MAIDSTONE BOROUGH COUNCIL

 

MEDIUM TERM FINANCIAL STRATEGY

2023/24 – 2027/28

 

 

 

CONTENTS

 

 

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

2. Corporate Objectives and Key Priorities........................................................................... 4

3. Economic Environment....................................................................................................... 6

4. Current Financial Position................................................................................................. 11

5. Available Resources........................................................................................................... 17

6. Scenario Planning.............................................................................................................. 21

7. Revenue Projections.......................................................................................................... 27

8. Capital Strategy.................................................................................................................. 29

9. Consultation........................................................................................................................ 31

 

 

 

 

 

 

 

 

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 an impending economic recession, high inflation and the state of the UK’s public finances.  The state of the international economy, with tensions between the superpowers, high energy prices and the continuing war in Ukraine, only serves to exacerbate these challenges.  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.  Although a three-year Spending Review was announced by the Chancellor in October 2021, there was only a one year settlement for Local Government for 2022/23.  At the time of writing (October 2022) the government had not set out its plans for balancing government spending over the medium term, but this was expected to include tight constraints on public expenditure.  More details will emerge in the Local Government Finance Settlement, expected in December 2022.  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 several 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, based on two key variables: (a) the performance of the economy, which is closely linked to the global economy and subject to all the pressures of war and constraints on energy supplies; and (b) how aggressively the government and the Bank of England respond to rising inflation.  We originally had 4 potential scenarios, given these two key variables, which can be shown as follows.

 

 

 

 

 

Figure 1: Potential future scenarios

 

 

1.6        Since we last provided an update on the MTFS we have introduced a fifth scenario to reflect the potential for reduction in funding.  Scenarios 4 and 5 are described as :

 

·         Scenario 4: Continuing high inflation leads to fiscal tightening, local government spending subject to restraints

·         Scenario 5: Continuing high inflation leads to fiscal tightening, local government spending subject to reductions

 

1.7        Scenario 4 has been used to assess the likely size of the budget gap, based on what we currently know.  We need to await confirmation of funding and monitor the economic environment including the level of inflation that the UK is currently facing.  There is still no clarity about local government following recent budget announcements, but we hope that the Chancellor’s announcement on 17^th November will start to provide some clarity.  The table below shows projections for scenario 4, before taking account of budget changes, which will be considered by members at PAC meetings in January 2023, and other updates.

 

Table 1: MTFS Revenue Projections 2023/24 – 2027/28

 

 

In accordance with legislative requirements the Council must set a balanced budget.  Section 7 concludes by setting out a proposed approach which will specifically address the budget gap in 2023/24 and, more generally, provide a framework for closing the budget gap in future years.

 

1.8        The Council’s strategic priorities are met not only through day-to-day revenue spending but also through capital investment.  The Council’s programme of building 1,000 Affordable Homes is the centre-piece of the Capital Strategy.  Capital investment therefore serves to deliver the Council’s strategic priorities, but must remain 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, e.g. the Levelling-Up Fund.

 

1.9        The MTFS concludes by describing the process of agreeing a budget for 2023/24, 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.  The Strategic Plan has been refreshed in light of the Covid-19 pandemic. The overall strategic priorities remain the same, but specific areas of focus for the next five years have been agreed. So far as recovery from Covid-19 is concerned, the Council’s approach will be based around four themes: economic recovery, supporting resilience for communities and vulnerable people, adapting the way we work, and financial recovery.  The 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 that we want Maidstone Borough to work for the people who live, visit and work; now and in the future. We want a Borough where there is a variety of jobs, housing need is met and infrastructure is in place to meet the growing needs of our residents and economy. We also want to ensure we lead and shape our place as it grows, including leading master planning and investing to bring about high quality housing and jobs in the Borough.

 

‘Homes and communities’ expresses that we want to have a place that people love and where they can afford to live. This means ensuring that there is a good balance of different types of homes, including affordable housing. We will have safe and desirable homes that enable good health and wellbeing for our communities. We will address homelessness and rough sleeping to move people into settled accommodation. We will work with our partners to improve the quality of community services and facilities including for health care and community activities. Residents will be encouraged and supported to volunteer and play a full part in their communities.

