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The Committee received the report of the Cabinet Member with responsibility for Resources which presented an updated Medium Term Financial Strategy (MTFS) as of November 2021. He explained that the MTFS provided a baseline forecast of income and expenditure and looked at the overall financial climate, including public finances and the local government financial environment.
The Cabinet Member reported that on 27 October the Chancellor delivered the Autumn Budget and Spending Review 2021. The Spending Review which covered the next three years (2022/23 to 2024/25) was broadly positive for local government, with funding much better than expected. The increase was very much front loaded with growth in grant funding in 2022/23 and no further general increase in the following two years. The draft MTFS assumed another year of the Revenue Support Grant and the Rural Services Delivery Grant, which was an additional £590k for next year. However, there was less certainty for continuation of the Lower Tier Services Grant and a new allocation of New Homes Bonus, so for now, these were not included in the MTFS beyond the current year.
The Committee was informed that the central assumption on Business Rates was a continuation of the current regime for another year, with changes taking place in 2023/24. East Suffolk was in an advantageous position under the current system and deferral of the reforms constituted a financial benefit of over £3m to the Council in 2022/23.
It was reported that the Provisional Local Government Finance Settlement had been released earlier in the day, which would provide greater detail on Government funding and Business Rates, but there was a considerable amount of analysis of the Settlement to be undertaken.
The updated Council Tax base was an improved position, with growth at 1.93% compared to 1% forecast earlier in the year. This amounted to additional income of £288k for 2022/23. A cautious approach had been taken with forecasting tax base growth in future years, with prudent assumptions regarding Local Council Tax Reduction Scheme (LCTRS) reliefs and collection rates, and completion of development sites levelling off.
As of November, the draft MTFS reported an updated budget gap of £1m for 2022/23, a reduction of £4.4m from the February position. This was primarily due to deferral of reforms to the Business Rates system. Future years were showing a slight increase on the February budget gap of between £700k and £800k, giving rise to potential annual budget gaps of around £6m.
It was explained that there were key areas of the budget still to be finalised which could have a significant impact on the budget position including the revenue implications of the capital programme, establishment costs and partnerships.
The Cabinet Member concluded that the 2022/23 budget would be presented to Cabinet and Council on 1 and 23 February respectively, along with further updates to the MTFS.
The Chairman reported that Councillor Beavan had submitted a number of written questions to the Cabinet Member in advance of the meeting and, to ensure everyone had the same information, these were read out in full, together with the responses as follows:
Page 3 tables - 2022/23 – Why do we expect an extra £2m of reduced income in 2022/23 which has had to be covered from reserves?
£2.370m of this is the collection fund deficit which is funded from the Business Rate Equalisation Reserve and makes up the bulk of the ‘Use of Reserves’ line of £2.7m.
Where does the other £3m expected extra income after the business rates bonanza for 2022/23 come from – Suffolk Pool benefits – RSG etc grants? How certain are they?
£3.115m Business Rates (one year delay effect). The remainder is:
- £1.829m Business Rates Pooling Benefit
- £0.143m Council Tax income
- £0.191m Council Tax Surplus
- £0.672m Government Grants – RSG, RSDG, HB Admin Grant
- £0.120m additional net income from the investment in Moor Business Park and the two Business Centres
Total £2.955m - We can be fairly certain on these, in particular once the settlement is confirmed.
We still have a £1m budget gap for 2022/23?
Budget is still a work in progress, and is particularly dependent on the Provisional settlement so not showing a balanced position at this time.
2.3 - What happens with our Treasury management if inflation goes up to 5% - how many of our investments will show a loss?
Inflation rate and interest rates are intrinsically linked, due to the fact that the Bank of England (generally) responds to higher inflation by tightening monetary policy and increasing interest rates. Consequently, investment returns should increase in a higher inflation and interest rate environment. The methodology behind the Council’s investment strategy is to ensure a portfolio mix of instant access, and short and long term structured investments. Increases in interest rate will benefit instant access and short term deposits and will be reflected fairly rapidly in the portfolio due to a monthly rolling investment schedule. Due to their nature, the Council’s longer term investments contained within the Multi Asset and Property Pooled Funds generally hold up well to market forces and early indications from fund managers reinforce this position.
How much are we making on the offices we bought at Lowestoft and Leiston. I see they returned some extra this year?
Net return on the two business centres (Lowestoft and Leiston) is £230k per annum and Moor Park is £120k. The additional £120k included in this report is net income that was too late to capture at the last budget round due to the timing of these acquisitions.
