Meeting documents

The Executive
Tuesday, 29 April 2003

EX290403-06

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ITEM EX6

EXECUTIVE - 29 APRIL 2003

FINANCIAL FORECAST 2004/05 – 2008/09

Report by the Head of Finance

Introduction

  1. This report marks the first in a series of reports on the Revenue Budget, Medium Term Financial Plan, Capital Programme and Oxfordshire Plan. ‘Maximising Our Resources’ elsewhere on the agenda sets out the standards for information, process and implementation timetable each subsequent report within the series will be recognisable from the logo above, which will incorporate a reference number unique to that document. Members are also being issued with a ring binder specifically to contain these reports and other related information.

  2. This first report is intended to remind members of the key issues in the approved Medium Term Financial Plan (MTFP) (reproduced herewith); provide any updated information; and give any related information on the current economic forecast.

  3. The Budget Books parts 1 and 2 are currently being updated and will be published at the end of May and June respectively. Part 1 contains comparative information on Formula Spending Share (FSS) and budget spending. The reformatted Book 2 is referred to more fully in ‘Maximising Our Resources’.

    4. Economic Forecast

  4. The Chancellor of the Exchequer’s target inflation for 2003 is 2.75%, and 2.5% for 2004 and 2005. However, Retail Prices Index (which is the index by which inflation is measured and excludes mortgage interest rates) has recently hovered around the 3% mark. Inflation is more than likely to rise and remain above the target in the near term, given the recent rise in oil prices. However, the Treasury considers that these will be transitory influences, which will gradually unwind, and inflation will fall back, further ahead. Therefore the central projection settles at around the 2.5% target by the two-year forecast horizon. This is important to monitor in relation to our assumptions around inflation included in the MTFP.

  5. The Chancellor is relying on growth forecast for future years to pay for part of the additional spending that is planned. Some additional borrowing is also required. If this forecast growth does not materialise there will be problems financing the extra spending. It would either have to be held back, or taxes or borrowing would have to rise again. For us, in line with other local authorities, the additional spending means the spending increases that were promised for 2004/05 and 2005/06 in the 2002 Spending Review. Work is now starting on the 2004 Spending Review which will give local authority spending figures for 2006/07 and 2007/08.

  6. The plan to allow local authorities to benefit from increases in the business rates for their area is included in the Local Government Bill. However, it is not yet entirely clear how this will work. There will be consultation on this issue during the summer.

  7. Other issues to note are:

    • possible scope for public sector pay to be regionalised – further details to be announced in coming months;

    • consideration of imposition of new powers to speed up house-building in areas where local councils are failing to meet targets – this would particularly affect the South East;

    • Landfill Tax to rise as expected – further announcements expected.

Agreed Medium Term Financial Plan 2003/04 – 2007/08

  1. The Council agreed the Revenue Budget 2003/04 and Medium Term Financial Plan 2004/05 to 2007/08 on 11 February. The indicative Council Tax increases in percentage terms for the years 2004/05 – 2007/08 are as follows:

    2.  

     

    2004/05

    2005/06

    2006/07

    2007/08

    Council Tax

    9.1

    8.3

    7.2

    6.0

    Budget Requirement

    5.9

    7.8

    5.0

    4.6

    What is allowed for in the Plan

  2. The budgets for the programme areas for future years include a number of assumptions. These include 3% for pay and price inflation, the full year effects of decisions implemented in 2003/04, and some other specific items. The major items to note are as follows:

  • The next pension fund revaluation is due at the end of 2004, the Plan adds in £1.4m in 2005/06 rising to £2.3m and then £3.1m in the following years. It is important to note that, given the current pressures facing all pension funds, this figure (based on latest best estimate) may well have to increase

  • Job Evaluation is included (£1.8m this year) as £3.3m in 2004/05, rising to £4.6m and £5.1m in the following years.

  • Around £0.6m per annum is added into the County’s General Reserve. This adds £1m per annum to reserves allowing for a further contribution of £0.4m per annum from repayment on the City Schools planned revenue overspend. This would mean that any subsequent erosion of balances in year may require more resources to restore them. Balances are referred to more fully later on in the Financial Strategy section.