 

‘A thriving place’ is a Borough that is open for business, attractive for visitors and is an enjoyable and prosperous place to live for our residents. Maidstone is the Business Capital of Kent; we will continue to grow our local economy with high employment, good local jobs and thriving local businesses. We want our town and village centres to thrive and be ft for the future. We will lead investment in the County town and rural service centres through our regeneration projects and working with partners. We are proud of our heritage and will continue to grow our leisure and cultural offer

 

A ‘safe, clean and green’ place is one where we will keep Maidstone an attractive and clean place for all. Maidstone is a safe place to live and we want our residents to feel safe. We want to protect and where possible enhance our environment and make sure our parks, green spaces, streets and public areas are high quality by ensuring they are looked after, well managed and respected.

 

 

 

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 the completion of the Innovation Centre and development a new Garden Community.

 

2.3        Amongst initiatives to help make Maidstone a ‘Thriving Place’ have been MBC investment at Lockmeadow and on the Parkwood Industrial Estate, along with the emerging plans for developing a Town Centre Strategy.  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

·         continued recovery from the Covid 19 pandemic.

 

2.7        The overall funding envelope within which these priorities must be delivered remains unclear.  However, it is clear that there are financial challenges arising from a likely downturn in the economy and continuing high levels of inflation. Whilst the Council is largely self-sufficient financially, drawing most of its income from Council Tax and a range of other locally generated sources of income, including Parking, Planning Fees and the Council’s property portfolio, it operates within the local authority funding framework set by central government, which is likely to impose tight constraints.  The most significant element of this is the restriction set by central government on the amount by which Council Tax can be increased.  The financial implications are set out in section 7 below.

 

3.          ECONOMIC ENVIRONMENT

 

 

Macro outlook

 

3.1        The outlook for the UK economy is exceptionally uncertain.  Following the initial recovery from the Covid recession, growth has slowed and the economy is likely to move into a recession, continuing into 2023. Growth thereafter will be very weak by historical standards. This reflects global factors including sharp rises in energy prices, but local factors mean that the UK economy is affected more severely and its performance lags behind that of other leading nations. The Bank of England projects negligible growth over the next two years and any subsequent recovery will be modest.

 

Figure 1: GDP projection based on market interest rate expectations

 

 

 

Source: Bank of England Monetary
Policy Committee report, August 2022

 

3.2        Stagnant economic growth will be accompanied, in the short term at least, by high inflation. Currently inflation is around 10% and the Bank of England forecasts that inflation will increase further.  The subsequent fall in inflation may be slower and longer than previously thought.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 2: CPI inflation projection based on market interest rate expectations

 

 

Source: Bank of England Monetary
Policy Committee report, August 2022

 

3.3        The projections above indicate that inflation will fall over the medium term. However, many commentators have challenged whether current policies will be successful in bringing down inflation. The example of the 1970s has been cited, when ‘those countries that rapidly killed inflationary impulses with tight policy, led by the West German Bundesbank, took the pain and suffered a short and shallow downturn. Those that followed a more accommodating path ended up with persistently higher inflation rates that required much deeper recessions in the early 1980s to stamp out inflation’. (Chris Giles, FT 09.06.2022).

 

Public Finances

 

3.4        An economic downturn impacts on the public finances by reducing tax income and increasing spending pressures.  The financial markets’ response to the ‘mini budget’ of September 2022 demonstrated that these pressures cannot be addressed by increasing public borrowing without a credible medium term fiscal plan.  At the time of writing, details of the government’s plans have yet to emerge, but they are likely to involve constraints on public spending.

 

3.5        The local authority funding framework set by government remains a crucial determinant of the Council’s future financial position. This is primarily because central government restricts the amount by which Council Tax can be increased through the referendum limit and it determines the share of business rates that can be retained locally.

 

 

 

 

 

 

 

Local Government Funding

 

3.6        The main sources of local government funding nationally are set out below.

 

 

Figure 3: How Council Services are funded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: IFS, ‘Does Funding Follow Need?’, October 2022

 

3.7        In recent years, the reduction in direct 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 led the government’s preferred measure of council spending, ‘Council spending power’, to increase, even though it may not reflect the actual resources available.

 

3.8        However, funding has failed to keep up with the increased demands on Council services, particularly for social care and housing.  LGA analysis ahead of the 2020 Budget and Spending Review identified that Council services faced an additional funding requirement for their annual day-to-day spending and the position is likely to have worsened since then.

 

 

 

 

 

 

 

 

 

 

 

Figure 4: 2025 funding gap analysis

 

Source: LGA analysis          

 

3.9        The other main element of local government funding, beside 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 10% in Maidstone’s case).  It was originally intended to increase the 50% share of business rates retained locally to 75%, but this is no longer government policy.