2.8 - Area of UNcertainty? Typo!?
Yes, typo, should be uncertainty.
2.9 - Has provisional local govt settlement been released?
Now expected this afternoon.
Appendix A - Council tax increase £4.95 on Band D (max £5) will be increasing at the maximum level. Retrospectively it might have been better to spread this over two years last year?
Freezing council tax last year was a policy measure to provide a measure of support to households at a peak period of the economic impact of the pandemic. Phasing this over two years would only have been of marginal financial benefit to the council.
4.32 - Is 525k income assumed from New Homes Bonus (NHB) in 2022/23? Does not year 8 of 548 become year nine next year? I don’t understand the table
£525k NHB income in 2022/23 is the last legacy payment relating to a previous NHB allocation (year 9), similarly £548k (year 8) was the last legacy payment of that previous allocation. The £104k in 2021/22 is a one year only allocation with no legacy payments in subsequent years. At the moment, we are not currently anticipating a new allocation for 2022/23 in addition to the £525k legacy payment, although this will become clear in the Provisional settlement.
5.17 – A pay rise of 2% assumed but will this be acceptable with 5% inflation? Have we assessed the risks of inflation and energy price increases sufficiently?
Local Government pay for 2021 is yet to be agreed. As of October 2021 the National Employers’ full and final pay offer for 2021 was:
- With effect from 1 April 2021, an increase of 2.75 per cent on NJC pay point 1
- With effect from 1 April 2021, an increase of 1.75 per cent on all NJC pay points 2 and above
With almost all staff on SCP 2 or above, a budget assumption of 2% for pay inflation is in line with the current pay deal offer, and would allow for some increase above that.
We have assumed 10% on energy costs for next year and then returning to 2.5% thereafter. A 10% increase is approximately £55k for the General Fund. There is exposure via our partners. We are closely monitoring utility costs with our Leisure contracts and monitoring inflationary pressures with our Operations partner through the budget monitoring.
6.6 - But reserves (from general reserves?) were used this year to balance the budget? Or does the positive balance revert to reserves?
Yes, £1.955m was budgeted to balance the current year from the In-Year Savings Reserve. Any positive balance on outturn this year will revert back to reserves, i.e. the In-Year Savings Reserve, as we will not be requiring as much.
6.10 - Reserves have halved because the earmarked reserves are being spent? Will they increase with new grants and projects? Will the general fund reserve be maintained at £6m?
The main reason for the use of reserves is the use of grants and external funding held for projects and specific initiatives, the Covid funding in particular, which held a balance of £15.7m at the start of the year. It is projected for the majority of this funding to be used by March 2022. Reserves could potential increase temporary if external funding for specific projects is received ahead of the need to spend. Grant funding is not recognised until it is realised or there is a high degree of certainty that it will be received. The current projection on reserves does not show any significant Council funds being added for projects. Presently the General Fund balance is to be maintained at £6m.
And lastly, why can we not borrow to build more homes for social rent in the HRA? According to the attached graphic from CIPFA, we are not very exposed to risk from borrowing for housing.
The Council’s capital programme is in part financed through borrowing and subject to the overarching borrowing limits contained within the Council’s prudential indicators. These limits cover both the General Fund and the HRA. The current capital programme maintains a borrowing position over the MTFS period just below this limit, so there is limited headroom for further borrowing, including on developing HRA properties. In addition to these limits, the other key factor in respect of borrowing is affordability, the ability of either the General Fund or the HRA to meet the revenue costs of borrowing, in the case of the HRA, primarily from rents as an income stream.
The Chairman invited questions from the Committee and Councillor Lynch queried if there was a total figure for the amount the Council was investing in green projects such as changing the vehicle fleet, to enable Members to focus on how much was being spent on getting to net zero. The Chief Finance Officer responded that the Capital Programme, which would be considered by Cabinet and this Committee in January, was divided by theme so where the primary theme was the environment he agreed it would be possible to pull out key projects on the revenue side based on the theme to get a total figure.
Councillor Gooch requested a full breakdown on the Transformational Environmental Budget and Environment Challenge Climate Change Budget and also queried if there were any economies of scale with any further scope of provision of services for cyber systems such as pooling with other Local Authorities. The Chief Finance Officer stated that he would liaise with the Head of Digital and Programme Management regarding procurement arrangements and email his response to Democratic Services for distribution to Members.
