Your Councillors


 

 

 

 

 

 

MAIDSTONE BOROUGH COUNCIL

 

MEDIUM TERM FINANCIAL STRATEGY

2021/22 – 2025/26

 


 

CONTENTS

 

 

1. Overview and Summary of Medium Term Financial Strategy ............... 1

2. Corporate Objectives and Key Priorities................................................. 3

3. Economic Environment............................................................................ 4

4. Current Financial Position....................................................................... 9

5. Available Resources.............................................................................. 13

6. Scenario Planning.................................................................................. 17

7. Revenue Projections.............................................................................. 20

8. Capital Strategy..................................................................................... 24

9. Consultation........................................................................................... 27

 

 

 

 

 

 

 

 

 

 

 



 

1.          OVERVIEW AND SUMMARY OF MEDIUM TERM FINANCIAL STRATEGY

 

1.1        The Medium Term Financial Strategy (MTFS) sets out in financial terms how the Council will deliver its Strategic Plan over the next five years.  The Council agreed a new Strategic Plan in December 2018 covering the period 2019 to 2045.  The priorities and outcomes in the Strategic Plan are currently being reviewed with a view to Council agreeing a refreshed Strategic Plan in February 2021.  The vision remains relevant and it is expected that it will retain its four key objectives: embracing growth and enabling infrastructure; homes and communities; a thriving place; and safe, clean and green.  Further details are set out in Section 2.

 

1.2        Delivering the Strategic Plan depends on the Council’s financial capacity and capability.  Accordingly, the MTFS considers the economic environment and the Council’s own current financial position.  The external environment (Section 3) is particularly challenging because of the economic impact of Covid-19.  In assessing the Council’s current financial position (Section 4), attention therefore needs to be paid to its resilience, including the level of reserves that it holds.

 

1.3        Most key variables in local authority funding are determined by central government, such as the Council Tax referendum limit and the share of business rates that is retained locally.  Because of economic uncertainty, central government is not prepared to give local authorities any certainty about these factors beyond 2021/22, thus making future planning even more difficult.  A consideration of the funding likely to be available in the future is set out in Section 5.

 

1.4        In view of these multiple levels of uncertainty, it is imperative that the MTFS both ensures the local authority’s continuing financial resilience and is sufficiently flexible to accommodate a range of potential scenarios.  The Council has prepared financial projections under different scenarios, following a practice that has been followed for a number of years.  Details of the assumptions made in the different scenarios are set out in Section 6.

 

1.5        The MTFS sets out the financial projections in Section 7. Various potential scenarios were modelled, described as adverse, neutral and favourable.   The table below shows projections under the neutral scenario. 

 

Table 1: MTFS Revenue Projections 2021/22 – 2025/26

 

 

20/21

20/21

21/22

22/23

23/24

24/25

25/26

 

Orig budget

Latest projn

Forecast

 

£m

£m

£m

£m

£m

£m

£m

Council Tax

16.8

16.1

17.1

17.7

18.3

19.0

19.6

Business Rates

4.5

3.7

3.9

3.3

3.5

3.8

4.1

Other Income

21.7

17.4

18.8

20.0

21.2

22.9

23.7

Total Funding Available

43.0

37.2

39.8

41.0

43.0

45.7

47.4

Predicted Expenditure1

43.0

43.2

43.1

41.6

43.0

45.0

47.1

Budget Gap

0.0

-6.0

-3.3

-0.6

0.0

0.7

0.3

Existing Planned Savings

0.9

0.6

0.2

 

 

Contribution to Reserves

 

 

0.2

0.7

0.3

Residual Budget Gap

-2.4

-0.0

0.0

0.0

0.0

 

 

In accordance with legislative requirements the Council must set a balanced budget.  The MTFS sets out a proposed approach that seeks to address the budget gap and therefore enable the Council to set a balanced budget.

 

1.6        The Council’s strategic priorities are met not only through day-to-day revenue spending but also through capital investment.  The Council has adopted a Capital Strategy, which sets out how investment will be carried out that delivers the strategic priorities, whilst remaining affordable and sustainable.  As set out in Section 8 below, funds have been set aside for capital investment and further funding is available, in principle, through prudential borrowing.

 

1.7        The MTFS concludes by describing the process of agreeing a budget for 2021/22, including consultation with all relevant stakeholders, in Section 9.


 

2.          CORPORATE OBJECTIVES AND KEY PRIORITIES

 

2.1        The Council has a Strategic Plan which was approved by Council in December 2018.  It sets out four key objectives, as follows:

 

-                       Embracing Growth and Enabling Infrastructure

-                       Homes and Communities

-                       A Thriving Place

-                       Safe, Clean and Green.

 

‘Embracing growth and enabling infrastructure’ recognises the Council’s role in leading and shaping the borough as it grows. This means taking an active role in policy and master planning for key sites in the borough, and where appropriate, investing directly ourselves.

 

‘Homes and communities’ expresses the objective of making Maidstone a

place where people love to live and can afford to live. This means

providing a range of different types of housing, including affordable

housing, and meeting our statutory obligations to address homelessness

and rough sleeping.

 

‘A thriving place’ is a borough that is open for business, attractive for

visitors and an enjoyable and prosperous place to live for our residents.

We will work to regenerate the County town and rural service centres and

will continue to grow our leisure and cultural offer.

 

A ‘safe, clean and green’ place is one where the environment is protected

and enhanced, where parks, green spaces, streets and public areas are

looked after, well-managed and respected, and where people are and feel

safe.

