Executive Report

Report of the Managing Director (Chief Finance Officer)

Author: Claire Morris, Head of Financial Services

Tel: 01483 444827

Email: Claire.Morris@guildford.gov.uk

Lead Councillor responsible: Nigel Manning

Tel: 01252 665999

Email: nigel.manning@guildford.gov.uk

Date: 21 July 2015

Budget Assumptions for Business Planning 2016-17 to 2019-20

Executive Summary In order to prepare both the Housing Revenue Account (HRA) and General Fund outline budgets for 2016-17 officers must know the parameters within which they are expected to work. Setting parameters for the whole of the plan period is beneficial in the calculation of projections over the medium term. Officers therefore propose working assumptions to use in the preparation of the outline budget for 2016-17 and projections for the following three years. These assumptions are as follows:

2016-17 2017-18 2018-19 2019-20

General Inflation

1.0% 1.5% 2.0% 2.0%

Payroll 1.5% 2.0% 2.0% 2.0%

Income 3.0% 3.0% 4.0% 4.0%

Council Tax increase

1.9% 1.9% 1.9% 1.9%

Business Rates Inflation

2.3% 3.0% 3.2% 3.1%

Revenue Support Grant (RSG) decrease

33% 41% 50% 20%

Housing rents

September CPI + 1%

Plus local rent

September CPI + 1%

Plus local rent convergence

September CPI + 1%

Plus local rent convergence

September CPI + 1%

Plus local rent convergence

convergence where

applicable

where applicable where applicable where applicable

Total NHB grant

£2,174,000 £2,235,034 £1,968,917 £1,518,514

Council Tax Base increase

0.46% 0.22% 0.22% 0.22%

The Council will make the final decision on the estimates for 2016-17 at its meeting on 10 February 2016; agreement of an allowance at this stage (for example the assumed pay award) does not mean that we cannot change it later in the process. Officer Recommendation: That the Executive approves the budget assumptions to be used in the preparation of the 2016-17 outline budget, as detailed in the report.

Reason for Recommendation: To set the budget assumptions that officers will use to prepare the 2016-17 outline budget and medium term financial plan.

1. Purpose of Report

1.1 This report sets out the suggested parameters that officers will use to prepare the

2016-17 outline budget and projections for the following three years to 2019-20. 2. Strategic Framework 2.1 The budget is the financial expression of the Council’s priorities and therefore

underpins all of the fundamental themes included within the Corporate Plan.

3. Background 3.1 In order to prepare both the Housing Revenue Account (HRA) and General Fund

outline budgets for 2016-17 officers must know the parameters within which they are expected to work. These are the level of:

a. general inflation to be assumed in expenditure budgets (excluding any increases of a contractual nature)

b. pay award to be assumed in the preparation of the salary budgets

c. increase in income to be achieved from fees and charges d. council tax increase e. housing rent increase f. business rates increase g. government grant predictions

3.2 Setting parameters for the whole of the plan period is beneficial in the calculation

of projections over the medium term. Officers are therefore proposing working

assumptions to use in the preparation of the outline budget for 2016-17 and projections for the following three years.

3.3 The Council will make the final decision on the estimates for 2016-17 at its meeting on 10 February 2016; agreement of an allowance at this stage (for example the assumed pay award) does not mean that we cannot change it later in the process.

3.4 Looking forward Central Government intends to issue a second budget in July

2015 and will carry out a Comprehensive Spending Review (CSR) this year that will come into effect from 2016-17. .

4. General Inflation 4.1 There are three generally accepted inflation measures:

a. Retail Prices Index (RPI) b. RPI excluding mortgage interest (RPI(X)) c. Consumer Price Index (CPI)

4.2 RPI is the traditional measure used in the United Kingdom. RPI and RPI(X) use

the same basket of goods but RPI (X) excludes the impact of mortgage interest costs. For this reason, wage negotiations normally use RPI.