 

3.10     At the time of writing, government spending plans are still based on a three-year Spending Review, announced 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.

 

3.11     Details of what the overall increase in spending power in year 1 of the three year Spending Review period meant for individual authorities were announced in the Local Government Finance Settlement in December 2021.  A potential issue for Maidstone was that an 'across the board' increase in funding for Councils could have used 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 would therefore have been used to reverse negative RSG, giving no benefit to the Council.  In the event, the original 2013/14 needs assessment was used to allocate additional resources to Councils, in the form of a Services Grant, which gave the Council an additional £225,000.

 

3.12     Although the Spending Review covered three years (2022/23 to 2024/25), this only translated into a one-year local government funding settlement in 2022/23 and it is anticipated that this will be the case again in 2023/24.

 

3.13     Government announcements in October 2021 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 is through a bidding process. Reflecting its low standing in the levelling up agenda, Maidstone is a Priority 2 area.

 

3.14     Spending plans for the period from 2023/24 remain to be announced at the time of writing, but current indications suggest the public sector is going to have to make cuts.  With severe pressures on the health service and adult and children’s social care, there is a risk that available funding will be focused on the NHS and upper tier authorities, rather than lower tier authorities like Maidstone.

 

Conclusion

 

3.15     The UK economy faces exceptional challenges, which make the government’s task of constructing a sustainable fiscal policy more difficult than ever.  Whilst local government faces severe spending pressures, there is a risk that available funding will be prioritised around the NHS and social care rather than the services delivered by this Council.

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.

 

4.2        Prior to the Covid-19 pandemic, the Council was broadly self-sufficient financially. It had ceased receiving direct government support in the form of Revenue Support Grant (RSG) and relied mainly on Council Tax and a range of other locally generated sources of income, including parking, planning fees and the property portfolio, to fund ongoing revenue expenditure. However, during the pandemic, income fell and expenditure increased. The consequent budget gap, being the difference between cost of services and aggregate income, was covered with direct government funding.

 

4.3        In 2021/22, income recovered more strongly than expected from the pandemic and the Council generated a modest surplus compared with budget. For 2022/23, there was no more direct government funding to cover the costs of Covid, but the Council was able to set a balanced budget. Additional provision of £1.3 million was made within the 2022/23 budget for the expected impact of higher inflation on the Council’s input costs. At the half-way point of 2022/23, it is expected that, with this provision, the Council will remain within budget for the year. If at any stage it appears that an overspend is likely, measures will need to be taken in-year to bring the budget back into balance.

 

4.4        It is nevertheless appropriate to assess the Council’s financial resilience.  CIPFA provide a Resilience Index tool to test a council’s financial resilience.  We have run the model for 2020/21 (comprising the most up to date data) and it confirms the council is in a good position with no ‘higher risk’ indicators.

 

Figure 5 – CIPFA Resilience Index for the Council in 2020/21.

 

 

4.5        There are a number of elements that contribute to financial resilience, according to CIPFA[1], based on financial data and also considering financial management:

 

·         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

 

4.6        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

 

31st March 2021		31st March 2022
£000		£000
164,760	Long Term Assets	186,272
35,849	Current Assets	50,819
57,257	Current Liabilities	76,301
96,857	Long Term Liabilities	97,854
46,495	Net Assets	62,935
33,691	Usable Reserves	34,160
12,803	Unusable Reserves	30,096
46,495	Total Reserves	64,256

 

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

 

·           Increase in long term assets: A number of additional properties were purchased during 21/22.

·           Increase in Current Assets: The value of short-term deposits with financial institutions grew as part of the Treasury Management Policy.

·           Increase in current liabilities: The movement in the balances for Central Government grants, e.g. for distribution to local businesses, which have been received by the Council but not yet deployed, were accounted for as liabilities at the balance sheet date.

·           Increase in unusable reserves: this primarily relates to the difference between council tax and non-domestic rates income, as credited to the Comprehensive Income & Expenditure Statement, and council tax and non-domestic rates income calculated in accordance with statutory requirements, where this income is dealt with through the Collection Fund.  The abnormal movement between years arises from the way that the Council was reimbursed for Covid business rates relief.

 

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

 

4.9        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.

