Report from the Cabinet Member for Finance.
The Director of Finance gave Members an overview of the national funding context as a backdrop to its financial review and budgeting work, highlighting the challenges that the Council would face in the short to medium term.
Lower tier authorities had seen the biggest reduction in funding because the services that they provided were those that were deemed to be under the most pressure. It was noted that more recently the 4-year funding deal had provided a period of stability.
The overall reduction in funding in real terms sat at just under 29%. Some local authorities responded to the reductions by making cuts in the first instance but since that time local authorities had begun responding in new ways focusing on innovation and growth.
The Council’s income came from three sources: council tax, business rates and fees and charges (including commercial income). There were restrictions associated with two of these areas; council tax could only increase by a fixed amount and the council had no control over business rates.
The revenue support grant had now been withdrawn, meaning that the Council was no longer receiving any direct grants from government, which increased the volatility of the Council’s funding arrangements. As a result of the changes to the way in which local government was being funded, the government was reviewing business rates and undertaking a fair funding review.
Members were advised that the government set a baseline level of the amount it thought each council needed to deliver its core services. While local authorities would receive a proportion of business rate income, which was expected to increase from 50% to 75%, the remainder would be distributed based on the calculated need. There was a risk that any review of the baseline of business rates income would mean that over time the benefits seen from economic growth would be taken away.
The fair funding review would take account of a range of factors in determining the amount local authorities needed to deliver their services. Unlike the current methodology, it was proposed that the calculation would recognise sparsity, deprivation and rurality as cost pressures.
These changes had originally been intended to come into effect for the 2020/21 financial year however, as Parliamentary time was limited, it was anticipated that changes would now come into effect from 2021/22. This would mean that the budget deficit projected in the Medium Term Financial plan would be deferred by a year. Members sought clarification that this would not mean the Council would face a cumulative deficit the following year.
Committee members asked whether the council needed to be pushing more for fairer funding but reassurance was given that the intention was to update the formula to recognise the cost of service delivery to rural areas the only restriction was the Parliamentary time that was available. The Cabinet had responded to every consultation and the council was a member of both Sparse and the Shire Districts Network, which provided extra channels through which it could lobby. Some concern was expressed that urban local authorities were now starting to lobby for additional funding having recognised the lobbying being undertaken by rural authorities.
Three possible scenarios were outlined which resulted from the delay: a one-year spending review with no funding reform, a one-year spending review plus funding reform or a three-year spending review plus funding reform. One member referred to recent conference sessions that he had attended. He stated that the indication there had been that there would be a one-year spending review with no funding reform.
Members’ attention turned to growing commercial income as a council and how the councils who pursued commercial opportunities would fare better than those that relied on more traditional forms of funding. There was some concern about the impact of any decision by CIPFA to adjust the prudential code which might prevent a council from developing commercial income. Members were advised that whilst it was important to diversify, the council needed to be cautious that it did not over-expose itself by relying on one form of income. CIPFA was asking local authorities to consider setting up a reserve around commercialism which would help stabilise any fluctuations in commercial income.
Within the diagrams showing the breakdown of council funding, Members suggested it would be helpful to show income from commercial activity separately; it was noted that commercial activity had only come to fruition within the past two to three years.