Budget Report

REVENUE BUDGET 2014-15 AND CAPITAL PROGRAMME 2014-19
Background

The financing of local government changed fundamentally in 2013/14. Key aspects of the new system as it impacts on Luton are set out below:

A)The Council now retains 49% of its business rates income. It therefore benefits from business development in the town, and loses out from reductions in the business base, or from reductions in business rate valuations (independently determined by the Valuation Agency, part of HMRC).Significant reductions in business rate valuations are having an adverse impact on the Council to a greater degree than was expected in the 2013/14 tax setting.
B)The Council receives a business rates ‘top up’ which increases in line with the retail price index.
C)Revenue Support Grant no longer variesin accordance witha needs-based assessment of population, deprivation etc. For the foreseeable future this grant will reduce significantly year on year, as Government tries to reduce public sector spending. The Government’s provisional grant figure for Luton in 2014/15 is an 18.6% reduction on the 2013/14 figure. (And the 2015/16 provisional figure is a 29.3% reduction on the 2014/15 figure.) Due to the timescales of the consultation on the Local Government Financial Settlement, the Council’s response had to be made under urgent action, rather than reported to Scrutiny and Executive. The response is attached as part of Appendix D, and sets out concern that there is a correlation between deprivation, ethnicity, and the highest levels of grant reduction.
D)The Council Tax Support Scheme is now a locally determined scheme (replacing the former Council Tax Benefit). Unlike most other Councils, Luton has not changed the eligibility criteria for the scheme at all, despite the reduced financial support from Government. It should be noted that any increase in caseload, or in Council Tax, increases the cost of the scheme for the Council.
E)The Council receives a number of specific grants from Government. The amount receivable from the Education Services Grant is dependent on the number of pupils educated in local authority schools, it reduces on a per pupil basis when pupils move to academies or free schools.
F)The Government is introducing a new Better Care grant to protect adult social care outcomes and reduce National Health Service costs. For 2014/15, the additional transfer from health to the Better Care pooled funding is £657k. For 2015/16, this will increase substantially, as is set out later in this report. The use of this funding has to be agreed between the Council and the local Clinical Commissioning Group, and approved by Government.
G)Since Luton is relatively grant dependent, with a low Council Tax base(the average property in Luton is valued between bands A and Bfor Council Tax purposes, and Luton’s Council Tax level is below the national average), the high levels of revenue support grant reduction have a very significant impact on the Council.This means that the Council needs to be prepared to make major savings and increase its income on an ongoing basis, in order to seek to meet the aims of its Prospectus 2013-2016, to:

Lead the borough to financial security and set it on course for future prosperity;
Deliver essential services that residents rely on;
Manage on much less funding from Government than in the previous three years.

The Audit Commission’s report of November 2013, Tough Times, reported that external auditors regarded 36% of all Councils to be at risk of not delivering their medium term financial plans. The Local Government Association’s financial analysis placed Luton in the lowest 30% for all 4 of the measures they used to assess future financial prospects. Grant Thornton’s review of local authority financial resilience noted that ‘the majority of councils felt a tipping point would be faced in 2015/16’ and also that ‘some commentators harbour serious doubts about the sustainability of the current model of local government beyond 2014/15’.

The provisional revenue support grant settlement for 2014/15is £552k less than the planning figure included in the 2013/14 grant announcement. This could have been worse: the Chancellor announced in his December Autumn Statement that Local Government was one of the relatively few areas protected from further cuts for 2014/15. Another positive is that as part of the summer consultations Government initially suggested that they would top-slice the New Homes Bonus currently received by Councils to fund infrastructure development from 2015/16. Luton was one of many authorities who responded objecting to this approach, and following consideration of the responses Government withdrew that proposal.

Current Position
Spending Power

In the papers published as part of the grant settlement the Government has not set out levels of grant reduction by authority. Instead, as last year, it has made what is stated to be a comparison of ‘spending power’ between 2013/14 and 2014/15. To calculate this civil servants have used an estimate of 2014/15 Council Tax, a number of specific grants, and what they call the ‘settlement funding assessment’. The settlement funding assessment is made up of the revenue support grant, the business rates top up grant, and an estimate of business rates income based on the figures used by Government for the 2013/14 grant settlement. The problem with this is that business rates are very volatile. Appeals against valuations, and changes in the business make up of an area, can have a major impact. In Luton’s case the current business rates estimate for 2014/15, excluding any allowance for 2013/14 losses, is £2.93million less than the figure used in the original spending power estimate.

