Medium Term Financial Strategy (MTFS) 2024/25 - 2028/29
Appendix 2 - MTFS estimates
Stubbornly high inflation continues to exacerbate the uncertainties of accurate modelling, adding pressure to the current year as well as forecasting for the future years impact, substantial pay awards and increased uncertainty around funding.
The MTFS has been prepared on best estimates using the current information we have to date amidst significant uncertainty about international issues, the national economy and cost of living crisis. Given the high uncertainty the impact of any changes to some of these assumptions and key risks are included in the supporting information. The table below shows the estimated financial gap over five years with the proposed use of reserves. These are shown in more detail within the review of reserves section.
2024/25 is the final year of the 3-year agreed budget approach which includes planned use of reserves agreed by Cabinet in December 2021. However, following the 2022/23 Revenue Outturn reported to Cabinet in June 2023, alongside active management of reserves agreed at Q1 Revenue Monitoring reported to Cabinet in July, an updated and reprofiled use of reserves is proposed in this MTFS. It is proposed that the use of reserves is extended for a further two years into 2026/27, with £11.175m in 2024/25, £7m in 2025/26, and £4m in 2026/27 to smooth the impact of cuts over the next 4 years. Significant use of reserves can only be justified on the following two fundamental outcomes:
- permanent savings must be delivered to close the estimated funding gap without further reliance on reserves beyond the MTFS period; and
- there must be a plan to replenish reserves to a prudent level over the MTFS period
The extension on the planned use of reserves from 3 to 5 years is predicated on the following:
- the impact that high inflation is having on the MTFS since the original strategy on use of reserves was agreed in December 2021
- the active management of reserves that allows this flexibility
- the current Capacity Fund and a further £2m proposed in 2024/25 to drive through to sustainability
- a budget approach to identify and deliver a pipeline of budget cuts of £32m over the next 4 years
- a proposed plan to replenish reserves from 2026/27
This remains an extremely challenging medium-term forecast. Using reserves in this way means that it is crucial to plan and deliver a pipeline of savings, efficiencies, and reinvestment to achieve a balanced budget in future years and to achieve Thrive priorities.
The financial gap can be summarised as follows:
2023/24 £m | Indicative Budget Forecasts | 2024/25 £m | 2025/26 £m | 2026/27 £m | 2027/28 £m | 2028/29 £m |
---|---|---|---|---|---|---|
289.903 | New Revenue Budget | 281.885 | 308.070 | 323.426 | 342.445 | 352.570 |
(8.996) | Base adjustments | (1.563) | 0.000 | 0.000 | 0.000 | 0.000 |
General inflation | 0.209 | 1.600 | 0.599 | 0.543 | 0.326 | |
Contractual inflation | 0.286 | 0.292 | 0.298 | 0.304 | 0.310 | |
Corporate pay pressures | 8.193 | 4.998 | 5.058 | 3.619 | 3.681 | |
Corporate pressures - capacity fund | 2.000 | 0.000 | 0.000 | 0.000 | 0.000 | |
Corporate pressures - replenish reserves | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 | |
0.416 | Adults Social Care pressures | 9.016 | 3.593 | 4.366 | 4.443 | 4.487 |
Children's Social Care pressures | 3.434 | 0.646 | 0.662 | 0.678 | 0.694 | |
0.562 | Public Health | 0.239 | 0.361 | 0.368 | 0.375 | 0.383 |
Strategic economic investment (capital) | 4.371 | 3.867 | 2.669 | 0.162 | (3.038) | |
281.885 | Revised base budget | 308.070 | 323.426 | 342.445 | 352.570 | 359.413 |
Revenue support grant | (18.733) | (19.107) | (19.489) | (19.879) | (20.277) | |
Retained business rates | (34.796) | (35.492) | (37.213) | (38.989) | (39.768) | |
