MAIDSTONE BOROUGH COUNCIL

 

MEDIUM TERM FINANCIAL STRATEGY

2022/23 – 2026/27

 


 

CONTENTS

 

 

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

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

3. Economic Environment............................................................................ 5

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

5. Available Resources.............................................................................. 14

6. Scenario Planning.................................................................................. 18

7. Revenue Projections.............................................................................. 23

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’s Strategic Plan, agreed in December 2018, covers the period 2019 to 2045.  The Strategic Plan incorporates 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 challenging because of uncertainty about the pace of recovery from Covid-19 and the risk of continuing high levels of inflation.  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.  The three year Spending Review announced by the Chancellor in October 2021 set out a more favourable outcome for local government than expected but the impact at the individual authority level remains unclear.  A consideration of the funding likely to be available in the future is set out in Section 5.

 

1.4        In view of these different elements of uncertainty, it is imperative that the MTFS both ensures Maidstone Council’s continuing financial resilience and is sufficiently flexible to accommodate a range of potential scenarios.  The Council has prepared financial projections under different scenarios, continuing  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 have been modelled, described as adverse, neutral and favourable.   The table below shows projections under the neutral scenario, before taking account of budget changes, which are due to be considered by members at Service Committee meetings in January 2022. 

 

Table 1: MTFS Revenue Projections 2022/23 – 2026/27

 

 

22/23

23/24

24/25

25/26

26/27

 

£m

£m

£m

£m

£m

Council Tax

18.2

18.8

19.5

20.2

20.9

Retained Business Rates

3.5

3.6

3.6

3.7

3.8

Business Rates Growth

1.2

 -  

0.2

0.4

0.5

Collection Fund adjustment

-0.2

-0.7

 -  

 -  

 -  

Budget requirement

22.7

21.7

23.3

24.3

25.2

Fees and Charges

21.9

23.3

24.5

24.9

25.4

Total Funding Available

44.6

45.0

47.8

49.2

50.6

Predicted Expenditure

43.8

47.0

48.6

49.7

50.7

Budget Surplus / Gap

0.8

-2.0

-0.8

-0.5

-0.1

 

In accordance with legislative requirements the Council must set a balanced budget.  The MTFS sets out a proposed approach that enables the Council to do this for 2022/23.

 

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, using prudential borrowing, and further funding may be available by taking advantage of opportunities to bid for external funding, eg the Levelling-Up Fund.

 

1.7        The MTFS concludes by describing the process of agreeing a budget for 2022/23, 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 its economy and population grows. This means taking an active role in policy and master planning for key sites in the borough, and where appropriate, investing directly and delivering projects 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. It also recognises that, as reflected in our Covid 19 recovery and renewal objectives and plans, we will work with our partners to improve the quality of community services and facilities and to encourage and support residents to volunteer and play a full part in their communities, the need for which has been accentuated by the impacts of the pandemic.

 

‘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. Our recovery and renewal strategy responds to the challenges in achieving this priority by identifying investment opportunities, for example bringing forward employment sites and a Town Centre Strategy for renewal and rejuvenation .

 

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.  The Maidstone Local Plan is due to be updated and a new Town Centre Strategy will be developed, setting out a clear framework for delivery of regeneration and growth.

 

2.3        Amongst initiatives to help make Maidstone a ‘Thriving Place’ are MBC investment at Lockmeadow and on the Parkwood Industrial Estate.  Preparations for the future include options appraisal for our leisure provision.  We will continue to leverage the Council’s borrowing power, if appropriate in conjunction with partners, to realise our ambitions for the borough.

 

2.4        Our ‘Homes and Communities’ aspirations are being achieved by investment in temporary accommodation and the Trinity Centre and the Leader’s commitment to build 1,000 new affordable homes.

 

2.5        The objective of a ‘Safe, Clean and Green’ place has been emphasised by the Council’s commitment to a carbon reduction target and the capital investment to help enable this to be delivered and timely preparation for new waste management arrangements.

 

2.6        Within the framework of the existing Strategic Plan, the Council is therefore prioritising:

 

-        development of the Local Plan and related strategies and policies, in particular the Town Centre Strategy

-        continued investment to make Maidstone a thriving place

-        investment in 1,000 new affordable homes

-        measures to enable the Council’s carbon reduction target to be met

-        recovery from the Covid 19 pandemic.