Councillor Gooch also queried if the Council bought fuel in bulk and if reference in the response to Councillor Beavan's question to "exposure to our partners" meant that the Council was working in partnership with them. The Chief Finance Officer clarified that this meant the Council's leisure providers and Norse. The Deputy Chief Finance Officer added that the Council was working with Norse to monitor their budgets given the fuel inflation and at the moment this was being managed within existing budgets. The Chairman repeated Councillor Gooch's earlier question regarding opportunities for buying in bulk and the Deputy Chief Finance Officer reported that this would need to be discussed with partners.
Councillor Deacon asked how it was proposed to close the shortfall of £1m and the Cabinet Member responded that it depended on the outcome of the local government settlement received and the indicators might be a help towards bridging the gap. He added that the Council had also received a letter from Michael Gove which needed to be analysed to understand the impact. The MTFS would be updated in January so it was too early to say at the moment but their statutory role was to present a balanced budget which they would do.
Councillor Goldson referred to the Council Tax surplus and asked what this was based on and the Chief Finance Officer stated that the Collection Fund had a surplus and a deficit which needed to be taken account of and this figure related to last year's surplus. Councillor Goldson also pointed out that the Ringo costs had increased but car parking income was down and he queried why Ringo still provided the service if it was costing more money. The Cabinet Member acknowledged that the main loss of income had been car parking, although he was not sure the figures reflected what it would be in a "normal" year, and suggested that the question of contract value should be directed to the Cabinet Member for Transport.
Councillor Beavan thanked the Cabinet Member for the responses to his earlier questions and queried how the prudential limits were calculated and what factors were taken into account. The Cabinet Member commented that it was helpful to have questions in advance and he would discuss the process for this with officers. The Chief Finance Officer stated that the prudential limits were in the Council's Treasury Management Strategy and were worked on a prescribed formula based on the maximum a Local Authority could have. He confirmed that £70m had been borrowed when the HRA had become self-financing which most authorities with council housing stock had done. He added that this figure counted towards the overall borrowing limit the Council had.
The Chairman referred to the collection deficit for business rates during Covid particularly for the retail and hospitality sector and queried why the Government compensation figure was higher than the costs for the Council. The Chief Finance Officer explained that the grant exceeded the deficit which could be spread over three years so in other words the grant was more than the Council needed for that particular year. He added that the Council Tax and Business Rates system worked a year in arrears and so the Council had to account for the deficit in the following year and the actual deficit the year after that, which meant that it was difficult to present and explain that in these reports. He agreed to produce more analysis in the table to try to explain this more fully in future reports. In relation to Council Tax base, the Chief Finance Officer explained that there had been a rapid recovery between now and the estimates this time last year when those estimates had been made. With regard to Business Rates, he added that the Council had been helped by large grants and reliefs to businesses from the Government.
The Chairman also referred to the projected Council Tax figure rise of 2% on a Band D property by 2025/26 and queried if this would be a sustainable situation for East Suffolk Council given the cumulative effect of a 2% rise on household budgets. The Cabinet Member responded that the Government set the referendum limits of 2% or £5 and East Suffolk had the choice within that and in terms of budgeting forward, a decision had been taken to have a balanced approach that it might be necessary to increase Council Tax. He added that a 2% increase in the Council Tax base from the Council's perspective would equate to £4.95 in our terms. He continued that the budget had included a potential increase of 2% last year but in the end the Council had chosen not to increase its portion of the Tax so it depended on the decision that was made. He explained that the rate of inflation impacted on sustainability e.g. it had been 1.9% during Covid, in July it was 4.9% and now was 5.1% and interest rates had just gone up to 0.25%. He concluded that the Council would be consistent going forwards in that this was our base point for budgeting purposes.
Councillor Gooch referred to the Green Homes Grants and queried if more direction was received from the Government on energy efficiency for homes on low income households if it was likely the Council would receive financial support. The Cabinet Member responded that the budget only included figures that were known today and did not include anything that might come forward such as funding for retrofitting.
The Chief Finance Officer referred to the earlier questions relating to Ringo and explained that the increase in their charge to the Council had been due to the very large increase in cashless payments due to the pandemic. He added that there might be some offsetting savings arising from less cash collections being made. He also referred to the graph on page 61 which grouped projects by strategic theme and agreed that this could be developed for future reports to give Members more detailed information.
On the proposition of Councillor Deacon, seconded by Councillor Lynch, it was
RESOLVED
That, having reviewed and commented upon the MTFS, the Scrutiny Committee endorsed the recommendations from Cabinet as set out below:
1. Approve the draft Medium Term Financial Strategy attached as Appendix A.
2. Approve that Members and Officers develop proposals to set a balanced budget for 2022/23 and beyond.