 

4.10     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 from 2021/22 that this minimum should be increased to £4 million.  This level of reserve provides flexibility to fund financial pressures on a one off basis.

 

Current Position

 

4.11     Current indications are that the Council will deliver a balanced budget for 2022/23, allowing the level of reserves to be maintained.  The balanced position does reflect some increased pressures in Temporary Accommodation.  Further pressures are expected arising from end of the current contract for waste collection.  These costs are being managed in year, but as they are likely to be ongoing, they will need to be reflected in the MTFS.

 

Financial management

 

4.12     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

 

4.13     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.

 

4.14     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.

 

4.15     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.

 

4.16     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.

 

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

 

Capital investment

 

4.18     The Council’s capital programme (5 year rolling programme) is intended to support local public services and to help the Council achieve its strategic priorities for the borough. The Council plans to continue investing through the capital programme. 

 

4.19     All schemes within the capital programme are subject to appropriate option appraisal. Any appraisal must comply with the requirements of the Prudential Code. which requires that capital investment should be funded in a way that is prudent, affordable and sustainable.  Increased cost of borrowing will require investments to provide a better return to ensure they are sustainable.

 

4.20     The capital programme is largely funded through external sources, so it depends on the availability of funding, whether through Public Works Loan Board borrowing or other sources of finance. The Council has locked in £80 million of future borrowing, to be drawn down between 2024 to 2026, in order to mitigate the funding risk.

 

4.21     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.

 

4.22     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.

 

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

 

Ability to deliver budget savings

 

4.24     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.

 

4.25     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.

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

 

Risk management

 

4.27     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. 

 

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

 

·         Failure to contain expenditure within agreed budgets

·         Inflation rate is higher than 2% government target

·         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

·         Capital programme cannot be funded

·         Planned savings are not delivered

·         Constraints on council tax increases

·         Litigation costs exceed budgeted provisions

·         Business Rates pool fails to generate sufficient growth

·         Shared services fail to meet budget

·         Council holds insufficient balances

·         Increased complexity of government regulation.

·         Other income fails to achieve budget

·         Increased complexity of government regulation

·         Financial Impact from IT security failure

·         Pension liability cannot be funded

 

4.29     The Council is implementing JCAD risk management software, which allows individual service areas to log and monitor risks.  By reviewing risks on a regular basis in this way, it is expected that any major new risks will be identified and appropriate mitigations developed. 

 

Conclusion

 

4.30     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 6: Sources of Income (£ million)

 

 

Council Tax income remained resilient throughout the Covid-19 pandemic, with only a slight deterioration in collection levels.  Other income fell back sharply in 2020/21, but has now largely recovered. 

 

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

 

	2018	2019	2020	2021	2022
Number of dwellings	70,843	71,917	73,125	75,034	76,351
% increase compared with previous year	1.74%	1.52%	1.68%	2.61%	1.76%

 

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.  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 2023/24 is a decision that will be made by Council based on a recommendation made by the Executive. 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 2022/23 was the greater of 2% or £5.00 for Band D taxpayers.  Council Tax was increased by the maximum possible, ie £5.40 (2%).

 

Business Rates

 

5.6        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 retains only around 10% of the business rates that it collects. 

 

5.7        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 in the medium term will remain the same, increase or decrease.

 

5.8        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 hitherto been spent on the Maidstone East development. Following Maidstone’s acquisition of Kent County Council’s 50% share in the development in 2021/22, the Growth Fund will be split equally between Maidstone Borough Council and Kent County Council.

 

5.9        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 5.8 above.

 

5.10     Total projected business rates income for 2022/23, and the ways in which it is planned to deploy it, are summarised in the table below.

 

Table 4: Projected Business Rates Income 2022/23

 

	£000
Business Rates baseline income	3,593	Included in base budget
Growth in excess of the baseline	1,692	Included in base budget
Pooling gain (MBC share)	507	Funds Economic Development projects
Pooling gain (Growth Fund)	204	Funds Maidstone East development
Total	5,996

 

Revenue Support Grant

 

5.11     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 four-year funding settlement which ran from 2016/19 to 2019/20, through 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. 

 

5.12     Any increase in overall funding for local authorities could simply be used to reverse negative RSG for those authorities where it was payable.  As has been seen, a different mechanism was used in 2022/23, which provided some benefit to the Council in the form of the Services Grant.

 

5.13     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.