 

The governance framework within which these priorities will be delivered is due to change, with the reintroduction of a Cabinet system in 2022, which will itself have financial implications in terms of potential additional support costs.

 

2.7        The overall funding envelope within which these priorities must be delivered remains broadly unchanged for 2022/23, meaning that savings will be required in some areas in order to fund growth in others, as well as to meet the savings already identified and agreed in earlier MTFS and budget setting decisions.  Looking further ahead, considerable uncertainty remains about the financial position for future years, meaning that the financial strategy must remain flexible.  The financial implications are set out in section 7 below.


 

 

3.          ECONOMIC ENVIRONMENT

 

 

Macro outlook

 

3.1        The UK economy initially recovered strongly from the Covid recession.  However, a combination of supply shortages, withdrawal of furlough and government support for businesses, and a growing reluctance to spend on the part of consumers, are all weighing down the recovery.  It remains to be seen how much long-term damage Covid will do to the economy, but at present the economy remains significantly smaller than it would have been in the absence of the pandemic.  This slower growth has been exacerbated by Brexit, which the ONS estimates to have led to a permanent 1%  reduction in the size of the economy.

 

Figure 1: Real GDP in central and pessimistic scenarios, 2008-2025

 

 

Source: IFS Green Budget 2021

 

3.2        The recovery has been uneven, with some sectors (eg transport and storage) recovering much more quickly than others (eg retail and hospitality), which points towards a permanent adjustment in the structure of the economy.

 

3.3        Inflation is now running at 3.1% (September 2021).  This is driven by a number of factors, some of which may only be transitory.  For example, the cost of energy can be expected to stabilise, as can price increases caused by supply bottlenecks.  However, inflation arising from wage increase expectations and the depreciation of the pound may be more difficult to eradicate.

 


 

Public Finances

 

3.4        Covid has led to a massive increase in public expenditure.  The government has increased taxes to help pay for this, and seems to accept that the public sector will account for a permanently higher share of national economy for the foreseeable future.  Currently it accounts for 42% of GDP, the highest level for over 50 years.

 

3.5        The increase in public expenditure has been concentrated in specific areas.  Above all, health expenditure, which was already rising in proportion to total public expenditure in response to demographic trends, is expected to continue to grow more quickly than other areas of public expenditure.

 

Local Government Funding

 

3.6        For many years, local government expenditure has seen steeper reductions and lower rates of growth than overall public expenditure.  However, in recent years, the reduction in central government funding for local government has been mitigated by increases in locally generated sources of income, with Council Tax rising by more than the overall rate of inflation.  Upper tier authorities in particular have been able to raise additional tax through a social care precept.  This has allowed the government to claim that so-called ‘Council spending power’ has increased.

 

Figure 2: Changes in Council Spending Power

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Source: Pixel Spending Review Briefing 2021

 

 

3.7        Authorities like Maidstone no longer receive unringfenced central government grant (Revenue Support Grant - RSG) and are instead largely reliant on Council Tax for their funding.  The only impact of increases in central government allocations to local government is a higher share of business rates income collected locally.

 

3.8        The apparent benefit of higher Council Tax income is not felt as strongly as it could be, because the local government tax base has gradually moved out of synch with the reality of local service pressures.  Council Tax continues to be based on 1991 valuations, which means that authorities in the south-east of England have seen much lower increases in income than the increase in house prices would imply.  Meanwhile, Council Tax increases in more deprived areas do not provide adequate compensation for the loss of central government grant.

 

3.9        The other main element of local government funding, beside central government grant and Council Tax, is Business Rates.  The 2010-15 Coalition Government transferred a notional 50% of locally-collected Business Rates income back to local government, but the requirement to adjust the amount of business rates retained between authorities, based on respective service needs, means that authorities with an active commercial sector and low perceived levels of need, like Maidstone, retain a low proportion of business rates (just 7% in Maidstone’s case).  It was originally intended to increase the 50% share of business rates retained locally to 75%, but the Secretary of State for the Department of Levelling Up, Homes and Communities (DLUHC) has now signalled that this is not a government priority.

