Medium Term Financial Strategy (MTFS) 2023/24 - 2027/28

Hyper- inflation has exacerbated the uncertainties of accurate modelling adding pressure to the current year as well as forecasting for the future years impact, increased pay award 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 shows the financial gap expected over five years with the proposed use of reserves. These are shown in more detail within the review of reserves section.

In December 2021, the budget approach was agreed for planned use of reserves of £20m to allow time to identify cuts and efficiencies required over a three-year period 2022/23 to 2024/25. The scale of the challenge required a radically different approach to the budget. With reducing resources, the Council cannot keep doing everything it has previously done, so the approach needs to be more clearly linked to the hierarchy of delivering on thrive priorities through the Health and Wellbeing Strategy and the Economic, Housing and Investment Strategies.

Based on estimates outlined in this report, the Council will need to close a cumulative financial gap of £55m in the next five years. This impact will be mitigated temporarily through the agreed planned application of £14m budget sustainability reserve (£6m in 2022/23). In addition, the gap assumes use of pandemic reserves of £8.9m in the current year, £13.5m in 2023/24 and £3m in 2024/25.

This is an extremely challenging medium-term forecast. Using reserves in this way means that it is crucial to plan and deliver a schedule of savings, efficiencies and reinvestment to achieve a balanced budget in future years and to achieve Thrive priorities.

Budget approach

The Budget approach incorporates the following activities:

• Priority Zero Based Budget Challenge
• Priority Based Transformation Programme
• Planned use of reserves

Work has commenced to generate options for budget cuts and savings and areas for investment within required timescales and guided by the budget approach framework. In February 2023, a report will propose a budget and council tax for 2023/24 to reflect statutory requirement to produce a balanced budget by 11 March each year and recommend this to Council in late February 2023.

The financial gap can be summarised as follows (there may be slight differences due to roundings):

Table 2 - rates (at a glance) used within the MTFS 2023/24 to 2027/28 assumptions

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. All budget growth (excluding social care demand or fees) must be funded through planned savings.

The starting point for the above forecast is the 2022/23 net budget of £254.304m approved by Council in February 2022. The forecast assume delivery of this budget and ongoing costs are incorporated into the projections.

Inflation

Inflationary pressures (unavoidable)

The inflationary pressures identified in 2022/23 will have a cumulative effect across the MTFS period. It is anticipated that levels of inflation will not reduce significantly by the end of 2022/23 and therefore there is likely to be ongoing pressures during 2023/24 as well.

The CPI and RPI assumptions are based on current Office for Budget Responsibility (OBR) forecast and shown in table 2 above. CPI potentially impacts on both costs and funding.

Energy costs

Energy costs are set within a North East Procurement Organisation (NEPO) framework. 2022 is an unprecedented year in relation to energy costs with +100% increase in both Gas and Electricity costs with expectation to rise further in 2023/24.

Fuel costs

Fuel cost have risen significantly in 2022, although recently started to reduce but still high cost compared to 2021 with uncertainty as to future years.

Pay pressures

Current Pay award 2022/23 made by the National Employers is significantly higher than previously estimated (5.7%). Assumed 1.75% pay award over future years which would be above the NLW set for 2024. 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.

Demand pressure (Social Care)

Increasing demand across Social Care in both Adult Social Care and Children's Services. This is due to the increase in population of older people fee increases in the commissioned sector in order to meet the cost of care. In addition, there are increases in demand pressure on Looked after Children and Care packages for children with multiple complex needs.

Corporate pressures

Cost pressures such as pensions costs, and a range of pay issues requiring a fundamental review of the whole pay and grading structure to tackle recruitment and retention issues and market pressures facing the Council, including job evaluation review covering all posts.

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 2022/23 and 2026/27 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 £1m 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, the New Homes Bonus scheme was due to be phased out by now, however it remains a key funding source for some councils. The New Homes Bonus money is in the Local Government system, and we anticipate that the funding would be redistributed via an alternative mechanism where the Council would expect to receive an allocation.

Regarding Better Care Fund, the Council has received inflationary increases in previous years and expects this to continue. Although the Improved Better Care Fund received a CPI increase in 2022/23, it has assumed cash flat in the current forecast as there is uncertainty this will continue.

Inflationary increases in respect of the Public Health 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.

Regarding Social Care reforms which will see the cost of care capped, it is anticipated that additional funding will pay for these reforms. Although the increase in funding may be significant, it will be coupled with new burdens. The MTFS has assumed that the reforms are cost neutral to the Council overall and not been included at this time.

In recent years, the Government have provided additional social care grants of which we assume will continue. There are well documented national pressures on Social Care, and the need for additional Social Care Funding has been prominent in the recent Government Leadership contest.

In 2022/23 the Council received a Lower Tier Services Grant of which we expect was one off in nature. However, the Council also received a new Services Grant which is anticipated will continue in some form of distribution to the Council.

Council resources

There is still no clarity from Government on funding beyond the current year therefore it is assumed the Revenue Support Grant (RSG) model will be in place going forward. The Settlement will not be known until mid to late December. It was announced (prior to changes to Government Leadership and Cabinet) that a possible 2-Year settlement may be delivered although this now appears unlikely.

For forecast purposes only a 1.99% increase in council tax has been assumed, and a 1% Adult Social care precept has also been assumed. Should the Government increase the Council Tax referendum limit, or allow for additional Adult Social Care precept and the Council decide to apply increases above those limits then every 1% increase would result in £1m of additional income.

A revised Council Tax and Business Rates base will be updated and will go to Cabinet in January 2023, in advance of setting the Council Budget in February 2023.

The Council receives Section31 compensation from Government when they decide to freeze the business rates multiplier which is applied against the rateable value of business properties.

This has been capped or frozen by the Government on many occasions previously. In 2018/19 it has been uprated using Consumer Price Index rather than the (higher) Retail Price Index. Our estimates are based on modelling with 2% uplift for future years.

Current Government policy is that Business Rates reset will occur in 2025/26 and at this point Section31 compensation grants would end, but the equivalent funding would be returned to the Council through some other mechanism.