4.3 The Government introduced CPI to assess whether prospective members of the European Monetary Union would pass the inflation convergence test and it is now the measure used by the Government in giving an inflation target to the Bank of England. CPI uses a slightly different basket of goods and household coverage to RPI and is calculated using a geometric mean rather than an arithmetic mean. This means that, for the same basket of goods, CPI will always be lower than RPI. In setting inflation targets (including Council Tax), the Council will have regard to all the indicators, but generally gives more emphasis to RPI(X).

4.4 The graph below shows the recent trend in inflation.

4.5 Below is the Bank of England’s (the Bank) May 2015 CPI inflation projection chart.

4.6 Inflation has been above the 2% target for four of the past five years but has been below target for at least the last 12 months and fell to 0% in March 2015. The reduction was due to falls in commodities and other imported goods. The

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1.0

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5.0

6.0

2011-12 2012-13 2013-14 2014-15

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Financial Year

Inflation indices over financial years

Retail Price Index (RPI)

Retail Price Index excluding mortgage interest RPI(X)

Consumer Prices Index (CPI)

Bank expects CPI to remain close to zero in the very near term and acknowledges a brief period of negative inflation will be witnessed before wage growth and unit labour costs rise, helping to return inflation to the 2% target by 2017, with the likelihood of inflation being above the target rising a little further into 2018.

4.7 The Bank does not produce an inflation forecast for RPI or RPI(X). The Office of Budget Responsibility (OBR) produces an economic forecast which is set out below:

2015-16 2016-17 2017-18 2018-19 2019-20

OBR RPI forecast (annual average, %)

1.2 2.3 3.0 3.2 3.1

OBR CPI forecast (annual average, %)

0.5 1.3 1.7 1.9 2.0

4.8 The Council has a policy not to allow provision for general inflation on specific budget heads and only allows contractual increases. We propose that this policy continues, in order to keep tight control of inflationary increases. We also propose that a central inflation allowance be included in both the General Fund and HRA estimates that officers can bid against where the effects of cash limiting detailed budgets become unsustainable.

4.9 We recommend that for planning purposes we set a 1.0% central inflation allowance for 2016-17, 1.5% for 2017-18 and 2% allowance for 2018-19 and 2019-20 on budgets heads that are not subject to contractual or payroll related inflation. This amounts to approximately £157,000 for the General Fund and £37,000 for the HRA. This is equal to or below the RPI and CPI forecasts in paragraph 4.7 above, thus continuing the real reduction in Council budgets.

5. Payroll Costs

5.1 Below is a graphical representation of the recent trend in Average Weekly Earnings (regular pay, which excludes bonuses) for both the public and private sector and Guildford Borough Council’s pay award.

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1.5

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2011-12 2012-13 2013-14 2014-15

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tage

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ange

Financial Year

Annual change in average weekly earnings

Average Weekly Earnings (Private Sector) - regular pay

Average Weekly Earnings (Public Sector excl financial services) - regular pay

Guildford BC Pay award

5.2 The majority of council employees did not have a pay award between April 2010 and April 2012, although we paid increments to those eligible. In 2010, we paid £300 to those earning less than £18,025 and in 2011 we paid £250 to those with a basic salary less than £21,000. This was in accordance with Government guidelines. We gave a 1% pay increase or £250 (whichever was the greater) to all staff except the Chief Executive and Strategic Directors in April 2012, although the estimates included a 1.5% allowance. The April 2013 award was 1.5% for all staff with a minimum award of £300. In April 2014 and 2015, we awarded a further 1.5% per annum to all staff.

5.3 Officers recommend that for planning purposes we maintain a 1.5% pay allowance for 2016-17 and a 2% allowance for the three years 2017-18 to 2019-20. The cost to the General Fund in 2016-17 is approximately £383,000 and £40,000 for the HRA.

6. Income 6.1 The Council’s recent policy has been to increase income by more than inflation

so that we increase the proportion of a service financed by the users rather than through the Council Tax or housing rent. However, in practice, review of the market in which each service operates has meant that the target has not been consistently achieved. Officers recommend that we use a target for increased income of 3% for 2016-17 to 2017-18 and 4% for 2018-19 to 2019-20, where there is capacity in the market, as this better reflects the RPI forecasts over the same period. This target will also apply to HRA fees and charges, excluding housing rents and service charges, although this type of income is minimal in the HRA.