 

3.10     Although local government funding is now both complex and inconsistent with good fiscal practice, central government has not addressed the issues.  The lack of clarity arising was mitigated to an extent in 2015, when David Cameron’s Conservative government provided some certainty for local government by announcing a four-year settlement, albeit that this incorporated a reduction in funding.  However, since 2019/20, local government funding settlements have been announced on an annual basis, usually just three months before the start of the new financial year. 

 

3.11     The Chancellor of the Exchequer announced a three-year Spending Review on 27 October 2021.  This included assumptions about real terms growth in Council Spending Power (the government's preferred measure) over the next three years.  It should be noted that the calculation of Council Spending Power assumes that local authorities will increase Council Tax by the maximum permissible without a referendum, which in Maidstone's case is a 2% increase. The term spending power should not be conflated with actual resources available.

 

3.12     Details of what the overall increase in spending power means for individual authorities remain to be announced in the Local Government Finance Settlement, which is due in December 2021.  A potential issue for Maidstone is that an 'across the board' increase in funding for Councils would use the current basis of assessing funding requirements, which in 2019/20 indicated that the Council would have to pay negative Revenue Support Grant (RSG) to government, rather than receiving RSG from the government.  The first element of any increase in funding could therefore simply be used to reverse negative RSG, giving no benefit to the Council. 

 

3.13     Although the Spending Review covered three years (2022/23 to 2024/25), it is not clear whether this will translate into a three-year local government funding settlement. 

 

3.14     The Chancellor's announcements included various capital funds (£300m grant funding to unlock brownfield sites, £1.5bn to regenerate unused land, UK Shared Prosperity Fund £2.6bn, Levelling-Up Fund £4.8bn).  Access to this funding will be through a bidding process; it is not clear what the criteria will be. Reflecting its low standing in the levelling up agenda, Maidstone is a Priority 2 area. 

 

Conclusion

 

3.15     The economic recovery from Covid-19 appears to be slowing down, and is accompanied by higher levels of inflation, which it may prove difficult to eradicate.  Whilst public expenditure has increased to levels not seen for many years, the main beneficiary has been the NHS rather than local government. The three-year Spending Review announced by the Chancellor in October 2021 set out a more favourable outcome for local government than expected but the impact at the individual authority level remains unclear.


 

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 arising in particular with respect to adults’ and children’s social care.  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[1]:

 

– 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

 

 

 

 

31.3.20

 

 

31.3.21

 

 

 

£ million

 

£ million

 

 

Long term assets

     158.6

 

163.5     

 

 

Current assets

       28.0

 

36.5

 

 

Current liabilities

       -44.0

 

       -57.3

 

 

Long term liabilities

-80.8

 

       -96.9

 

 

Net assets

       61.8

 

       45.9

 

 

Unusable reserves

       -44.6

 

       -12.2

 

 

 

17.2

 

33.7

 

 

Represented by:

 

 

 

 

 

Unallocated General Fund balance

         8.8

 

10.3

 

 

Earmarked balances

         7.8

 

22.9         

 

 

Capital receipts reserve

         0.6

 

         0.5

 

 

Total usable reserves

       17.2

 

       33.7

 

 

 

 

 

 

 

 

4.3        The main changes between the two balance sheet dates and the principal reasons are as follows:


 

Increase in current liabilities

 

Government grants, eg for distribution to local businesses, which have been received by the Council but not yet deployed, are accounted for as liabilities at the balance sheet date.

 

Increase in long term liabilities

 

The liability to pay employee pensions in the future is re-assessed by actuaries each year.  When interest rates are low, as at present, this leads to an increased liability as the discount rate applied to the obligation is correspondingly low.

 

Increase in earmarked balances

 

The main element in the increase is a £14.7 million timing difference, arising because the Collection Fund deficit incurred in 2021/22 as a result of Covid-19 has to be accounted for in 2022/23.

 

Decrease in unusable reserves

 

This is the impact on reserves of the increased pension liability and the Collection Fund timing difference (as described above), ie an equal and opposite amount to these increases in liabilities / earmarked balances.

 

4.4        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.

 

4.5        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.