 

2.2        Since the adoption of the Strategic Plan in December 2018, the objective of ‘Embracing growth and enabling infrastructure’ has started to be realised, for example through our work on the Innovation Centre and a new Garden Community.  Amongst initiatives to help make Maidstone a ‘Thriving Place’ include investment at Lockmeadow and on the Parkwood Industrial Estate.  Our ‘Homes and Communities’ aspirations are being achieved by investment for example in temporary accommodation and new build housing schemes at Brunswick Street and Union Street. The objective of a ‘Safe, Clean and Green’ place has been emphasised by Council’s decision to declare its recognition of global climate and biodiversity emergencies.

 

2.3        Covid-19 and the overall financial climate for local government have compelled the Council to re-prioritise its objectives.  While the overall vision remains unchanged, the way in which it is achieved and the pace of delivery are likely to be affected.  In some areas, it is recognised that funding pressures and the changed environment created by Covid-19 will lead to the Council’s ambitions being modified in the short term.  The pressures also demand that the Council takes a radical look at how it organises its work, leaving no stone unturned in the search for greater efficiency.  Further details are set out in the proposed strategy that is described in section 7 below.

 

 

3.          ECONOMIC ENVIRONMENT

 

Macro outlook

 

3.1        Before the onset of Covid-19 in early 2020, economists were starting to identify some signs of stabilisation after a period of slowing global growth.  The IMF projected that global growth, estimated at 2.9 percent in 2019, would increase to 3.3 percent in 2020 and 3.4 percent in 2021.  These projections were accompanied by caveats about the risks around a further escalation in the US-China trade tensions, a no-deal Brexit, the economic ramifications of social unrest and geopolitical tensions, and weather-related disasters[1].

 

3.2        The UK’s growth rate was projected to be slower, stabilising at 1.4 percent in 2020 and increasing to 1.5 percent in 2021.  However, these forecasts assumed an orderly exit from the European Union followed by a gradual transition to a new economic relationship with the EU.

 

3.3        Covid-19 has changed the picture completely, with economic activity contracting dramatically during 2020.  Although activity picked up in May and June as economies re-opened, as of November 2020 the pandemic is continuing to spread and the recovery has stalled.  The UK, with its dominant service sector, has been hit particularly hard, with services that are reliant on face-to-face interactions, such as wholesale and retail trade, hospitality, and arts and entertainment seeing larger contractions than manufacturing.  IMF projections are set out in the graph below.

 

Figure 1: Real Per Capita Output (Annual percent change in constant 2017 international dollars at purchasing power parity)

 

 

Source – IMF World Economic Outlook, October 2020

 

The IMF projects a contraction in output in the UK of 10.4% in 2020, followed by growth of 5.4% in 2021.  This is broadly consistent with the Bank of England’s latest projections, which envisage a fall in GDP of 11% in Q4 of 2020.[2]

 

Public Finances

 

3.4        The government’s response to Covid-19 has been to borrow on an unprecedented scale both to support public services, businesses and individuals and to absorb the impact of the downturn on tax revenues.  This is expected to lead to public borrowing of £420bn (21.7% of GDP) in 2020/21[3], a level not seen outside the two world wars of the twentieth century.

 

3.5        In the short term, the government is able to fund this deficit without an increase in the cost of borrowing. This is because the Bank of England is likely to maintain the government’s borrowing costs at historic lows, supported by quantitative easing.  The second lockdown in November 2020 was accompanied by a £100 billion expansion in QE and there is likely to be more to come.

 

3.6        The low cost of borrowing and the need to promote economic recovery means that there is currently a strong justification for continued large scale public expenditure.  However, this is not sustainable in the long term.  Prior to the pandemic, public sector net debt was around 80% of national income, well above the 35% of national income seen in the years prior to the 2008 financial crisis. The Institute for Fiscal Studies forecasts that in 2024–25, public sector net debt will be just over 110% of national income in their central scenario, close to 100% of national income in their optimistic scenario and close to 130% in their pessimistic scenario.[4] When the economy eventually recovers, the IFS states that policy action will be needed to prevent debt from continuing to rise as a share of national income.

 

Local Government Funding

 

3.7        Local government forms only a small part of the overall government expenditure related to Covid-19.  The pie chart below sets out the estimated impact of the various elements that have contributed to the overall increase in public borrowing this financial year.

 


 

Figure 2: Drivers of increase in government borrowing 2020/21 (£ billion)

 

 

 

-   ‘Other public services’ includes public transport, education and local government.

-   ‘Other’ includes the devolved administrations, revenue measures, the Culture Recovery Fund, 'Eat Out to Help Out' and several other programmes.

 

          Source: IFS Green Budget 2020

 

3.8        By comparison with the amounts being spent on direct support for businesses and individuals and on the NHS, local government has received relatively little support.  Direct unringfenced government grants have amounted to £4.6 billion, which has been paid out in a number of different tranches as the increasing scale of the pressure on local authorities has emerged.  There has also been a plethora of other grants to local councils to cover specific initiatives, typically accompanied by detailed conditions about how the grant is to be spent.

 

3.9        The finances of some local authorities, mostly upper tier authorities, were already fragile before the onset of Covid-19.  This has led to much discussion about whether the pressures of Covid-19, on top of any pre-existing issues, would lead to individual authorities failing to balance their budgets.  A number of councils have been in discussions with the Ministry of Housing, Communities and Local Government (MHCLG) about this risk.  For example, the London Borough of Croydon sought additional financial support, which prompted the government to commission a review of the council’s governance, culture and management of risk.  The implication is that financial support for Croydon, or any other council in a similar situation, will be accompanied by an increased degree of central government involvement.

 

3.10     Although the incremental cost of the local government response to the pandemic has been relatively small, it is generally considered that, where local authorities have been actively involved in the response, they have performed well, taking advantage of their local knowledge and the strong professional culture of the sector.  Many local authority political leaders have challenged central government over its apparent reluctance to make more use of local councils.