6.2 The table below shows the effect of a one per cent change in various sources of General Fund income. We can only achieve increases in income where there is

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2011-12 2012-13 2013-14 2014-15

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Financial Year

Average of monthly figures for financial year

Average Annual Change – Private Sector - Average Weekly Earnings - regular pay

Average Annual Change – Public Sector excl financial services - Average Weekly Earnings - regular pay

Guildford BC Pay award

capacity in the market and officers will take account of the charges levied by our competitors when recommending changes. Officers will, of course, be expected to maximise income wherever possible, both by the introduction of new charges and by ensuring that current charges are maximised. We will report the recommended fees and charges to the Scrutiny Committee and Executive in the Outline Budget report.

Service Effect of 1% change

(£000)

Off Street Car Parks 97

Recycling & Refuse Collection 40

Parks and countryside 15

Crematorium 12

Other fees, charges and miscellaneous income 46

Total: 205

7. Council Tax Increase 7.1 The Council has a key delivery target to keep council tax rises below inflation

through balanced budgets. When assessing the level of increase, we take into account the November rate (published in December) for RPI(X).

7.2 Although most commentators expect RPI to be above the 2% target for most of the plan period, it is likely that the cap, above which we must hold a referendum, will be set at 2%.

7.3 The government have a history of offering local authorities a grant (Council Tax

Freeze grant) in lieu of an increase in their Council Tax. Initially this grant was a one-off but recent grants have been built into the spending review baseline. This ensures that authorities continue to receive the ongoing benefit of the grant in future years and avoid a ‘cliff edge’ of the grant falling out of the baseline in the following year. Guildford Borough Council accepted the freeze grant in 2011-12 and 2012-13 but then decided to increase Council tax in 2013-14, 2014-15 and 2015-16. There have been no announcements from Central Government concerning a potential freeze grant offer for 2016-17. Therefore officers will assume that a grant to freeze Council tax for 2016-17 will not be made available and will update Councillors in future budget reports if the situation changes. For planning purposes officers will assume an annual Council Tax increase of 1.9% for the period 2016-17 to 2019-20.

8. Housing Rent Increases 8.1 The Department for Communities and Local Government (DCLG) issues specific

guidance to local authorities but exclude us from the rent standard section and regulatory framework. However, the Government retain a key rental control

mechanism in the Housing Benefit system, which incentivises us to follow government guidance.

8.2 In May 2014, DCLG issued formal guidance in their publication ‘Guidance on Rents for Social Housing’. It sets out their policy from April 2015 onwards. They are clear in their expectation that local authorities will have regard to this guidance when setting rents. The HRA Business Plan assumes that future rent increases will be in line with government policy adjusted to reflect a local rent convergence policy of CPI plus 1%.

8.3 The regulatory framework requires us to ensure that at all times we have a viable and sustainable HRA. Whilst we have a degree of discretion to apply a lower rent increase it must take into account the impact it will have on longer term financial stability, as the cumulative impact of the decisions on the rent increase in any one year is significant. In the current economic climate, few social landlords have taken such a risk.

8.4 Our ability to support an on-going development programme is heavily reliant on decisions made on annual rent increases, particularly if we want to achieve rents that are affordable on new developments.

8.5 For planning purposes, it is proposed we use CPI plus 1%, in line with the

government guidance.

9. Business Rates Increase

9.1 The local government finance settlement provides each Council with a Settlement Funding Assessment (SFA). The SFA has two parts: Revenue Support Grant (RSG) and Baseline Funding Level (BFL). Central Government have not yet provided indicative figures for either the SFA or BFL for 2016-17. . For the purposes of forecasting business rate income, we have used the OBR’s RPI forecast, as this appears to be the RPI measure used by the Government for the same purpose.

9.2 As part of our Corporate Plan, we will undertake the redevelopment of North Street in the next 3-5 years. During the redevelopment scheme, we expect that our income from business rates will fall. As a result, we anticipate contributing our share of business rate levy into the business rate reserve, to offset future reductions. During the development phase of the project, we will transfer funds from the reserve to support the revenue budget. Once development is completed, we should experience a growth in business rates.