 

4.6        Maidstone Council historically set £2 million as a minimum level for unallocated reserves.  In the light of the heightened risk environment facing the Council, it was agreed when setting the 2021/22 budget that this minimum should be increased to £4 million.

 

Current Position

 

4.7        Current indications are that the Council will deliver a balanced budget for 2021/22, allowing the level of reserves to be maintained.

 

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.

 

4.13     The authority consistently receives clean external and internal audit opinions.

 

Capital investment

 

4.14     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.

 

4.15     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.

 

4.16     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.

 

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

 

Ability to deliver budget savings

 

4.18     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.

 

4.19     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.

 

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

 

Risk management

 

4.21     The Council’s MTFS is subject to a high degree of risk and ?uncertainty.  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. 

 

4.22     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

 

4.23     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 3: 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

 

 

2017

2018

2019

2020

2021

Number of dwellings

69,633

70,843

71,917

73,125

75,034

% increase compared with previous year

1.63%

1.74%

1.52%

1.68%

2.61%

 

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 to both an increase in the number of Council Tax support claimants and a fall in the collection rate, which is likely to offset to an extent the benefit of an increased number of dwellings. The increase in the number of households and people living in the borough also impacts on the cost of service delivery, for example refuse collection and street cleansing.

 

5.5        The level of council tax increase for 2022/23 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 2021/22 was the greater of 2% or £5.00 for Band D taxpayers.  Council Tax was increased by the maximum possible, ie £5.31 (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 (as agreed in collaboration agreements and where MBC is the employer)

-          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, was seriously affected by Covid-19.  Whilst the government has committed to compensating local authorities for 75% of lost income above a 5% threshold for the first quarter of 2021/22, there has been no guarantee of ongoing support in the event that income fails to return to pre-Covid-19 levels.  Commercial property income was adversely affected by the pandemic, and whilst it has now recovered, it remains potentially at risk from a resurgence.

 

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.  This was subsequently reduced to 75%, but the Secretary of State has now announced that this is no longer a government priority.

 

5.10     The amount of business rates retained by individual authorities is currently based on a needs assessment that dates back to 2013/14.  A reset is expected at some point, 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.

 

5.11     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.

 

5.12     It should be noted that, when re-allocating business rates according to need, following a Fair Funding Review, the business rates baseline is likely to be reset, so all growth accumulated to that point will be reallocated between local authorities as described in paragraph 5.10 above.

 

5.13     Total projected business rates income for 2021/22, and the ways in which it is planned to deploy it, are summarised in the table below.

 

Table 4: Projected Business Rates Income 2021/22

 

 

£000

 

Business Rates baseline income

3,430

Included in base budget

Growth in excess of the baseline

620

Included in base budget

Pooling gain (MBC share)

349

Funds Economic Development projects

Pooling gain (Growth Fund)


349

Spent in consultation with KCC, eg on Maidstone East

Total

4,748

 

 

5.14     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

 

5.15     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 subsequent Local Government Finance Settlements. 

 

5.16     Any increase in overall funding for local authorities could simply be used to reverse negative RSG for those authorities where it was payable.  More generally, a needs-based distribution of funding will continue to create anomalies like negative RSG, so it cannot be assumed that the threat of an adverse impact, such as Maidstone was due to experience in 2019/20, has gone away.

 

Conclusion

 

5.17     It can be seen that ongoing revenue resources are subject to uncertainty, owing to the economic environment and lack of clarity about the government’s plans for funding local government.  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.

 

Favourable

 

There is strong economic growth, with inflation pressures contained within the government’s long term target rate of 2%.  This allows the Council’s external income to recover to pre-Covid levels in 2022/23 and grow strongly thereafter.  New house building continues at pre-Covid levels (ie around 2% growth per annum).  Cost pressures are contained, allowing scope for budget growth.

 

Neutral

 

Growth is slower, with external income returning to pre-Covid levels over a period of 3-4 years.  There continues to be growth in the Council Tax base, but constraints in the construction sector mean there is a slow-down for the first 2-3 years of the planning period.  The Council maintains existing service levels and is able to fund inflationary increases in expenditure.