 

Other income

 

5.14     Other income is an 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

·         Private rented sector housing (Maidstone Property Holdings)

·         Planning fees

·         Crematorium and cemetery

·         Garden waste collection

·         Commercial waste collection

 

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.

 

5.15     Commercial property income in particular has increased rapidly in recent years.  This has arisen from a deliberate strategy of focusing capital investment on projects such as the acquisition of the Lockmeadow Leisure Complex and Maidstone House which have served the dual purposes of meeting the Council’s strategic priorities and generating income.  See below.

 

Table 5: Net Property Income 2016/17 – 2022/23

 

	16/17	17/18	18/19	19/20	20/21	21/22	22/23
	£000	£000	£000	£000	£000	£000	£000
Commercial Property	847	1,064	1,467	1,590	2,774	2,819	3,437
Maidstone Property Holdings (PRS Housing)	0	0	0	188	280	837	830
Total	847	1,064	1,467	1,778	3,054	3,656	4,267

 

Source: MBC Budget Books

 

5.16     Other income, particularly parking, was seriously affected by Covid-19.  However, income levels in most categories have now recovered to pre-Covid levels.

 

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 were prepared in July 2022 on four different scenarios.  Following a further deterioration in the economic outlook and the impact of the September 2022 ‘mini budget’ it is now considered that unfortunately Scenario 4, the most adverse of these scenarios, is the most likely to materialise.  We have also now developed a scenario 5 to reflect the potential impact of the latest views from government.

 

Scenario 1: Fiscal tightening in response to threat of inflation, limited flexibility for local government, economy recovers

This is the scenario in which the government takes prompt action to bring down inflation. This would be likely to involve restrictions on government spending, including limits on Council Tax increases. If successful, this policy would mean that inflation would return to the government’s long term target rate of 2% and the economy would recover, leading to renewed growth in the Council Tax base and the Council’s other sources of income.

 

Scenario 2: Accommodative local government finance settlements, steady reduction in inflation, return to economic growth

Current government and Bank of England policy was previously based on the assumption that drastic action was not required to combat inflation, and there would be a return to growth in any case. Growth would however be anaemic, with external income returning to pre-Covid levels over a period of 3-4 years. There would continue 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 would be able to fund inflationary increases in expenditure through matching increases in Council Tax. This is the most optimistic scenario.

 

Scenario 3: Continuing high inflation, increased spending pressures, recession, but local government retains flexibility for time being

Heightened assumptions about the inflation rate, 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 no real terms growth in Council income. Whilst under this scenario, the Council would be able to match inflationary growth in costs through increases in Council Tax, the poor performance of the economy would nevertheless lead to an overall deterioriation in its financial position.

 

Scenario 4: Continuing high inflation leads to fiscal tightening, local government spending subject to restraints

In this scenario the government is forced to take action to bring down inflation. This would involve restrictions on government spending, including limits on Council Tax increases. The Council would not be able to match inflationary growth in costs through increases in Council Tax and the poor performance of the economy would mean minimal growth in the Council Tax base and other sources of income. This is now considered to be the most likely scenario.

 

Scenario 5: Inflation peaks at a higher level than previously envisaged and remains high.  Local government spending is subject to reductions.

In this scenario inflation remains higher than originally expected.  The Government and Bank of England take action to stabilise the economy, but this is not sufficient to avoid a prolonged recession. This will be reductions in government spending, including limits on Council Tax increases. The Council will not be able to match higher and sustained inflationary growth in costs through increases in Council Tax and the poor performance of the economy would mean minimal growth in the Council Tax base and other sources of income. This is the most pessimistic scenario.

 

Strategic Revenue Projection

 

6.2        For illustrative purposes, assumptions about what scenarios 4 and 5 might mean are set out in this section, and high-level revenue projections are shown for both. The key dimensions are:

 

·         the Council Tax base;

·         the level of Council Tax;

·         retained Business Rates, which in turn depends on overall business rates income and government policy on distributing it between local authorities and central government;

·         other local income, eg fees and charges;

·         the cost of service delivery, which is subject to the effect of inflation on input prices.

 

          Each of these is considered in more detail below.

 

          Council Tax base

 

6.3        Projected Council Tax income for 2022/23 amounts to £18.2 million and is the Council’s single biggest source of income. Council Tax is a product of the tax base and the level of tax set by the 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.  As described in the previous section, the tax base has increased steadily in recent years, reflecting the number of new housing developments in the borough.