 

3.11     The relatively low value placed on local authorities’ role is consistent with the way that public expenditure has been prioritised by central government in recent years.  See graph below.

 

Figure 3: Planned real change to Departmental Expenditure Limits 2010-11 – 2019-20 (per cent)

 

 

 

3.12     MHCLG, which provides central government funding for local authorities, has seen some of the biggest cuts.  Although the policy of austerity in the first part of the last decade has now been reversed, there has been no indication, either before or during the Covid-19 pandemic, that the current Conservative government envisages a bigger role for local authorities.

 

3.13     The effects of austerity in local government have not been spread evenly between authorities.  The increasing costs of adult social care and children’s social care – services delivered by the upper tier of local government - contribute by far the majority of the funding gap faced by the sector.  In the short term, upper tier authorities such as Kent County Council currently face the greatest financial risks.  In the medium term, when local government spending needs are eventually assessed against resources in the government’s ‘Fair Funding Review’, it is likely that any rebalancing of public spending will benefit the upper tier authorities that deliver these services, rather than District Councils like Maidstone.

 

Conclusion

 

3.14     Covid-19 has had an enormous impact on the national economy and consequently on public finances.  Whilst central government has spent unprecedented amounts of money to support the NHS, businesses and individuals, support for local authorities has been tailored quite strictly to their specific needs, and to specific initiatives that they have been asked to undertake by central government.  Where Covid-19 has led to unsustainable pressure on individual councils’ finances, it appears that any additional financial support is likely to be contingent on accepting government intervention.  Councils therefore need to look, first and foremost, to measures that are within their own control to ensure financial resilience.

 


 

4.          CURRENT FINANCIAL POSITION

 

4.1        As a lower tier authority, Maidstone Borough Council is not subject to the extreme pressures currently faced by upper tier authorities.  It is nevertheless appropriate to assess the Council’s financial resilience.  There are a number of elements that contribute to financial resilience, according to CIPFA[5]:

 

– level of reserves

– quality of financial management, including use of performance information

– effective planning and implementation of capital investment

– ability to deliver budget savings if necessary

– risk management.

 

An assessment is set out below of how the Council performs on these measures.

 

Level of Reserves

 

4.2        Maidstone Borough Council’s financial position, as shown by its most recent balance sheet, is as follows (unallocated General Fund balance highlighted, previous year shown for comparative purposes).

 

Table 2: Maidstone Borough Council balance sheet

 

 

 

 

31.3.19

 

 

31.3.20

 

 

 

£ million

 

£ million

 

 

Long term assets

     121.9

 

     161.4

 

 

Current assets

       32.9

 

       28.0

 

 

Current liabilities

       -29.1

 

       -47.7

 

 

Long term liabilities

       -75.0

 

       -77.1

 

 

Net assets

       50.7

 

       64.6

 

 

Unusable reserves

       -35.1

 

       -47.4

 

 

 

15.6

 

17.2

 

 

Represented by:

 

 

 

 

 

Unallocated General Fund balance

          9.2

 

         8.8

 

 

Earmarked balances

         5.8

 

         7.8

 

 

Capital receipts reserve

         0.6

 

         0.6

 

 

Total usable reserves

       15.6

 

       17.2

 

 

 

 

 

 

 

 

4.3        The maintenance of the unallocated general fund balance is an essential part of the Council’s strategic financial planning, as this amount represents the funds available to address unforeseen financial pressures.

 

4.4        For local authorities there is no statutory minimum level of unallocated reserves.  It is for each Council to take a view on the required level having regard to matters relevant to its local circumstances. CIPFA guidance issued in 2014 states that to assess the adequacy of unallocated general reserves the Chief Financial Officer should take account of the strategic, operational and financial risks facing their authority. The assessment of risks should include external risks, such as natural disasters, as well as internal risks such as the achievement of savings.

 

4.5        Maidstone Council has historically set £2 million as a minimum level for unallocated reserves.  In the light of the heightened risk environment now facing the Council, it is considered that this minimum should be increased to £4 million.

 

Current Position

 

4.6        Since the balance sheet date of 31 March 2020, the position has changed completely as a result of the Covid-19 pandemic.  The Council has:

 

-          Incurred substantial additional expenditure, in particular as a result of accommodating homeless people and establishing a community hub;

-          Lost substantial income in areas such as parking;

-          Suffered a reduction in Council Tax and Business Rates receipts.

 

These additional pressures have only been partially mitigated by government support. 

 

4.7        As at November 2020 the likely outturn for the financial year remains unclear, given the second wave of Covid-19 infections and resulting lockdown, and potential further outbreaks in future.  However, it is likely that there will be a deficit which will reduce reserves below the current level of £8.8 million. 

 

Financial management

 

4.8        Financial management at Maidstone Borough Council contains a number of elements.  Officers and members are fully engaged in the annual budget setting process, which means that there is a clear understanding of financial plans and the resulting detailed budgets

 

4.9        Detailed financial reports are prepared and used on a monthly basis by managers, and on a quarterly basis by elected members, to monitor performance against the budget.  Reports to members are clear, reliable and timely, enabling a clear focus on any areas of variance from the plan.

 

4.10     Financial reports are complemented by performance indicators, which are reported both at the service level to the wider leadership team, and at a corporate level to members.  Member reports on performance indicators are aligned with the financial reports, so that members see a comprehensive picture of how services are performing.

 

4.11     Financial management and reporting is constantly reviewed to ensure that it is fit for purposes and meets the organisation’s requirements.  Quarterly financial reports to members have been redesigned over the last two years to make them more user-friendly.

 

4.12     Where variances arise, prompt action is taken to address them.  Action plans are put in place at an early stage if at appears that there is likely to be a budget overspend.