 

Adverse

 

Government measures to stimulate the economy are constrained by the economy’s capacity to grow and the need to keep public expenditure under control.  Capacity constraints and low economic growth compared with other national economies lead to prolonged inflation in excess of the government’s 2% target.  As a result, there is minimal growth in Council external income and increased cost pressures lead to spending cuts in order to ensure that statutory services are maintained.

 

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  2% in 2022/23. This is consistent with the Government’s spending power assumptions.

 

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:


 

 

 

22/23

23/24 onwards

Favourable

2.5%

2.0%

Neutral

2.0%

1.5%

Adverse

1.5%

1.0%

 

 

Business Rates

 

6.4        For 2022/23 the government is rolling forward the existing arrangements.  Business rates are frozen for ratepayers but local authorities will be compensated with an increase in the business rates baseline to reflect inflation.

 

6.5        After 2023, the proportion of business rates retained by the authority is likely to be adjusted to reflect the findings of the Fair Funding 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        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 2023/24, then is gradually reinstated from 2024/25.

                                            

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

 

 

2022/23

2023/24 onwards

 

Baseline growth

Local growth

Baseline growth

Local growth

Favourable

5.0%

0.0%

3.0%

3.0%

Neutral

2.0%

0.0%

2.0%

2.0%

Adverse

-5.0%

-10.0%

0.0%

0.0%

 

Inflation

 

6.8        CPI inflation is currently (September 2021) running at 3.1%.  The Bank of England expects it to peak at around 5% in April 2022 before falling back materially in the second half of the year.  For the purpose of forecasting, it is assumed that the government’s target rate of inflation is 2% is achieved over the medium term in the favourable and neutral scenarios.  A higher rate of 3% is assumed in the adverse scenario.

 

 

 

 

Pay inflation

 

6.9        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 2%.  An additional amount of 1% has been allowed for in pay inflation assumptions, arising from the annual cost of performance related incremental increases for staff, giving a total assumed increase of 3%.

 

6.10     Whilst the planning assumption remains a 2% pay increase, it is important that the Council continues to pay a competitive rate in order to retain and attract staff.  This position is therefore under review.  The Council maintains a corporate contingency budget which allows a measure of flexibility if a higher increase than 2%, or market factor supplements for in-demand roles, are required in order to keep pace with the job market.

 

Fees and charges

 

6.11     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.

 

6.12     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.  A relet of the waste contract in October 2023 is likely to lead to permanently higher contract costs.

 

6.13     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 higher in the short term.

Employee Costs

1.00%

2.00%

3.00%

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

0.50%

1.00%

1.50%

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

         

The government has said that it will compensate public sector employers for the increase in employer national insurance announced earlier in 2021.  However, this does not address pressures faced by employees from increased national insurance and higher prices.  Pay structures will be reviewed to consider how best to mitigate these pressures within the overall spending envelope. 

 

Service Spend

 

6.14     Strategic Revenue Projections under all scenarios will take account of savings previously agreed by Council, assuming that they are still deliverable.  In addition, the following potential budget pressures have been identified and will be addressed by incorporating budget growth, subject to member agreement, as part of the budget setting process.

 

Communities and Housing

 

This service area supports the corporate priority ‘Housing and Communities’ and specifically the objective of delivering 1,000 new affordable homes.  This may require a level of revenue subsidy, which would represent budget growth.

 

Environment & Public Realm

 

A provision of £1 million has been built into the Strategic Revenue Projections to recognise the likely increase in waste collection costs arising from the forthcoming contract relet in October 2023.

 

Heritage, Culture & Leisure

 

The Serco leisure contract comes to an end in 2024.  Depending on the scope of any new contract, budget growth may be required.  The objective of making Maidstone Town Centre a thriving place may also require budget growth, eg to provide leisure and cultural activities in the town centre.

 

 

Planning Services

 

In addition to core development management and spatial planning services, there is a requirement for more extensive planning policies and a Town Centre Strategy. 

 

Corporate & Shared Services

 

Additional expenditure is likely to be required to support the new governance structure and to meet the Council’s aspirations for better quality data analysis.

 

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

 

Summary of Projections

 

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


 

7.          REVENUE PROJECTIONS

 

7.1        Strategic revenue projections have been prepared based on the assumptions set out above and are summarised in table 6 below for the 'neutral' scenario.  Additional growth to accommodate new pressures described in the previous section, together with any offsetting savings, are still to be included in the projections.

