Members received and considered the report of the Chief Finance Officer (CFO) on the Council’s Medium Term Financial Plan (MTFP) 2023/24 to 2027/28, which would be considered by Cabinet at their meeting on 12 December 2022.  The MTFP set the financial framework for the next five years and would be modified as the financial situation of the Council changed during that period.  Appendix A to the report gave details of the MTFP forecasting a £2.2m funding gap in 2023/24 but this was subject to confirmation of Government funding and several other factors that might affect the Council’s finances.  Appendix B to the report illustrated the impact on the Council’s Reserves.  Members noted that the figures quoted were as robust as possible, but the financial forecast was a work in progress and an update would be reported to Members in January.

The following salient points were noted:

•           Budget Process: The Council followed a three phased budget process.  The first phase was to update the MTFP, which set out budget pressures and estimated the size of the budget deficit over the next five years. The second phase was to produce a detailed draft budget for Cabinet’s consideration in January 2023. The third phase was to finalise the budget once the national funding settlement had been announced and incorporate the Capital Strategy and revised Capital Programme into the MTFP for approval by Cabinet and full Council in February 2023.

•           Local Government Funding Settlement: In June 2022, the Levelling Up Secretary, Michael Gove, announced the introduction of a two-year financial settlement with effect from 2023/24; and that the Department for Levelling Up, Housing & Communities (DLUHC) would complete the local government ‘Fair Funding Review’ in consultation with local authorities in 2022. He also announced that the DLUHC would look to reduce the number of funding pots that Councils must bid for in order to secure resources for specific initiatives. The funding settlement for 2023/24 was expected around mid-December 2022, but at this stage it was unclear whether it would contain further clarification about the June 2022 announcements.

•           Cost Pressures: These included inflationary increases built into certain service contracts, increasing demand in Temporary Accommodation (TA), predicted increase in external audit costs, net financing costs due to the planned increase in capital investment on major projects such as the Property Investment Strategy and TA acquisition programme, the annual pay award, non-pay inflation increases, increasing electricity costs and a budget contingency of £200k.

•           Corporate Plan:  The Corporate Plan was adopted by full Council on 5 July 2021 and included several priority objectives, some of which could require revenue and capital investment if they were to be successfully delivered. The MTFP forecast did not include any additional funding to deliver these objectives, so any proposals for further investment would need to be considered for affordability. This may also necessitate a need to realign existing resources or make compensatory savings elsewhere from the budget. One of the objectives of the Corporate Plan was to achieve financial stability by the end of 2025/26. The current forecast  shown in Appendix A to the report showed that without further action, an underlying budget deficit would remain until at least 2027/28 and the Council would not be able to replenish revenue reserves.

•           Financial Stability Programme (FSP):  There were four main work themes designed to achieve financial stability within five years by delivering cost savings and income, namely Service Devolvement, Invest to Save, Income Generation and Service Prioritisation.  Significant progress had been made in areas such as the devolution of services and other smaller initiatives, however further work would be required if the Council was to achieve the targets set.

•           Business Rates:  The Council remains part of the East Sussex 50% Business Rate Pool, which meant the Government levy on business rate growth was retained by the pool. The pooling arrangement would be reviewed, but it had previously been financially beneficial and for the purposes of the forecast it was assumed that it would continue.  In September, the DLUHC wrote to all councils in the pool asking them to indicate their preference, subject to confirmation by the Secretary of State that pooling arrangements would continue in 2023/24. The CFO provisionally accepted the invitation to remain in the pool, but this would need to be approved by Members.

•           Non-Specific Revenue Grants: The Council had engaged the services of local government policy specialists LG Futures to forecast likely government grant funding levels from 2023/24 and the information provided forecasted a net decrease of £295,000 compared to the 2022/23 base budget. The main change was due to a £408,000 predicted reduction in the New Homes Bonus grant, as this assumed that the Government would wind up the scheme by 2026/27. However, it was expected that this would be partially offset by increases in other grants, mainly the Homelessness Preventions and Services grants.