6.4        The Council tax base is also affected by collection rates and the number of households benefitting from the Council Tax Reduction Scheme. Typically these factors do not vary significantly between years but in the event of a major downturn in the economy, collection rates could be expected to fall and more households would be eligible for the Council Tax Reduction Scheme.

 

 

 

6.5        Future growth assumptions for each scenario are set out below.

 

Table 6: Council Tax Base Growth

 

Council Tax base growth assumptions
	23/24	24/25	25/26	26/27	27/28
Scenario 4 – Limited flexibility, continued stagflation	1.5%	1.0%	1.0%	1.0%	1.0%
Scenario 5 – Limited flexibility, potential funding reductions, continued stagflation	1.5%	1.0%	1.0%	1.0%	1.0%

 

Level of Council Tax

 

6.6        In practice, the Council’s ability to increase the level of council tax is limited by the need to hold a referendum for increases over a government set limit. In 2022/23, the limit was 2%. The Council approved the maximum possible increase. The rationale for this approach was that:

 

•              pressures on the Council’s budget mean that even a marginal difference in Council Tax income is of value;

•              the referendum limit might revert to a lower level in later years;

•              because the starting point for calculating the referendum limit in any given year is the previous year’s Council Tax, agreeing a lower increase reduces the Council’s room for manoeuvre in later years.

6.7        The referendum limit of 2% was intended broadly to reflect the rate of inflation. It was also assumed in the government’s planning for local government expenditure that local authorities would indeed increase by the maximum permissible amount, and this was reflected in the ‘Spending Power’ data published for each local authority. At this stage there is no indication as to whether the government will set a higher referendum limit in 2023/24 to reflect current inflation levels.

 

6.8        Assumptions for each scenario are set out below, on the basis that these increases represent the government’s referendum limit and the Council follows its practice of increasing Council Tax by the maximum permitted.

 

Table 7: Council Tax Increase

 

Council Tax increase assumptions
	23/24	24/25	25/26	26/27	27/28
Scenario 4 – Limited flexibility, continued stagflation	2.0%	2.0%	2.0%	2.0%	2.0%
Scenario 5 – Limited flexibility, potential funding reductions, continued stagflation	2.0%	2.0%	2.0%	2.0%	2.0%

Retained business rates

 

6.9        Under the current business rates regime, local government in aggregate retains 50% of business rates income. However, most of the 50% share collected locally is lost to Maidstone, because it is redistributed to other authorities and the government through a system of tariffs and top-ups.

 

Table 8: Projected Business Rates Income 2022/23

 

	£000	%
Maidstone Borough Council	5,285	10
Kent County Council	4,631	9
Kent Fire & Rescue Authority	515	1
Central Government	41,410	80
Total Business Rates Income	51,841	100

 

 

6.10     To the extent that business rates income exceeds a notional baseline, this growth element is retained locally, subject to a levy payable to central government by tariff authorities like Maidstone. The Council has been able to minimise the levy payable on business rates growth through its membership of the Kent Business Rates Pool. This is because, by pooling our income, the levy payable by some pool members (district councils) is offset against the top-up received by the major preceptors (Kent County Council and Kent Fire and Rescue).  Details are set out in the previous section.

 

6.11     It is assumed at this stage that pool proceeds continue to be earmarked as currently.  Note that in the event of a business rates reset there would initially be no growth available for pooling.

 

6.12     In general, projections of business rates income for the years after 2023/24 must, of necessity, take a cautious position on how much business rates income is likely to be retained locally, given that this is the element in our total resources that is most at risk from the vagaries of government policy.  Future growth assumptions for each scenario are set out below.

 

Table 9: Business Rates Growth Assumptions

 

Business Rates growth assumptions
	23/24	24/25	25/26	26/27	27/28
Scenario 4 – Limited flexibility, continued stagflation	0.0%	0.0%	2.0%	2.0%	2.0%
Scenario 5 – Limited flexibility, potential funding reductions, continued stagflation	0.0%	0.0%	2.0%	2.0%	2.0%

 

 

 

 

Other income

 

6.13     The main components of other income are set out below:

 

Table 10:  Projected Other Income 2022/23

 

	£ million
Fees and charges	9.2
Property rental income and service charges	6.9
Shared services trading income	3.3
Other income	2.3
TOTAL	21.7

 

Each component is subject to different inflationary factors.  Some fees and charges are set by central government and are not necessarily increased annually.  However, where the council has the flexibility to review fees and charges, it is assumed that they are increased in line with inflation.  Rents may only change at the point of periodic rent reviews.  Future growth assumptions, using a composite inflation rate, are set out below.

