	-	7,000
Children's Services	1,260	-	1,260
Total	8,260	-	8,260

5.13 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 efficiency and other 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.

5.14 No further reductions are required to balance the 2008/09 to 2010/11 budget guidelines at this stage, but Executive members and chief officers will also need to demonstrate how cash efficiency savings of 3% per annum will be achieved by the end of the three year period. Specific savings targets can be added where appropriate when the consultants working on the fundamental service review identify those specific opportunities.

6 Budget consultation and review of budget options

6.1 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.

6.2 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.

7 Capital programme

7.1 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.

7.2 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:

Table 10 : Locally resourced capital programme guidelines
	2008/09	2009/10	2010/11
	£'000	£'000	£'000
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

7.3 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.

8 Impact assessment

8.1 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.

Links(s) to Corporate Strategy
	Yes	No
Hampshire safer and more secure for all
Maximising well-being
Enhancing our quality of place

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