Top up grant/equalisation | (23.196) | (23.660) | (24.134) | (24.616) | (25.109) | |
Council Tax base and growth | (116.826) | (120.834) | (124.962) | (129.213) | (135.592) | |
Other grants (including Public Health) | (87.460) | (88.353) | (89.264) | (90.192) | (91.140) | |
(264.998) | Total funding resources | (281.012) | (287.447) | (295.062) | (302.890) | (309.885) |
16.887 | Funding gap (before reserves) | 27.058 | 35.979 | 47.383 | 49.680 | 49.528 |
(4.524) | Pandemic reserves | (2.000) | (2.000) | (2.000) | 0.000 | 0.000 |
(2.363) | Other reserves | |||||
(10.000) | Budget sustainability reserve | (9.175) | (5.000) | (2.000) | 0.000 | 0.000 |
0.000 | Total reserves | (11.175) | (7.000) | (4.000) | 0.000 | 0.000 |
Minimum cumulative funding gap | 15.883 | 28.979 | 43.383 | 49.680 | 49.528 | |
Minimum annual funding gap | 15.883 | 13.096 | 14.404 | 6.297 | (0.152) | |
Options to close gap: | ||||||
Adult Social Care interventions | (2.189) | (1.728) | (2.201) | (2.224) | (2.227) | |
Children's Social Care interventions | (0.394) | (1.105) | (1.244) | (0.392) | (0.392) | |
Corporate interventions | (5.666) | (0.292) | 0.000 | 0.000 | 0.000 | |
Unidentified to balance budget | (7.634) | (9.971) | (10.959) | (3.681) | 0.000 | |
Provisional balanced budget | 0.000 | 0.000 | 0.000 | 0.000 (32.245) | (2.771) |
Rates used within the MTFS 2024/25 to 2028/29 assumptions
Assumptions | 2024/25 | 2025/26 | 2026/27 | 2027/28 | 2028/29 |
---|---|---|---|---|---|
CPI | 5.41% | 2% | 2% | 2% | 2% |
Pay inflation | 5.41% | 2% | 2% | 2% | 2% |
Council Tax increase (core) | 2.99% | 1.99% | 1.99% | 1.99% | 1.99% |
Council tax increase (ASC) | 2% | 1% | 1% | 1% | 1% |
Capital investment must also be kept under review and clearly aligned to priorities and financial sustainability to ensure affordability and to manage risks. This will include a strategic investment plan to underpin the prioritisation of capital investment.
The starting point for the MTFS forecast is the 2023/24 net budget of £289.903m approved by Council in February 2023, adjusted to reflect amendments agreed by Cabinet as part of Q1 Revenue Monitoring, resulting in a revised 2023/24 starting base of £281.885m. The MTFS forecast assume delivery of this budget and ongoing costs are incorporated into the projections.
Inflation
Inflationary pressures
The inflationary pressures identified in 2023/24 will have a cumulative effect across the MTFS period. It is anticipated that levels of inflation will not reduce significantly by the end of 2023/24 and therefore there is likely to be ongoing pressures during 2024/25.
CPI assumption is based on current Office for Budget Responsibility (OBR) forecasts for 2024/25 and is thereafter based on the Government target of maintaining inflation at 2%. CPI impacts on both costs and funding.
Energy costs
Energy costs are set within a North-East Procurement Organisation (NEPO) framework. 2022 was an unprecedented year in relation to energy costs with +100% increase in both Gas and Electricity costs. Early estimates indicate that this will rise further in 2023/24 by c.15% for gas and 20% for electricity, before falling by c.20% in 2024/25. Fluctuations in the volatility of energy costs are managed through Contingency.
Fuel costs
Fuel cost rose significantly in 2022, although recently costs have started to reduce. This is however still high cost compared to 2021 with uncertainty as to future years.
Pay pressures
The current pay award offer for 2023/24 made by the National Employers is in line with 2022/23 at an increase of £1,925 per employee. This has yet to be confirmed. Assumed 5.41% pay award for 2024/25 and 2% thereafter in line with CPI. For planning purposes provision is included for the impact of pay awards and estimated impacts of the National Living Wage which are unfunded by government.
Contractual inflation
Rising costs to existing contracts.