 

Capital investment

 

4.13     Capital expenditure proposals are developed in response to the Council's strategic priorities as part of the annual budget cycle.  Capital investment must fall within one of the four following categories: required for statutory reasons, eg to ensure that Council property meets health and safety requirements; schemes that are self-funding and meet Strategic Plan priority outcomes; other schemes that are clearly focused on Strategic Plan priority outcomes; and other priority schemes which will attract significant external funding.  All schemes within the capital programme are subject to appropriate option appraisal. Any appraisal must comply with the requirements of the Prudential Code.

 

4.14     Member oversight is ensured, first by inclusion of schemes in the capital programme that is approved as part of the annual budget setting process.  Subsequently, prior to any capital commitment being entered into, a report setting out details of the capital scheme is considered by the relevant service committee.

 

4.15     The Council has a corporate project management framework that applies to most of the projects included within the capital programme.  This provides for designation of a project manager and sponsor, and includes a mechanism for progress on major projects to be reported to a Strategic Capital Investment Board.

 

4.16     Financial monitoring of capital projects is incorporated within the quarterly reports to Service Committees.

 

Ability to deliver budget savings

 

4.17     The Council has a good track record of delivering budget savings, whilst sustaining and investing in services.  Savings initiatives are planned so far as possible across the five year period of the MTFS, rather than the focus being simply on achieving whatever savings are necessary in order to balance the budget for the coming year.

 

4.18     A common criticism of local authority financial planning is that proposed savings are often over-optimistic and are not based on realistic evidence of what is achievable.  The Council aims to mitigate this risk with a robust process for developing budget savings proposals:

 

-          New and updated savings proposals are sought on a regular annual cycle, with Service Managers typically briefed on the savings remit in August/September

 

-          Savings proposals are then developed over a period of around two months

 

-          Savings proposals have to be formally documented and signed off by the Service Head who will be responsible for delivering them.

 

4.19     Once savings have been built into the budget, their achievement is monitored as part of the regular financial management process described above.

 

Risk management

 

4.20     The Council’s MTFS is subject to a high degree of risk and certainty.  In order to address this in a structured way and to ensure that appropriate mitigations are developed, the Council has developed a budget risk register.  This seeks to capture all known budget risks and to present them in a readily comprehensible way.  The budget risk register is updated regularly and is reviewed by the Audit, Governance and Standards Committee at each meeting. 

 

4.21     The major risk areas that have been identified as potentially threatening the Medium Term Financial Strategy are as follows.

 

-        Financial impact from resurgence of Covid-19 virus

-        Fees and Charges fail to deliver sufficient income

-        Adverse impact from changes in local government funding

-        Collection targets for Council Tax and Business Rates missed

-        Adverse financial consequences from a disorderly Brexit

-        Capital programme cannot be funded

-        Planned savings are not delivered

-        Failure to contain expenditure within agreed budgets

-        Inflation rate predictions in MTFS are inaccurate

-        Constraints on council tax increases

-        Litigation costs exceed budgeted provisions

-        Commercialisation fails to deliver additional income

-        Business Rates pool fails to generate sufficient growth

-        Shared services fail to meet budget

-        Council holds insufficient balances

-        Increased complexity of government regulation.

 

It is recognised that this is not an exhaustive list.  By reviewing risks on a regular basis, it is expected that any major new risks will be identified and appropriate mitigations developed.

 

Conclusion

 

4.22     When assessed against the CIPFA criteria for financial resilience, the Council can be seen to have adequate reserves in the short term and to be positioned well to manage the financial challenges it will face.  The following section considers whether this position is sustainable.

5.          AVAILABLE RESOURCES

 

5.1        The Council’s main sources of income are Council Tax and self-generated income from a range of other sources, including parking, planning fees and property investments.  It no longer receives direct government support in the form of Revenue Support Grant; although it collects around £60 million of business rates annually, it retains only a small proportion of this.

 

Figure 4: Sources of Income (£ million)

 

 

Council Tax

 

5.2        Council Tax is a product of the tax base and the level of tax set by Council. The tax base is a value derived from the number of chargeable residential properties within the borough and their band, which is based on valuation ranges, adjusted by all discounts and exemptions.

 

5.3        The tax base has increased steadily in recent years, reflecting the number of new housing developments in the borough.  See table below.

 

          Table 3: Number of Dwellings in Maidstone

 

 

2016

2017

2018

2019

2020

Number of dwellings

68,519

69,633

70,843

71,917

73,125

% increase compared with previous year

1.18%

1.63%

1.74%

1.52%

1.68%

 

Note:  Number of dwellings is reported each year based on the position shown on the valuation list in September.

 

5.4        Whilst the effect of the increased number of dwellings is to increase the Council Tax base, this is offset by the cost of reliefs for council tax payers, in particular Council Tax support, and any change in the percentage of Council Tax collected.  Covid-19 has led both to an increase in the number of Council Tax support claimants and a fall in the collection rate.

 

5.5        The level of council tax increase for 2021/22 is a decision that will be made by Council based on a recommendation made by the Policy and Resources Committee. The Council's ability to increase the level of council tax is limited by the requirement to hold a referendum for increases over a government set limit. The referendum limit for 2020/21 was the greater of 2% or £5.00 for Band D tax payers.  Council Tax was increased by the maximum possible, ie £5.13 (2%).

 

Other income

 

5.6        Other income is an increasingly important source of funding for the Council.  It includes the following sources of income:

 

-          Parking

-          Shared services

-          Commercial property

-          Planning fees

-          Cremations

-          Garden waste collection

-          Income generating activity in parks

 

Where fees and charges are not set by statute, we apply a policy that guides officers and councillors in setting the appropriate level based on demand, affordability and external factors. Charges should be maximised within the limits of the policy, but customer price sensitivity must be taken into account, given that in those areas where we have discretion to set fees and charges, customers are not necessarily obliged to use our services.