  • For each year of the MTFP there is a contribution from capital (in effect self financing) to offset the revenue cost of the Homes for Older People (HOPs) externalisation, contained within the Social & Health Care Programme area. However, by 2007/08 this source is diminished to around £0.6m which means that most of the cost is borne by Social & Health Care, around £2.5m.

Efficiencies

  1. Efficiencies have been made in the 2003/04 budget. These total £2.1m. It is assumed within the published plan that these savings continue. Further efficiency savings of £3m in 2004/05, rising to £8m, £13m and £18m thereafter, are added into the agreed plan. Allowing for the £2.1m assumed ongoing in the base, this assumes a 1% net increase year on year, which achieves cumulatively £20m (£18m plus £2m already in the base) by 2007/08.

  2. Achievement of these efficiency targets impacts directly on the amount of contingency (that is, unallocated funds) which will be available. The amount included as contingency in future years is explained below. Where the efficiency target is not delivered it directly reduces the contingency available for that year. In other words, unless we achieve £3m efficiencies in 2004/05 assumed in the plan, then the contingency for that year reduces by the same amount, from £11m to £8m.

    3. Contingency

    Explanation

  3. Members will recall that last year the approach to the budget was simplified and the budget was re-based. This meant taking the budget for 2002/03 and adding the minimum of expenditure considered as unavoidable. This mainly related to general pay and price inflation, the planned increase in employer’s N.I., and Local Government pay award. Previously taken decisions to allow automatically above average inflation, demography and other new expenditure items included in the published MTFP were deleted, and everything had to be re-evaluated and put forward afresh for members to agree. The primary purpose of this overhaul of the system was to put members back in charge of the budget. No new expenditure for options and priorities beyond 2003/04 has been added to the budget or automatic allowances and variations as set out above. For this reason, a contingency (sum available to allocate) is added in for all future years. This continues the emphasis in the budget process on keeping members in control.

    4. Contingency for 2004/05 and beyond

  4. The Contingency figure shown for 2004/05 is £11m. This rises to £36m, £53m and £63m in the following years. The reason for the significant change between the 2004/05 and 2005/06 contingency is the assumed increase in Total Formula Grant (TFG) of 6.9% as per the Spending Review 2002. This can be partly accounted for by a 9.6% forecast increase in "Social Services" Formula Spending Share (FSS) in 2005/06 (equivalent to £11m). However this large increase may represent transfers of specific grants and\or functions. Given that there are insufficient details available at this time, a contra amount has not been added into Social & Health Care to offset this apparent gain. Members need to take note that the forecast on contingency in future years will be subject to change. I will be closely monitoring and reporting changes as the information becomes available.

  5. For 2003/04, £21.1m of options and priorities were added into the approved Budget. The full year effect of decisions taken in 2003\04 is included within the programme area forecasts for future years and does not form part of the contingency.

    6. Options and Priorities for 2004/05 and beyond

  6. As part of the 2003/04 Budget and MTFP process the Directorates have already identified options and priorities for future years. This list will need to be re-evaluated, re-sorted by priority and updated. The implementation plan for ‘Maximising our Resources’ sets out the timetable for completion of this task by end of June 2003. They will then be included in an updated MTFF report to the Executive on 22 July 2003.

  7. The recorded options and priorities for 2004/05 come to around £12m. This rises to £17m, £21m and £24m in subsequent years. For 2004/05, cross service priorities are £2.2m for general repairs and maintenance of property, £0.5m for E-Government and £0.75m (per annum) for replacement costs of the OCN. Learning & Culture priorities include £2.3m for Education Standards Funds dropping out and £1.1m for introduction of Foundation Stage and £0.4m for additional funding for Key Stage 3 (KS3). Social & Health Care priorities include £1m for above average inflation, £0.5m for demography, and £0.8m relates to pressures on Mental Health and Adult Residential Care. Finally Environment, Roads & Transport priorities come to £2.7m, which includes £2m for Highways Maintenance backlog and £0.25m in relation to above normal inflation on public transport contracts to maintain current service levels. The summarised position looks like this:

    8. Priorities identified:

    Cross Service

    Learning & Culture

    Social & Health Care

    Environment, Roads & Transport

    £m

    3.5

    3.9*

    2.3

    2.7*

    12.4

    * This updated list includes £0.3m (KS3) in the Learning & Culture area and £2.0m for Highways Maintenance, additional priorities from 2004/05 .