Inflation | 2024/25 £m | 2025/26 £m | 2026/27 £m | 2027/28 £m | 2028/29 £m |
---|---|---|---|---|---|
Utilities increase | 0.000 | 0.000 | 0.100 | 0.100 | 0.100 |
Other costs (NNDR and insurance) | 0.209 | 0.213 | 0.217 | 0.221 | 0.226 |
Pay award | 7.693 | 2.998 | 3.058 | 3.119 | 3.181 |
Investment interest tapering | 0.000 | 1.387 | 0.298 | 0.304 | 0.310 |
Contractual inflation | 0.286 | 0.292 | 0.298 | 0.304 | 0.310 |
Total | 8.188 | 4.890 | 3.955 | 3.966 | 3.817 |
Corporate pressures
Job evaluation review has commenced in 2023/24 and it is expected to be finalised in 2025/26. It requires a fundamental review of the whole pay and grading structure to tackle recruitment and retention issues and market pressures facing the Council.
Strategic economic investment
The Council's capital investment plans are set out in the capital strategy and programme, with the latest approved programme covering the period between the 2023/24 to 2027/28 financial years. The effective use of capital resources, including asset management, is fundamental to the Council achieving its medium- and long-term strategic objectives. Capital investment has a significant impact upon the local economy and helps to ensure that the Council can continue to provide the best possible services and outcomes within Gateshead.
All capital investment decisions will have implications for the revenue budget. The revenue costs over the lifetime of each proposed capital project are considered when the project is being developed to ensure that the impact can be incorporated within the Council's financial plans and to demonstrate that the capital investment is affordable. Revenue implications may include the costs associated with supporting additional borrowing as well as any changes to the running costs associated with the asset or wider benefits to the Council such as the delivery of ongoing revenue budget savings or additional income through the generation of business rates, council tax or energy revenues.
The Council continues to explore external funding possibilities when developing capital projects to minimise the borrowing requirement as far as possible. Within the MTFS, assumptions have been made around the level of external funding in the future, but detailed work programmes will not be committed to until the allocations have been confirmed. Projects and investment plans may therefore be re-prioritised depending on the availability of external funding.
The generation of capital receipts can help to provide resources to support additional capital investment or can help to reduce the borrowing requirement and therefore the cost to the revenue budget. The generation of capital receipts to support the capital programme has historically been challenging, representing low land values and high remedial costs due to land contamination. It is currently assumed that £0.75m p.a. will be achieved through capital receipts and further consideration is needed into how the few potentially higher value sites can be brought forward to achieve improved capital receipts to support the delivery of capital schemes.
Significant challenges and priorities for the Council's capital investment over the medium term that are set out in the Council's key strategies include:
- investing in assets to enable the Council to meet its key objective of Making Gateshead a Place Where Everyone Thrives
- investment in housing to ensure the supply of housing best meets current and future needs and aspirations to create thriving, mixed communities throughout Gateshead
- investment to achieve the Council's climate change aspirations
- continuing to regenerate the Gateshead Quays and Baltic Business Quarter area as part of the Council's Accelerated Development Zone, working with our development partner to build upon the successful delivery of iconic projects such as the Sage Gateshead and Baltic to create a significant new mixed-use development to help unlock economic growth and generate additional business rates and raise the profile of Gateshead
- continuing to support the regeneration of Gateshead Urban Core to deliver a centre with the stature and vibrancy of a city and continuing to invest in improvements to local centres across Gateshead
- improving the Council's corporate ICT infrastructure, equipment and systems to improve connectivity, security and resilience and ensure that the Council remains fit for the future and can provide services as efficiently and effectively as possible
- investing in strategic infrastructure to support growth within Gateshead. This includes investment in areas such as transport infrastructure to provide an integrated transport system which meets demand and improves connectivity and accessibility as well as investment in the Council's schools to help increase capacity
- investing in the provision of energy infrastructure to support the expansion of the District Energy network to provide lower cost, lower carbon energy to support regeneration and economic development, generate income and provide long term resilience against rising energy prices
- meeting essential health and safety and mandatory obligations, such as Equality Act improvements, to improve the accessibility and sustainability of Council owned assets
The financial planning framework provided by the MTFS will provide the context for a Council Investment Plan that will inform the allocation of resources within the capital programme.