 

5.7        Other income, particularly parking, has been seriously affected by Covid-19.  Whilst the government has committed to compensating local authorities for 70% of lost income above a 5% threshold in 2020/21, there has been no guarantee of ongoing support in the event that income fails to return to pre-Covid-19 levels.

 

Business Rates

 

5.8        Under current funding arrangements, local government retains 50% of the business rates it collects.  The aggregate amount collected by local government is redistributed between individual authorities on the basis of perceived need, so that in practice Maidstone Borough Council receives only around 7% of the business rates that it collects. 

 

5.9        Prior to the 2017 General Election, the Government was preparing to move to 100% business rates retention with effect from 2020.  The additional income would have been accompanied by devolution of further responsibilities to local government.  However, the need to accommodate Brexit legislation meant that there was no time to legislate for this.    The Government indicated that they would increase the level of business rates retention to the extent that it was able to do within existing legislation, and had originally planned to introduce 75% business rates retention with effect from 2021/22.  However, these plans have been delayed for at least another 12 months owing to the Covid-19 pandemic.

 

5.10     In the meantime, the November Spending Review is expected to mean a ‘roll-forward’ settlement for local government in 2021/22, with the existing 50% scheme retained and the amounts retained by individual local authorities increased in line with inflation.

 

5.11     Any new business rates retention regime, coming into effect in 2022/23 or subsequently, would be linked to a mechanism for rates equalisation to reflect local authorities’ needs.  These will be assessed based on a ‘Fair Funding Review’. The overall amounts to be allocated as part of the Fair Funding Review are yet to be determined. It is therefore difficult to predict with any degree of accuracy whether the proportion of business rates retained by Maidstone will remain the same, increase or decrease from 2021/22 onwards.

 

5.12     The current local government funding regime gives authorities the opportunity to pool their business rates income and retain a higher share of growth as compared with a notional baseline set in 2013/14.  Maidstone has been a member of the Kent Business Rates pool since 2014/15.  Its 30% share of the growth arising from membership of the pool has hitherto been allocated to a reserve which is used for specific projects that form part of the Council’s economic development strategy. A further 30% represents a Growth Fund, spent in consultation with Kent County Council. This has been used to support the Maidstone East development.

 

5.13     It should be noted that in 2022, the business rates baseline will be reset, so all growth accumulated to that point will be reallocated between local authorities as described in paragraph 5.11 above.

 

5.14     Total projected business rates income for 2020/21, and the ways in which it was originally intended to deploy it, are summarised in the table below.

 

Table 4: Projected Business Rates Income 2020/21

 

 

£000

 

Business Rates baseline income

3,260

Included in base budget

Growth in excess of the baseline

1,210

Included in base budget

Pooling gain (MBC share)

542

Funds Economic Development projects

Pooling gain (Growth Fund)

542

Spent in consultation with KCC, eg on Maidstone East

Total

5,554

 

 

5.15     These are budgeted amounts.  The actual amounts received will be lower if Covid-19 continues to have an adverse impact on collection performance.

 

Revenue Support Grant

 

5.16     Maidstone no longer benefits directly from central government support in the form of Revenue Support Grant, as it is considered to have a high level of resources and low needs.  In fact, Councils in this situation were due to be penalised by the government under the previous four year funding settlement, through a mechanism to levy a ‘tariff / top-up adjustment’ – effectively negative Revenue Support Grant.  Maidstone was due to pay negative RSG of £1.589 million in 2019/20.  However, the government faced considerable pressure to waive negative RSG and removed it in the 2019/20 and 2020/21 Local Government Finance Settlements.  The government has also stated that it is minded not to levy negative RSG in 2021/22.

 

5.17     From 2022/23 there will be a new local government funding regime.  However, it should be noted that a needs-based distribution of funding will continue to create anomalies like negative RSG, so it cannot be assumed that the threat of losing funding in this way (even if the mechanism is different) has gone away.

 

Conclusion

 

5.18     It can be seen that ongoing revenue resources are likely to be adversely affected by the Covid-19 pandemic in the short term, at a time when services pressures will increase.  The previous section indicated that the Council’s reserves, while adequate, do not leave it with a large amount of flexibility.  This puts a premium on accurate forecasting and strong financial management.


 

6.          SCENARIO PLANNING

 

6.1        Owing to uncertainty arising from the economic environment, and from the lack of clarity about what the government’s plans for local government funding will mean for the Council, financial projections have been prepared for three different scenarios, as follows.

 

1.   Favourable

 

The economy recovers rapidly from the impact of the Covid-19 pandemic.  The effect is that its previous growth trajectory resumes from 2022/23 onwards and this feeds through to income from Council Tax, Business Rates and other sources.  Inflation remains under control and within the government’s 2% target.

 

2.   Neutral

 

Covid-19 has a more longer-lasting impact, with some permanent scarring of the economy.  The result is that Council income starts growing again, but does not resume its previous pattern until the end of the five year planning period.  Inflation remains within the government’s 2% target.

 

3.   Adverse

 

There continue to be outbreaks of Covid-19, and future international trading arrangements fail to replicate the economic benefits of EU membership.  As a result, the economy is slower to recover and sterling falls in value against other currencies, leading to a resurgence of inflation.  This both reduces Council income and leads to increased service pressures in areas like homelessness.

 

Details of key assumptions underlying each of these scenarios are set out below.

 

Council Tax

 

6.2        It is assumed that the Council will take advantage of any flexibility offered by central government and will increase Council Tax up to the referendum limit, which is assumed to be 2% in 2021/22.  It is not known at this stage what the referendum limit will be for subsequent years, but it is assumed to be 2%, to align with the government’s inflation target. 