There are further issues with the spending power calculation. Firstly, it does not take into account changes in the Education Services Grant. If a substantial number of schools become academies or free schools in a year, that grant reduces, but this is not recognised in the government’s definition of spending power. Secondly, it includes funding which is ring-fenced, to Public Health and to Health and Social Care. Luton is due to receive an additional £1.178m of Public Health funding in 2014/15, and, in conjunction with the Clinical Commissioning Group, £657k of funding for social care that will improve health outcomes. The funding will be an increase in the Council’s overall spending power, but it cannot be used to reduce the level of savings needed as a result of:

a)The 18.6% reduction in revenue support grant
b)The losses in business rate income
c)The increases in demand for some statutory services.

Set out below is the Government’s analysis of 2014/15 changes in spending power, together with Luton’s reduced spending power based on the budgeted business rates.

Spending Power per Government analysis produced on 18 December.

/ %age change / Spending Power per dwelling
Luton / -4.1 / 2,211.07
Central Bedfordshire / 0 / 1,883.18
Bedford / -1.2 / 2,174.13
Hertfordshire / -0.6 / 1,663.99
Buckinghamshire / 0.1 / 1,603.67
Unitaries without Fire - average / -2.9 / 1,977.74
England - average / -3.1 / 2,248.03

Luton’s spending power with its reduced business rates income

/ -5.7 / 2,173.52
NB, the shire counties do not provide the full range of services for their areas, so their powers per dwelling are not comparable with the others shown here. It will be noted that Luton’s budgeted spending power per dwelling is below that of the England average, and below that of Bedford.
Savings and Increases in Income

The level of savings/increased income included in the 2013/14budget was £18.3million. For 2014/15 the savings and income increases included in the budget can be shown as follows:

£000
Savings/increased income / 16,421
Additional Dividend from London Luton Airport Limited used for revenue purposes / 1,888
Gross Total / 18,309
Estimated Savings falling outside the General Fund / 100
Net Total / 18,209

The Council’s budget sets out the resources available to provide each of the Council’s services over the next year. The Executive has made very clear to officers that the aim should be to ensure that core services to the public are maintained as a first priority, and that efficiency savings are maximised. To this end, the Corporate Leadership Management Team (CLMT) have worked with the Council’s Luton Excellence Support Team (LEX), all Heads of Service, finance staff and managers throughout the Council to put this budget together.

Council Tax

Last year the Council increased the Council Tax by 2%. The Government has again announced the offer of a Council Tax freeze grant. This is equivalent to a 1% rise in the Council Tax - prior to the reduction in the tax base that arises from the cost of the Council Tax Support Scheme. The total on offer is therefore £686k, even though the Council only gets £536.5k from a 1% increase

The Government hasnow also made clear that tax freeze grant funding is not time-limited. Ministers have also made clear that they are very keen on all authorities taking the grant, to avoid the impact of a tax increase on taxpayers.

The Government has announced that under the provisions of the Localism Act, it will determine a referendum limit. Any tax increase above that limit will require an authority to hold a referendum – which in 2014/15 would be expected to be run alongside the European elections. The Government last year stated that the limit was likely to be 2% or less. In recent weeks press articles have indicated that the Secretary of State is considering a 1.5% limit, and is contemplating action against those authorities who have been increasing their Council Tax by amounts just below the referendum limit each year.

The changes in the Council Tax base for 2014/15 (as explained in the Executive report of 16 December ) means each 1% tax increase will now yield £536.5k. A 1.5% increase will give £804k additional income. This is £118k more than the Tax Freeze offer. The budget has been prepared on the basis that the Executive’s previous strategy of increasing the Council Tax will continue, but that for 2014/15 and 2015/16, this will be limited to 1.5%, reverting to 2% thereafter.

From a purely financial viewpoint, a tax increase has the following advantages:

It helps in the process of making the authority less reliant on grant – a key part of the Council’s financial strategy
The level of additional income that can be achieved from a tax increase is greater than that achievable from taking the tax freeze grant.
The tax level is higher in the following year. So tax increases in future years yield more than if the tax freeze grant is accepted. Therefore a strategy of tax increases reduces the ongoing savings requirement when compared with a strategy of accepting a tax freeze grant.

To illustrate the longer term impact of accepting the freeze grant, compared with increasing the Council Tax:

If the Council Tax is frozen in 2014/15 and 2015/16, and then increased by 2% in 2016/17, the amount achieved from that 2% increase will be £1.65million less than if the Council Tax is increased by 1.5% in both 2014/15 and 2015/16, then increased by 2% in 2016/17.