10. Government Grant Predictions

10.1 As stated in paragraph 9.1, we have not yet received an indicative RSG amount for 2016-17 from central government. Our medium term projections, set out in the Budget report to Council in February 2015, show a continuing reduction in Central Government support over the medium term period.

10.2 We predict a modest increase in New Homes in the medium term; based on expected completions and hard commitments1 generated in 2014-15 and expected for 2015-16 profiled over the medium term period. The predicted number of new homes in the borough informs both the increase in our Council tax base and any New Homes Bonus (NHB) grant to be received from Central government. The amounts are shown in the following table:

2016-17 2017-18 2018-19 2019-20

Total NHB grant

£2,174,000 £2,235,034 £1,968,917 £1,518,514

Council Tax Base increase

0.46% 0.22% 0.22% 0.22%

10.3 Our policy in recent years has been to transfer any NHB grant received in excess

of £1million to reserves and this transfer continues in the budget model for 2016-17 to 2019-20. The reserve will be used to finance specific short-medium term revenue projects or capital projects and therefore does not affect the council tax calculation or the budget gap identified below. This policy is due to NHB funding only being available for six years and so it would not be prudent to rely on the income to finance ongoing revenue expenditure. We expect that out NHB income will start to fall in 2018-19 unless any new developments are identified; however, as the Local Plan is developed we anticipate being able to change this assumption.

10.4 The chart below shows the latest information about the Council’s income.

1 Hard Commitment is a term used to describe sites where planning permission has been granted and it is

known that the building work has started, i.e. a commitment to build out the planning permission is in place

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2,000

3,000

4,000

5,000

6,000

7,000

2015/16 2016/17 2017/18 2018/19 2019/20

Forecast Government Grant and Business Rates Income, £000

Revenue Support Grant Business rates baseline funding New Home Bonus

11. Financial Implications 11.1 Officers will use the financial assumptions detailed in this report for planning the

2016-17 budget and the medium term financial plan to 2019-20. The assumptions result in a deficit between projected income and expenditure of £5.5 million over the period 2016-17 to 2019-20 as shown in the following chart and table.

11.2 To address the shortfall, Officers will continue to identify savings, efficiencies and additional income as part of the business planning process. In addition, the Council is pursuing a programme of transformation to ensure a financially sustainable future. The transformation programme has three strands:

a. Commercial / traded services b. Asset investment c. Fundamental service reviews including possible alternative service

delivery models where appropriate.

11.3 Over the coming months Officers will work with Councillors to identify the specific actions and projects required to address the deficit.

12. Legal Implications 12.1 The Council has a legal obligation to set a balanced budget (s32 of the Local

Government Finance Act 1992).

2015/16 2016/17 2017/18 2018/19 2019/20

In year Budget Gap 2.0 1.6 0.9 1.0

Cumulative Budget Gap 0.0 2.0 3.6 4.5 5.5

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Guildford Borough Council 5-year Budget, £million

13. Human Resource Implications 13.1 Our recommendation is to pay below inflationary increases on salaries. Now that

the job market is picking up, that policy is starting to have an emerging impact on the recruitment and retention of staff in areas where employees are not restricted to local government as commercial competitors are able to pay more than the council.

14. Key Risks

14.1 The Council faces many risks to the successful delivery of a balanced budget. Further information was provided in the Budget report presented to council in February 2015 and will be updated as part of the 2016-17 business planning process however, some of the major ones linked to the assumptions set in this report are explained below.

14.2 The economic situation. Particular consideration will need to be given to the following in the budget proposals:

Loss of income from Fees and Charges

Higher than expected cuts in central government support following the 2015 general election

14.3 Business rates retention scheme. There continues to be volatility in our

business rate income due to voids, appeals, revaluations and bad debts. This uncertainty makes it difficult to budget accurately for business rate income and close monitoring through the year is crucial to identify any shortfalls at an early stage. If a large business chose to close or relocate away from Guildford, it would adversely affect our income. We manage this risk through our business rates equalisation reserve.