 

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.  

 

Table 6:  Strategic Revenue Projections 2022/23-2026/27

 

 

22/23

23/24

24/25

25/26

26/27

 

£m

£m

£m

£m

£m

Council Tax

18.2

18.8

19.5

20.2

20.9

Retained Business Rates

3.5

3.6

3.6

3.7

3.8

Business Rates Growth

1.2

 -  

0.2

0.4

0.5

Collection Fund adjustment

-0.2

-0.7

 -  

 -  

 -  

Budget requirement

22.7

21.7

23.3

24.3

25.2

Fees and Charges

21.9

23.3

24.5

24.9

25.4

Total Funding Available

44.6

45.0

47.8

49.2

50.6

Predicted Expenditure

43.8

47.0

48.6

49.7

50.7

Budget Surplus / (Gap)

0.8

-2.0

-0.8

-0.5

-0.1

 

 

7.3        The above table shows a modest surplus in 2022/23.  However, the likely impact of a business rates reset and the cost of accommodating the costs of a new waste collection contract means that a deficit is projected in 2023/24.  On current projections, this deficit will reduce over the remaining term of the MTFS to achieve a broadly balanced position in 2026/27.  It should be noted, however, that at this stage these figures do not incorporate growth to reflect the new pressures described in the previous section.  Proposals for the relevant budget changes will be considered by members at Service Committees in January 2022.

 


 

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 2021/22 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.  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 has revised 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. 

 

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 paid New Homes Bonus on a one-year only basis in 2021/22 and is likely to do so again in 2022/23.  Under any new Local Government funding regime 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 7: Capital Programme Funding

 

 

21/22

22/23

23/24

24/25

25/26

Total

 

£000

£000

£000

£000

£000

£000

New Homes Bonus

 3,995

 1,373

 1,373

 1,373

 1,373

 9,487

Capital Grants

 4,064

 850

 850

 850

 850

 7,464

Internal Borrowing

 3,114

 336

 803

 1,080

 1,050

 6,383

External Borrowing

 37,838

 25,311

 14,655

 16,305

 11,280

 105,389

TOTAL

 49,011

 27,870

 17,681

 19,608

 14,553

 128,723

8.8        The use of New Homes Bonus to fund the capital programme arises from previous Council decisions.  It could alternatively be used to fund revenue expenditure and therefore address relevant growth pressures, in particular the requirement for more extensive planning policies and a Town Centre Strategy (see paragraph 6.14 above).  This would have the effect of increasing the revenue cost of funding the capital programme by £40,000 per annum for every £1 million of New Homes Bonus that was deployed in this way.

 

8.9        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 existing Capital Strategy was approved by Council at its meeting on 24th February 2020 and will be refreshed in February 2022.

 

8.10     The existing capital programme was approved by Council at its budget meeting on 24th February 2021.  Major schemes include the following:

 

-      Completion of Brunswick Street and Union Street developments

-      Purchase of housing for temporary accommodation

-      Flood Action Plan

-      Mote Park Improvements

-      Further investment at the Lockmeadow Leisure Complex

-      Commercial Property Investments

-      Kent Medical Campus Innovation Centre

-      Mall Bus Station Improvements

-      Biodiversity and Climate Change.

 

8.11     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.

 

8.12     In particular, the updated capital programme will reflect the Council’s ambition to deliver 1,000 new affordable homes.  As this implies a significant expansion of the existing capital programme, its overall affordability and the extent to which it exposes the Council to risk will be addressed in the Capital Strategy.

 

8.13     An updated capital programme will be considered by Policy and Resources Committee in January 2022 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 will be considered by Service Committees.

 

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

 

9.3        Consultation with members will take place in January 2022 on the detailed budget proposals.  Individual Service Committees will consider the budget proposals relating to the services within their areas of responsibility. 

 

 


 

Document History

 

Date

Description

Details of changes

11.11.21

Draft to Corporate Leadership Team

 

16.11.21

Draft to Policy & Resources Committee

Changes requested by CLT

 

 

 

 

 

 

 

 



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