Therefore, given the ongoing reductions required in the Council’sbudget, a tax free strategy will require substantially more savings than a strategy of ongoing tax increases, even though there may be only a small difference between the amount receivable as a tax free grant and the amount raised from a tax increase in any year.

A 1.5% increase in Luton Borough Council’s part of the Council Tax will result in an average increase for Luton tax payers of £13.03 per annum, or 25p a week, given that Luton’s average Council Tax per dwelling is £869, as set out in Appendix E.

Members will also be aware that Executive has already determined to protect the neediest from the impact of any tax increase by maintaining the Council Tax Support scheme for 2014/15 on essentially the same basis as the former Council Tax Benefit scheme, despite the ongoing reduction in government funding to support the scheme.

Income Generation.

Luton Borough Council is relatively heavily grant-dependent. This means that standard percentage reductions in grant have a greater impact on Luton than on the average authority. The reason that Luton is grant-dependent is that it has a higher than average relative need, and a lower than average tax income per dwelling. As a resultthe old, needs-related grant system gave it above average levels of grant. Grant reductions in future years are certain, and so the Council needs to maximise its ability to raise income in order to be able to fund demand-driven services such as adults and children’s social care, refuse collection and waste disposal.

Under the new system, to increase this funding, the Council needs to increase its income from local business rates and other sources. The Council cannot increase the level of the business rate (this is set nationally).To increase income there has to be an increase in Luton’s business base. The new scheme is intended to make all Councils focus on encouraging business growth, in order to drive the national growth agenda. Luton’s issue is that it is already an exceptionally highly developed area with tightly drawn boundaries, so the available space to deliver significant additional business - alongside the required housing and schools necessary for the local population - is much more limited than in most areas. The Council is determined to respond positively to this challenge, and the Prospectus makes clear that the first point in the three point plan at the heart of the document is the aim to increase income from business growth. The Napier Park proposals should help, but members will be aware that outline planning approval does not guarantee scheme delivery, and that the office part of the scheme may take some time to become viable.

Success in the new system can generate a virtuous circle. More business will deliver more jobs and more income for the local authority. When local education and training is working well, there will be good Luton-based candidates for the additional jobs. When there is more employment, council tax support costs will go down. It is also possible that social problems will reduce and demands on social care may lessen (with the exception of the pressures resulting from an increase in the elderly population requiring care). This is in line with the second point at the heart of the Prospectus; investment in education and training.

On the other hand, if the business base reduces, there is the danger of a vicious circle: less income for the Council, less jobs, more demands on social care, a greater cost in council tax support, and a greater level of savings needed in Council services at a time when the demand for those services is increasing. The third point at the heart of the Prospectus is working effectively in partnership to ensure the most vulnerable in Luton are safe and supported, and the challenge to do this will be far greater if income cannot be increased.

It should also be noted that the Government is currently offering income in terms of a New Homes Bonus for each new home completed (and the net increase in empty homes brought back into use) each year. For 2014/15, this is worth £500k for Luton. However, there are 2 issues with this.
The funding for New Homes Bonus is top-sliced from the amount that would otherwise be available for grant. If this was not done, it is estimated that Luton would receive £3.07m more in grant, rather than £500k in bonus.
Homes and their occupants also add demands for infrastructure such as schools, and services such as waste collection and disposal, adult social care, etc. The previous, needs-based funding system recognised to a degree the increased costs associated with an increase in population, but the new one does not. Milton Keynes Council, who have experienced a greater increase in building and population than most over the years, estimate that every 1,000 houses generate £3.5million in additional cost, assuming an increase in population of 3,000 (Luton’s population increase may be less, as more will be redistributed from existing Luton housing than in Milton Keynes), and that local fees and charges and council tax offset £1.6m of that cost (Luton’s offset will be less, as the average council tax in Luton is 10% less than the Milton Keynes average, so the overall cost in Luton is likely to be similar). Hence a £1.9million net cost. New Homes Bonus on 1,000 houses will deliver about £1.1 million per annum for Luton, so additional housing in Luton is likely to result in a significant additional spend pressure overall. The initial estimate is likely to be around £800k per 1,000 houses, but the actual cost will depend on many variables, such as whether existing schools in the areas of expansion have vacant places, which would reduce costs significantly.

The budget includes significant income from trading with schools, housing associations and others, as well as dividend from London Luton Airport Limited.

Spend Pressures

The budget reflects increasing demand-driven spend pressures in certain key areas, in particularAdult social care, in terms of those requiring physical and learning disability care packages, and care for the elderly, at home as well as in residential and nursing environments.The challenge for the Council is to manage the increasing costs of these statutory, demand-driven services when its income is reducing substantially.

Capital Programme Key Issues