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ITEM EX5

EXECUTIVE - 1 OCTOBER 2002

DRAFT BUDGET STRATEGY AND MEDIUM TERM FINANCIAL FORECAST

Report by Director for Business Support & County Treasurer

1. The Executive is planning to announce its Draft Budget Strategy on 1 October. It will build on the Medium Term Financial Plan agreed earlier this year and published in two volumes – Summary (part 1) and Service Analysis (part 2).
2. A detailed report on the Medium Term Financial Forecast (MTFF) for 2003/04 to 2007/8 has been updated for known changes and Government announcements on the Spending Review. The forecast has been extended to a five year period and is available as a background paper. A copy is filed in the Members’ Resource Centre.
3. The Medium Term Financial Plan envisages reductions in the Council Tax increase over a three year period – 7% (2003/04), 6% (2004/05) and 5% (2005/06) – following an increase of 9.8% in the current year.
4. This position is, however, under severe threat from two sources:
   
   

1. Budget pressures to spend beyond the planned figures are very substantial.
2. The Government is proposing changes to the grant arrangements that will probably result in substantially lower sums for Oxfordshire.
   
   

Budget Requirement

5. The budget requirement for 2003/04 is set out at Annex A. The starting point is the figure for the current year (£451.2m) which is increased as detailed by £31.1m (6.9%) in arriving at the published forecast for next year of £482.3m. This is the amount in the current plan with the 7% Council Tax increase.
6. It will be noted, however, that there are considerable pressures beyond this although clearly some are stronger than others. General pressures amount to £12.4m ( including £4m to restore general balances to 1% of budget); service pressures amounting to £17.1m (including £13.3m in Social and Health Care); and savings of £3.4m identified by directors, both to help accommodate pressures faced and find additional headroom for strategic priorities.
7. The total forecast for the year amounts to £508.4m ( increase 12.7% over current year). This would result in a Council Tax increase of some 23.2%, before any loss of grant referred to above.
8. Furthermore, the forecast has not yet been directly compared with financial requirements coming out of the Oxfordshire Plan and this needs to be done.
9. It is clear that substantial further work is required to determine priorities, re-phase and almost certainly reject some of these expenditure pressures.

Way Forward

10. I therefore propose that we revise the starting point for the MTFF. For 2003/04 I propose we roll forward the base budget for 2002/03 and add the minimum of expenditure which I consider to be unavoidable for the purposes of prudent financial management. I suggest the following:
    
    

		£m
Budget 2002/03		451.2
Pay/price increases at 3%	14.1
Local Government pay award	1.7
National Insurance	1.8
Capital Financing Costs	3.3
Insurance premiums/fund	0.9
Use of reserves	-0.9
Savings	-3.4*
Balances (at this stage)	3.0**	20.5
New Control Total 2003/04		471.7

* The savings figure includes £1m relating to schools National Insurance added employer’s liability – and this would need to be considered alongside the bids from schools.

** The amount needed to restore balances is dependent on the current financial year’s forecast and this is a latest estimate. However, I have used a higher figure of £4m (Annex A) in considering possible further pressures on the budget.

The Revised Process

11. Based on the above, I propose that the revised starting point for the budget should be £471.7m. This represents a budget increase of 4.5% and implies a Council Tax increase of 2.1%, not allowing for any subsequent loss of SSA as a result of the formula funding review, which I have outlined later in the report.
12. This means that total expenditure pressures of £36.7m are excluded at this stage, including £14.9m of the expenditure pressures included in the current published forecast.
13. By way of illustration, if a further £10m of expenditure is approved and added to the budget requirement, then this increases the overall budget by 6.8% and the Council Tax by 7.8%. Some examples are shown below

Increase to base of £471.7m

£m	£m Budget inc(%)	£m Budget inc(%)
10	6.8	7.8
15	7.9	10.7
20	9.0	13.6

14. If this approach is adopted by the Executive in its Draft Budget Strategy on 1 October, then it also needs to signal that some of the lower priority pressures need to be resisted. Given that there is six months ahead before the start of the new financial year, then the longest possible lead time needs to be allowed to assist directors to make changes or find alternative savings.
15. Any existing links between SSAs and programme areas will need careful reassessment in the light of changes to SSA, which will be known in late November/early December.
16. The computerised multi-year budget model will again be available this year to assist with alternative and emerging solutions.

The Bidding Process

17. The Director(s) for the programme areas as follows: Learning and Culture; Social and Health Care; Environment, Roads and Transport; Community Safety and Corporate Governance should be asked to bring forward bids ranked in priority order, initially for discussion with the relevant Executive Member(s) on an informal basis and then for consideration by Scrutiny and finally the Executive. The process for preparing the bids needs to be rigorous and the criteria need to be both robust and transparent. The guidelines are as follows:

• All bids to be prepared on the basis of the programme areas and ranked in priority order showing ;
• Clear evidence of the need to spend;
• Direct linkage to the County Council’s five strategic objectives;
• Where the growth is the result of central government directive, what funding has been provided by central government;
• Consideration of alternative sources of finance including those external to the Council;
• Compensating budget reductions within the Directorate that can be made to fund the bid;
• All bids must be prepared on a multi year basis and, where there is government funding towards the costs, the impact of any taper must be demonstrated;
• Identify links with capital.

18. A budget planning timetable is attached at Annex C. (download as .xls. file) The key dates and events are set out.
19. The bids resulting from the process outlined in paragraph 17, together with the other proposals in this report, the Executive’s draft Budget Strategy, and the capital programme update presented on 17 September, would together comprise the ‘initial proposals’ for consultation with Scrutiny Committees, in accordance with the Budget and Policy Framework Procedure Rules set out in the Constitution, before finalisation of proposals by the Executive at the meeting in January, and recommendation of a budget, Council Tax and capital programme to the Council in February.

Revenue Support Grant (RSG)

20. The Government announced consultative proposals in July this year to change the formulae for distributing SSA/RSG. We have until 30 September to respond and a campaign involving MP’s, Districts and other interested parties in Oxfordshire is underway.
21. There are over 40 possible different outcomes, of which at worst we could lose £43m (36%) of RSG. At the other end of the spectrum, the best outcome for Oxfordshire would result in a gain of £18m. In practice, neither of these scenarios is probable and the more likely outcome is a loss in formula funding which could be substantial. Any change would be phased in with ‘floors’ and ‘ceilings’ ( to spread losses and gains respectively over a number of years).
22. We are currently working on the assumption that we could lose grant to the equivalent of around 8 percentage points on our Council Tax in 2003/04. So, for example, the Council Tax increase for the suggested new budget control total (paragraph 11 above) would be nearer 10% than 2%.
23. The Executive’s Draft Budget Strategy, elsewhere on the agenda, sets out the intentions of the Executive with regards to how any such increase will be treated in setting the Council Tax. The options are, whether to pass the increase on to the Council Tax, or further review expenditure levels.

Conclusions

24. It is recommended that a fresh approach to the budget will be advantageous. Budget pressures beyond the published plan are potentially around £26m in 2003/04. Government formula funding changes may result in substantial losses in SSA which have a direct impact on the budget and potentially Council Tax

RECOMMENDATIONS

25. The Executive is RECOMMENDED to approve the basis and process set out in the report for development of the 2003/04 budget and capital programme and authorise consultation with the Scrutiny Committees accordingly.

CHRIS GRAY
Director for Business Support & County Treasurer

Background Papers: Medium Term Financial Forecast 2003/04 – 2007/8

Contact Officer: Jenny Hydari Telephone: 01865 815401

September 2002

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