 

6.3        The other key assumption regarding Council Tax is the change in the Council Tax base.  The number of properties in Maidstone has grown by over 1.5% for the past four years.  However, if there is a downturn in the economy, this rate of increase could fall.  Moreover, Covid-19 is likely to reduce the amount of Council Tax collectible from each household.  Assumptions are as follows:

 

 

21/22

22/23 onwards

Favourable

1.0%

2.0%

Neutral

-0.5%

1.5%

Adverse

-2.0%

1.0%

 

 

Business Rates

 

6.4        It is likely that for 2021/22, the government will roll forward the existing arrangements, with an increase in the business rates baseline to reflect inflation.

 

6.5        After 2022, the proportion of business rates retained by the authority will be adjusted to reflect the findings of the Fair Funding Review and the Spending Review.  It is very difficult to predict what this will mean in practice.  However, for the purposes of revenue projections, a number of assumptions have been made.

 

6.6        The starting point in the government’s calculations will be Maidstone’s perceived level of need, which in the previous four year funding settlement led to the Council being faced with a negative revenue support grant payment of £1.589 million in 2019/20.  In the event, this was not levied on the Council, following concerted lobbying by Maidstone and other authorities that faced negative RSG.  The amount of negative RSV thus avoided is being held in reserve to address likely future funding pressures.

 

6.7        The starting point for future business rates income is therefore assumed to be the current baseline share of business rates income, as adjusted for inflation in 2021/22, less £1.589 million.  It is not accepted that this would be a fair allocation of business rates income but it is nevertheless prudent to make this assumption for forecasting purposes.

 

6.8        A further factor to be considered is the resetting of the government’s business rates baseline.  This represents the level above which the Council benefits from a share in business rates growth.  It is likely that the government will reset the baseline in order to redistribute resources from those areas that have benefitted most from business rates growth in the years since the current system was introduced in 2013, to those areas that have had lower business rates growth.  Accordingly, cumulative business rates growth has been removed from the projections for 2022/23, then is gradually reinstated from 2023/24.

                                            

6.9        Given these assumptions, the specific assumptions for business rates growth in each scenario are as follows:

 

 

2021/22

2022/23 onwards

 

Baseline growth

Local growth

Baseline growth

Local growth

Favourable

5.0%

0.0%

3.0%

3.0%

Neutral

0.0%

-5.0%

2.0%

2.0%

Adverse

-5.0%

-10.0%

0.0%

0.0%

 

Inflation

 

6.10     For the purpose of forecasting, it is assumed that the government’s target rate of inflation is 2% is achieved in the favourable and neutral scenarios.  A higher rate of 3% is assumed in the adverse scenario, reflecting the risk of increases in input prices pushing up inflation rates.

 

Pay inflation

 

6.11     Pay is the Council’s single biggest item of expenditure, accounting for around 50% of total costs.  Although the Council sets pay rates independently of any national agreements, in practice it has to pay attention to overall public sector and local authority pay settlements, as these affect the labour market in which the Council operates.  It is assumed for the first three years of the MTFS planning period that the annual increase will be 1%.  An additional amount has to be allowed for in pay inflation assumptions arising from the annual cost of performance related incremental increases for staff.

 

Fees and charges

 

6.12     Fees and charges are affected by changes both in price levels and in volume.  The projections imply that the level of fees and charges will increase in line with overall inflation assumptions, to the extent that the Council is able to increase them.  In practice, it is not possible to increase all fees and charges by this amount as they are set by statute.  Accordingly, the actual increase in income shown in the projections is 50% of the general inflation assumption in each scenario.

 

6.13     The sensitivity of fees and charges income to overall economic factors varies across different income streams.  Parking income is highly sensitive, and has been very severely affected by the Covid-19 pandemic.  Other sources of income, such as income from industrial property holdings, are more stable.

 

Contract costs

 

Costs are generally assumed to rise in line with inflation, but a composite rate is applied to take account of higher increases on contracts like waste collection where the growth in the number of households leads to a volume increase as well as an inflation increase.

 

6.14     Inflation assumptions are summarised as follows.

 

Table 5: Inflation Assumptions

 

 

Favourable

Neutral

Adverse

Comments

General

2.00%

2.00%

3.00%

2% is the government’s target inflation rate but in reality it is likely to be lower in the next few years.

Employee Costs

1.00%

1.00%

2.00%

Neutral assumption is in line with the most recent pay settlement and government inflation targets

0.50%

0.50%

0.50%

The annual cost of performance related incremental increases for staff

Contract costs

2.00% -

5.00%

2.00% -

5.00%

2.00% -

8.00%

A composite rate is applied, reflecting different pressures on individual contracts

Fees and charges - price

2.00%

2.00%

3.00%

In line with general inflation assumptions

Fees and charges - volume

2.00%

0.00%

-2.00%

Reflects overall economic conditions

         

Service Spend

 

6.15     Strategic Revenue Projections under all scenarios assume that service spend will remain as set out in the previous MTFS, so savings previously agreed by Council will be delivered and no further growth arising from the new Strategic Plan is incorporated.  In practice, it is likely that service spending would need to be reduced if the adverse scenario were likely to arise.

 

6.16     The projections include provision for the revenue cost of the capital programme, comprising interest costs (2.5%) and provision for repayment of borrowing (2%).

 

Summary of Projections

 

6.17     A summary of the financial projections under the neutral scenario is set out in section 7.


 

7.          REVENUE PROJECTIONS

 

7.1        Strategic revenue projections, based on the assumptions set out above, are summarised in table 7 below for the 'neutral' scenario.  More detailed projections are included in Appendix B. 