Resources - other grants
Regarding funding changes, for the Public Health Grant an indicative allocation for 2024/25 was published in March 2023 with an increase of 1.3% on 2023/24 levels. From 2025/26 inflationary increases in grant are anticipated. It should be noted if any funding formula are changed this could result in significant changes and potential reduction to grant. However, Government Departments may seek to mitigate the extent of any reductions to Councils that are adversely affected by formula changes by providing transitional arrangements.
For the Better Care Fund, the Council has received inflationary increases in previous years and expects this to continue.
There are well documented national pressures on Social Care and additional funding has recently been granted to support Social Care reforms, most notably the Market Sustainability and Improvement Fund and the Discharge Fund. Although the increase in funding is significant, it is coupled with new burdens, and therefore this funding does not help to reduce the Council's funding gap. Furthermore, the duration of this funding is uncertain, with Government announcements referring to 2023/24 and 2024/25 only, making the ability to efficiently plan and implement long term strategies extremely difficult.
The Council also received an increase for the Social Care grant in 2023/24 and assumed increases in 2024/25 based on the announcement about the national allocation. Beyond 2024/25, this has been assumed cash flat for future years.
The New Homes Bonus scheme was a key funding source for the Council and was due to be phased out by now. The Council received a small allocation for 2023/24 but no further funding has been included in the MTFS on the assumption that this grant will cease.
In 2023/24 the Council received a Services Grant which is anticipated will continue in some form of distribution to the Council.
The MTFS projections assume all grants will continue beyond 2023/24, with the exception of New Homes Bonus.
2023/24 £m | Funding / Grants | 2024/25 £m | 2025/26 £m | 2026/27 £m | 2027/28 £m | 2028/29 £m |
---|---|---|---|---|---|---|
(17.787) | Public Health | (18.026) | (18.386) | (18.754) | (19.129) | (19.511) |
(7.771) | Better Care Fund | (8.211) | (8.375) | (8.543) | (8.714) | (8.888) |
(11.387) | Improved Better Care Fund | (11.387) | (11.387) | (11.387) | (11.387) | (11.387) |
(19.543) | Social Care grant | (22.433) | (22.433) | (22.433) | (22.433) | (22.433) |
(2.654) | ASC MSIF | (3.990) | (3.990) | (3.990) | (3.990) | (3.990) |
(1.596) | ASC Discharge Fund | (2.650) | (2.650) | (2.650) | (2.650) | (2.650) |
(17.455) | S31 Business Rates | (18.399) | (18.767) | (19.142) | (19.525) | (19.916) |
(0.094) | New Homes Bonus | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 |
(2.365) | Services Grant | (2.365) | (2.365) | (2.365) | (2.365) | (2.365) |
(80.652) | Total | (87.460) | (88.353) | (89.264) | (90.192) | (91.140) |
Council resources
There is still no clarity from Government on funding beyond the current year and finance reform has been delayed until the next parliament. The Settlement will not be known until mid to late December and is likely to only be for one year.
On 12 December 2022 the Government announced changes to referendum limits for Council tax. As a result, following consultation the Council was able to increase Council tax by 2.99% and the Adult Social Care Precept by 2% for 2023/24. The Government have confirmed that the same principles will apply in 2024/25 but it's unclear how long these limits will remain in place. Each 1% increase results in approximately £1.1m of additional income. For forecast purposes, from 2025/26 onwards the MTFS assumes the rate returns to the previous levels of 1.99% maximum increase in council tax and 1% maximum increase in Adult Social care precept. These assumptions are for planning purposes only and Council Tax rates will be agreed by Council each year in February. A revised Council Tax and Business Rates base will be updated and agreed by Cabinet in January 2024, in advance of setting the Council Budget in February 2024.
The Council receives Section 31 compensation from Government when they decide to freeze the business rates multiplier which is applied against the rateable value of business properties.