14.4 CSR 2015. It is clear from the continued economic difficulties experienced in the UK, Europe and the USA and the statements made by the Chancellor of the Exchequer in the 2014 Autumn Statement that the 2015 CSR will bring further government funding reductions for local authorities.

15. Consultation with Corporate Improvement Scrutiny Committee

15.1 The Corporate Improvement Scrutiny Committee (CISC) reviewed the report at its meeting on 25 June 2015. The Committee debated the use of the New Homes Bonus, queried the sensitivity of the assumptions used and the link between the budget and the Corporate Plan. A number of questions were also asked in relation to the Council’s approved Treasury Management Strategy, which officers will respond to via email as it is not a matter for this report.

15.2 The Committee agreed with the assumptions, recommended by Officers, contained in the table in paragraph 16.1 below. The Committee also recommended that the Executive set out a clear and transparent statement of policy in relation to how the New Homes Bonus will be used to benefit local communities that have accepted development as expected by DCLG and clarity over how the benefits of development are tracked.

15.3 Since the CISC meeting, the Head of Financial Services (HoFS) has clarified her

comments at the meeting with the Lead Councillor for Finance and Asset Management and the Executive are advised that there is no legal requirement for the Council to pass NHB funding to communities even if a Neighbourhood Plan is in place, contrary to the comments made by the HoFS at the CISC meeting. The HoFS had mistakenly thought there was a requirement to pass the funding to neighbourhoods and communities that have an adopted neighbourhood plan as there is such a requirement for a portion of the Community Infrastructure Levy (CIL) to be passed to neighbourhoods and parishes, and had thought a similar proposal for NHB was being put forward by Central Government. The NHB grant is an un-ringfenced bonus and local authorities have flexibility as to how it is spent. However, there are a number of examples of Local authorities that have adopted a parish allocations policy in relation to NHB.

15.4 The Committee also requested it is consulted on the method used to balance the budget for 2016-17. Officers confirmed at the meeting that the business planning process will bring forward further savings and income generation proposals to help meet the budget gap identified in the report and that those proposals will be considered by the Joint Scrutiny Committee at its meeting in November 2015.

16. Conclusion 16.1 The table below shows the various inflation factors currently approved over the

medium term plan period and those we are now proposing.

2016-17 2017-18 2018-19 2019-20

Currently approved

General Inflation (not to be automatically allocated)

1.5% 2.0% 2.0%

n/a

Payroll (excl incremental progression)

1.5% 2.0% 2.0% n/a

Income 4% 3.6% 3.8% n/a

Council Tax increase

1.9% 1.9% 1.9% n/a

Business Rates Inflation

3.3% 3.6% 3.8% n/a

Revenue Support Grant (RSG) decrease

37% 47% 25%

n/a

2016-17 2017-18 2018-19 2019-20

Housing rents (for planning purposes and subject to review)

September CPI + 1%

September CPI + 1%

September CPI + 1%

n/a

Recommended

2016-17 2017-18 2018-19 2019-20

General Inflation

1.0% 1.5% 2.0% 2.0%

Payroll 1.5% 2.0% 2.0% 2.0%

Income 3.0% 3.0% 4.0% 4.0%

Council Tax increase

1.9% 1.9% 1.9% 1.9%

Business Rates Inflation

2.3% 3.0% 3.2% 3.1%

Revenue Support Grant (RSG) decrease

33% 41% 50% 20%

Housing rents

September CPI + 1%

Plus local rent

convergence where

applicable

September CPI + 1%

Plus local rent convergence

where applicable

September CPI + 1%

Plus local rent convergence

where applicable

September CPI + 1%

Plus local rent convergence

where applicable

Total NHB grant

£2,174,000 £2,235,034 £1,968,917 £1,518,514

Council Tax Base increase

0.46% 0.22% 0.22% 0.22%

17. Background Papers 17.1 The following information, available on the internet, was used in writing this

report: 1. Office of Budget Responsibility, Economic and fiscal outlook supplementary

economy tables – March 2015 2. Bank of England, Inflation Report May 2015: Prospects for inflation

3. Office of National Statistics, EARN01: Average Weekly Earnings. May-2015

18. Appendices None