 

7.2        In light of the many uncertainties around future funding, it is important to note that projections like these can only represent a ‘best estimate’ of what will happen.   These projections will be updated as more information becomes available, prior to a final version of the projections being included in the Medium Term Financial Strategy to be presented to Council in February 2021.

 

 

Table 6:  Strategic Revenue Projections 2021/22-2025/26

 

 

20/21

20/21

21/22

22/23

23/24

24/25

25/26

 

Orig budget

Latest projn

Forecast

 

£m

£m

£m

£m

£m

£m

£m

Council Tax

16.8

16.1

17.1

17.7

18.3

19.0

19.6

Business Rates

4.5

3.7

3.9

3.3

3.5

3.8

4.1

Other Income

21.7

17.4

18.8

20.0

21.2

22.9

23.7

Total Funding Available

43.0

37.2

39.8

41.0

43.0

45.7

47.4

Predicted Expenditure1

43.0

43.2

43.1

41.6

43.0

45.0

47.1

Budget Gap

0.0

-6.0

-3.3

-0.6

0.0

0.7

0.3

Existing Planned Savings

0.9

0.6

0.2

 

 

Contribution to Reserves

 

 

0.2

0.7

0.3

Residual Budget Gap

-2.4

-0.0

0.0

0.0

0.0

 

 

1 Predicted Expenditure assumes that Existing Planned Savings and Savings Required
arising in the preceding year have been delivered and are built into the budget.

 

7.3        The above table shows that, based on the ‘neutral’ scenario, income will recover from the levels projected in 2020/21, and one-off additional expenditure will reduce.  However, there will not be a full recovery, with income remaining below the levels previously projected.  In the absence of any mitigating action, this would lead to a deficit, smaller than the £6.0 million projected in the current year, but still very significant.

 

7.4        The MTFS must balance the very tight financial constraints set out in previous sections with the requirement to deliver the Strategic Plan.  Members considered at Policy and Resources Committee on 16th September 2020 a number of ways in which the objectives in the Strategic Plan could be re-prioritised, including:

 

 

-          A more modest direction of travel in developing the museum

-          Reconsidering the sustainability of the Hazlitt Theatre

-          Reviewing the scope of our community safety work.

 

7.5        At the same time, as agreed by the Committee at its meeting on 21st July 2020, a radical and ambitious approach is required to transforming the way the Council does business.  This includes:

 

-      Review of office accommodation

-      Better use of technology

-      Better use of external grant funding

-      Identifying further opportunities for income generation

-      Absorb overhead costs of delivering the capital programme within the cost of individual schemes

-      Better service commissioning

-      Review of shared service arrangements

-      Review of staff reward packages

-      Review of the structure of democratic representation

-      Exploit synergies between service areas.

 

A further area for exploration that was identified in the report to Policy and Resources Committee on 21st July, absorbing the overhead costs of project delivery within the savings from individual projects, will be reflected when examining project feasibility, in particular in the area of better use of technology.

 

7.6        The overall approach will be that nothing is excluded from consideration, including proposals made in the past but rejected at the time.

 

7.7        It is recognised that savings proposals emerging from this work will not be capable of being implemented over the next twelve months.  In the meantime it will therefore be necessary to deploy earmarked reserves, including resources hitherto earmarked for other purposes, such as New Homes Bonus and uncommitted Business Rates Growth proceeds.  This is a departure from the Council’s existing policy, but is considered to be justified given the scale of the budget gap that the Council faces.

 

 

7.8        The following table plots the projected savings trajectory against the SRP projections and shows the impact on reserves.  It assumes that one-off funding from New Homes Bonus and the Business Rates Pool can be deployed to meet the budget shortfall.  Both of these resources are time-limited.  New Homes Bonus is expected to be phased out over the next few years.  The Business Rates Pool gives the Council a share of growth in excess of the business rates baseline, but the baseline is expected to be reset in 2022/23.

 

 

Table 7:  Use of Reserves



 

21/22

22/23

23/24

24/25

25/26

 

£m

£m

£m

£m

£m

Savings Required (from Table 7)

-2.4

0.0

0.0

0.0

0.0

Proposed savings

1.0

0.4

0.4

0.2

0.0

Savings shortfall b/f

 

-1.4

-1.0

-0.6

-0.4

Savings shortfall c/f

-1.4

-1.0

-0.6

-0.4

-0.4

New Homes Bonus

2.3

1.2

 

 

 

Additional borrowing costs/MRP arising from use of NHB for revenue

-0.1

-0.2

-0.2

-0.2

-0.2

Business Rates Pool surplus (est)

0.3

 

 

 

 

Contribution to reserves

 

 

0.2

0.7

0.3

General Fund reserves b/f

6.8

7.9

8.0

7.4

7.6

General Fund reserves c/f

7.9

8.0

7.4

7.6

7.3

 

7.9        The above table shows that by using New Homes Bonus, the Council can sustain reserves at broadly the same level as at present.

 

7.10     Note that there are a number of risks inherent in this approach.  It assumes that the budget gap will not widen further over the next three years, and therefore that the level of savings currently projected will be adequate.  It also requires a sustained effort to deliver savings over a long period of time.  However, these risks need to be weighed against the feasibility of making large scale savings in a short period of time and the disruptive effect that this might have.

 


 

8.          CAPITAL STRATEGY

 

8.1        The capital programme plays a vital part in delivering the Council’s strategic plan, since long term investment plays an essential role in realising our ambitions for the borough. The cost of the capital programme is spread over the lifetime of investments, so does not have such an immediate impact on the revenue budget position.  However, there are revenue consequences to the capital programme.  Maidstone Borough Council borrowed to fund its capital programme for the first time in 2019/20.  The cost of borrowing is factored into the 2020/21 budget, along with a Minimum Revenue Provision which spreads the cost of loan repayments over the lifetime of an asset.  The budgeted total revenue costs of the capital programme in 2020/21 amounted to £1.870 million.