  8. Members are reminded that the amount added into the Budget 2003/04 was around £21m, and are asked to take note of other references in the report to areas, which may also need a further injection of resources, for example general balances, dependant on performance of budget in year and unexpected expenditure pressures.

  9. The updated list of options and priorities will be subject to scrutiny to see whether the Council has a choice about whether they are funded.

    10. Education Passport

  10. Members have, to date, ensured that increases to Education are passported. The assumed increase for 2004/05 in Education Formula Spending Share is £10m (i.e. after allowing for £4.7m damping to drop out). However the Education budget already assumes an additional £10m spending within the MTFP allowing for inflation and the full year effects of decisions taken in 2003/04. This means that without adding any further options and priorities for 2004/05 Education is already more or less at Passport. Education has already earmarked around £3.9 m of options and priorities outlined above which, if approved, would take them above Passport.

    11. Prospects for 2004/05 Budget and Medium Term Financial Plan

  11. The budget situation looks tight. This is as I commented in endorsing the Executive proposed Budget and MTFP to Council, when I wrote in relation to a 9% proposed Council Tax increase, ‘It is clear that this will be very difficult to deliver. The position after 2004/05 looks more tenable. Further work is required for all future years’. It is therefore appropriate that the Executive is commencing the Budget and Oxfordshire Plan planning cycle now and that the Leader and the Deputy Leader have set out their agenda and planning and implementation timetable in ‘Maximising Our Resources’.

    12. Capital

  12. The updated Capital Programme and report on allocation of capital resources in 2003/04 is going to the 13 May Executive. Revenue and capital must be looked at jointly in considering the budget, financial forward plan and priorities for the Council. Following that report I will be able to let the Executive have a more complete picture. Members are reminded that we are expecting the Prudential Code to come into effect from April 2004, when the Council should be able to instigate further unsupported borrowing to support achievement of its priorities. A sum has been included in the agreed MTFP, which allows for the estimated costs of borrowing an additional £2m from 2004. The decision will need to be revisited as part of the Budget and Planning Process.

    13. Financial Strategy 2003/04 – 2006/07

  13. The Financial Strategy for the Council was adopted in October 2002. This will require updating alongside the Budget. The Strategy sets out the policy framework for achieving sound financial management. This includes restoring balances to a level of £10m over the period of the published plan; creating headroom in the budget by identifying efficiency gains of 10% over 5 years and re-examining service priorities.

  14. Balances are referred to earlier. The MTFP allows for £1m to be added per annum to restore general reserves to £8m by 2008/09. This assumes no further erosion of balances in year, which would negate the increase and is a step towards achieving the policy set out in the Financial Strategy but is less ambitious in setting a target of £8m rather than £10m. This policy will require revisiting as will the rest of the strategy.

    15. Conclusions

  15. I have set out the main components and issues included in the MTFP for consideration. I have also included an overview of the latest Economic Forecast. There are principally 2 conclusions to reach. Firstly, in relation to the agreed Plan, the financial situation looks tight and there are still some significant areas, which may require further resources. The Directorates are working to update their own options and priorities by the end of June. Secondly, the Economic Forecast is generally stable – but again there are some uncertainties around which require careful monitoring.

    16. RECOMMENDATIONS

  16. The Executive is RECOMMENDED to note:

          1. the issues highlighted in the report;

          2. the need to reconsider the financial strategy as part of the budget process;

          3. that an updated MTFF report will be brought to the Executive on 22 July 2003.

CHRIS GRAY
Head of Finance

Background Papers Local Government Association write-up on recent national budgetrui

Contact Officer: J Hydari Tel (01865) 815401

April 2003

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