•           Council Tax: For 2022/23, Council Tax was again only allowed to increase by the maximum of 2% or £5 per Band D average before a referendum would be required. The Council Tax Base allowed for an annual increase in new builds from housing developments based on the Council’s targets less an allowance for collection losses and Council Tax Reduction claimants. The report had been written before the recent budget, which raised the permitted increase to a maximum of 3% before a referendum was required; however this would only result in an additional £30k per year. The increases for each year of the MTFP, as set out in the report, would be reviewed during phase 2 of the budget process once the final council tax base figures were submitted to the DLUHC in December.

•           Revenue Reserves: The MTFP report predicted Revenue Reserves to fall to £2.342m by the end of 2027/28, which was well below the £5m level that had previously been used as the Council’s preferred minimum level. It was though above the levels indicated in a paper issued by Grant Thornton, which advised that ideally Reserves should be at least 10% of an authority’s net expenditure. The view of the CFO was that the Council should  ensure its Revenue Reserves were at least £5m and where this could not be achieved in the short term, they should develop proposals to replenish reserves to that level. He supported this by explaining that the Council’s pandemic response meant that it unexpectedly had to find £3.3 million and although most of this was reimbursed by central government grants, it made clear the need to proof itself against unexpected financial shocks. 

•           Capital Programme: The draft Capital Programme was shown at Appendix C to the report and comprised a range of strategic projects that spanned more than one year and many operated for several years or had recurrent investments. Some projects had recurrent investment by the Council to deliver key priorities. Projects that had not spent all their allocation in the year of inception could, if still required, have the remaining funding carried forward into the next financial year, which was known as ‘slippage’.  Slippage from prior year projects had been included at Appendix C, but more accurate cash flows would be developed during phase 2 of the budget process.

•           Capital financing costs estimates were extremely sensitive to changes in interest rates and along with inflation rises, this could have a significant impact on the affordability of some capital schemes. Therefore, larger and more complex schemes would be subject to a detailed affordability review before proposals were taken to Members for consideration.

•           Budget Consultation: This would be held between 9 December 2022 and 31 January 2023.  An interim report on the consultation would be reported to the Overview and Scrutiny Committee on 23 January 2023.

Members were given the opportunity to ask questions and the following points were noted during the discussions:

•           increasing the staff pay award assumption to 4.5% would add a further £90k to the budget requirement in 2023/24 and increase the base budget by approximately £150k to allow for the full year effect;

•           the impact of a 100% Council Tax Reduction Scheme was estimated at approximately £711k in total, of which Rother District Council’s share would be approximately £77k;

•           under the Local Government Finance Act 1988, a CFO must issue a section 114 notice if they concluded that the Council could not balance its budget in-year and the necessary action to rectify the situation was not supported by Members.  Members recommended that reserves should be maintained at a level of one third of net expenditure or £5m, whichever was the lesser;

•           senior officers across the Council were working with each team to identify savings and look at the consequences of those savings; and

•           the total spend on the Town Hall Renaissance Project to date was £667k.  A budget for the project had not been included in the MTFP beyond the current year as it was still in the pre-development phase.

Despite the multiple financial pressures, the Council could deliver a balanced budget with a combination of sound financial management and the successful delivery of the FSP and savings targets. The importance of this last point could not be overstated and failure to achieve it would result in the Council having to make difficult decisions around the provision of local services.

RESOLVED:  That Cabinet be requested to agree that:      

1)         the financial forecast and proposed way forward be noted;

2)         the Council maintain its policy of maximising the annual increase in Council Tax within the Government’s referendum limit;

3)         delegation be granted to the Chief Finance Officer to finalise the wording of the budget consultation literature in  consultation with the Cabinet Portfolio Holder for Finance and Performance Management;

4)         the Council continues to be part of the East Sussex Business Rate Pool in 2023/24 and that the Chief Finance Officer be granted delegated authority to finalise the necessary agreement with the Member authorities in consultation with the Cabinet Portfolio Holder for Finance and Performance Management; and

5)         officers develop proposals, which will enable the Council to maintain or replenish its level of Revenue Reserves to one third of net expenditure or £5m, whichever was the lesser.