 

8.2        Typically, local authorities fund capital expenditure by borrowing from the Public Works Loan Board, which offers rates that are usually more competitive than those available in the commercial sector.  Prior to 2019/20, Maidstone Borough Council had not borrowed to fund its capital programme, instead relying primarily on New Homes Bonus to fund the capital programme.  Borrowing has not been required so far in 2020/21, but is likely to be in subsequent years.  The cost of any borrowing is factored into the MTFS financial projections.

 

 

8.3        Public Works Loan Board funding has for several years offered local authorities a cheap source of finance, which has been used more and more extensively.  The government is expected to revise the terms of PWLB borrowing to ensure that local authorities use it only to invest in housing, infrastructure and public services.  Given the Council’s capital strategy, this should not prevent us accessing PWLB borrowing.  In any case, given that borrowing costs in the market generally remain very low, it is considered likely that local authorities will be able to continue to borrow cheaply from other lenders, if not from the PWLB.

 

 

8.4        There has been a reduction of the period for which New Homes Bonus would be paid from six years to five in 2017/18 and then to four in 2019/20 and 2020/21.  The government is likely to pay New Homes Bonus on a one-year only basis in 2021/22, but under the new Local Government funding regime to be implemented from 2022/23 a new, unspecified mechanism for incentivising housebuilding is envisaged.

 

 

8.5        External funding is sought wherever possible and the Council has been successful in obtaining Government Land Release Funding for its housing developments and ERDF funding for the Kent Medical Campus Innovation Centre.

 

 

8.6        Funding is also available through developer contributions (S 106) and the Community Infrastructure Levy (CIL).  The Community Infrastructure Levy was introduced in Maidstone in October 2018.

 

 

8.7        The current funding assumptions used in the programme are set out in the table below.

 

 

Table 8: Capital Programme Funding

 

20/21

21/22

22/23

23/24

24/25

Total

 

£000

£000

£000

£000

£000

£000

External sources

4,738

10,175

3,881

2,232

2,242

23,268

Own resources

530

517

537

568

580

2,732

Debt

32,997

11,604

13,262

12,284

12,272

82,418

TOTAL

38,265

22,296

17,680

15,084

15,094

108,418

         

8.8        Under CIPFA’s updated Prudential Code, the Council is now required to produce a Capital Strategy, which is intended to give an overview of how capital expenditure, capital financing and treasury management activity contribute to the provision of local public services, along with an overview of how associated risk is managed and the implications for future financial sustainability.  The Capital Strategy was approved by Council at its meeting on 26th February 2020 and will be updated in February 2021.

 

8.9        The existing capital programme was approved by Council at its budget meeting on 26th February 2020.  Major schemes include the following:

 

 

-      Completion of Brunswick Street and Union Street developments

-      Granada House extension

-      Further mixed housing and regeneration schemes

-      Purchase of housing for temporary accommodation

-      Flood Action Plan

-      Mote Park Improvements

-      Further investment at Lockmeadow Leisure Complex

-      Commercial Property Investments

-      Kent Medical Campus Innovation Centre

-      Mall Bus Station Improvements

-      Biodiversity and Climate Change.

 

8.10     The capital programme for 2020/21 has been reviewed in the light of the Covid-19 pandemic.  The majority of projects in the current programme are either already under way, are required for health and safety reasons, or must be carried out to meet contractual commitments.  However, it is proposed that a number of projects are deferred to 2021/22, which will have the effect of reducing the in-year revenue costs of capital expenditure.

 

8.11     The capital programme is reviewed every year.  In carrying out the annual review, prior to presentation of revenue and capital budget proposals to Council in February 2021, consideration will be given as to how the capital programme can support the process of recovery from Covid-19, eg by investing in projects that have a positive effect on employment and economic regeneration.

 

 

8.12     A review of the schemes in the capital programme is currently under way.  Proposals will be considered for new schemes to be added to the capital programme, whilst ensuring that the overall capital programme is sustainable and affordable in terms of its revenue costs.  An updated capital programme will be considered by Policy and Resources Committee in January 2021 and recommended to Council for approval.


 

9.          CONSULTATION AND NEXT STEPS

 

9.1        Each year the Council carries out consultation as part of the development of the MTFS.  A budget survey has been carried out and is attached as Appendix C.

 

9.2        Consultation will be undertaken with the business community, including a presentation to the Maidstone Economic Business Partnership.

 

 

9.3        Consultation will also take place in January 2021 on the detailed budget proposals.  Individual Service Committees considered the budget proposals relating to the services within their areas of responsibility.  Full details of the proposals were published and residents’ and businesses’ views welcomed.

 

 

9.4        The process of member consultation on the MTFS is as follows:

 

 

Meeting

Date

Policy and Resources Committee

25 November 2020

Communities Housing & Environment Committee

1 December 2020

Strategic Planning & Transportation Committee

8 December 2020

Economic Regeneration & Leisure Committee

15 December 2020

Council

24 February 2021

 

 


 

Document History

 

Date

Description

Details of changes

25.11.20

Draft to Policy & Resources Committee

 

01.12.20

Draft to Service Committees

Minor typographical changes

 

 



[1] IMF, World Economic Outlook, January 2020

[2] Bank of England, Monetary Policy Report, November 2020

[3] Capital Economics, UK Economic Update, November 2020

[4] Institute for Fiscal Studies, IFS Green Budget 2020, p 180

[5] CIPFA Financial Management Code, Guidance Notes, p 51