 

Table 11:  Other Income growth assumptions

 

Other income growth assumptions
	23/24	24/25	25/26	26/27	27/28
Scenario 4 – Limited flexibility, continued stagflation	5.0%	5.0%	5.0%	5.0%	5.0%
Scenario 5 – Limited flexibility, potential funding reductions, continued stagflation	5.0%	5.0%	5.0%	5.0%	5.0%

 

Cost of Service

 

6.14     The cost of services is subject to inflation.  Salaries account for around 50% of total input costs, and whilst salary increases tend to lag behind published inflation figures, market pressures are likely to mean that inflation will impact salaries in the medium term.  Many other costs, in particular contract costs, are directly linked to inflation indices.

 

6.15     A recent benchmarking exercise indicates that salaries at Maidstone have fallen behind the policy target of the public and not for profit sector median level for any given grade.  It is estimated that an additional £675,000 growth, including salary on-costs, less amounts that can be recharged, would be required to bring salaries into line.  For the purposes of the MTFS projections, this growth has been excluded, on the basis that it will need to be self-financing, ie any growth will need to be funded from new savings.

 

6.16     Assumptions for each scenario, using a composite rate at this stage, are set out below.  Note that these figures do not equate to inflation projections, because the growth in cost of services tends to lag behind headline inflation indices.  The figures below exclude any growth to address the shortfall against the salary benchmark described in the previous paragraph.

 

Table 12:  Cost of Service growth assumptions

 

Cost of services growth assumptions
	23/24	24/25	25/26	26/27	27/28
Scenario 4 – Limited flexibility, continued stagflation	5.0%	5.0%	5.0%	5.0%	5.0%
Scenario 5 – Limited flexibility, potential funding reductions, continued stagflation	10.0%	7.0%	5.0%	5.0%	5.0%

 

For the purposes of detailed budget planning, a more granular approach is taken to forecasting budget growth, and specific percentages are applied to the different categories within cost of services.  Additionally, specific provision has been built into the strategic revenue projections for two major known future pressures, namely the continuing additional cost of providing temporary accommodation and the likely additional costs arising from relet of the waste collection contract.

 

7.          REVENUE PROJECTIONS

 

7.1        Strategic revenue projections, based on the assumptions set out above, are summarised in the table below for scenarios 4 and 5.  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 updated Medium Term Financial Strategy.  The figures exclude the cost of potential changes in pay and grading as set out above.

 

Table 13:  MTFS Revenue Projections 2023/24-2027/28

 

 

Notes

1.    Resources comprise Council Tax, retained Business Rates and Other Income.

2.    Predicted expenditure comprises the cost of services and finance costs.

3.    A negative figure represents the amount of savings required to balance the budget; a positive figure represents a budget surplus.

4.    All scenarios incorporate the assumption that Council Tax income is increased by the maximum possible given the referendum limit, and fees and charges are increased in line with inflation to the extent that the Council has the flexibility to do so. 

 

7.2        Even in the more favourable scenario, government constraints on local government spending, principally a freeze in the Council Tax referendum limit at the current level of 2%, lead to a deficit in 2023/24 if no further savings are made.

 

Approach to balancing the budget

 

7.3        In delivering a balanced budget, the requirement to make savings or generate increased income will need to be balanced against the key priorities set out in the Council’s Strategic Plan, namely:

 

·         Embracing Growth and Enabling Infrastructure

·         Homes and Communities

·         A Thriving Place

·         Safe, Clean and Green.

7.4        In recent years, the Council has been successful in simultaneously generating additional income and meeting its strategic priorities, through successful investments (Lockmeadow, Maidstone House) and its programme of delivering private rented sector housing through Maidstone Property Holdings.  The Council will continue to seek similar opportunities in the future.  However, it would not be prudent to rely solely on this approach to balance the budget, both because of the scale of the budget gap and because of current challenges in delivering capital investment, namely the availability of affordable finance and the paucity of suitable opportunities.

 

7.5        Accordingly, all budgets will be reviewed in detail to identify opportunities for savings, or increased income, which can be delivered with the minimum impact on the strategic priorities.  To the extent that further growth is planned, above and beyond existing budgets, this will need to be offset by further savings.  It should be noted that the savings requirement in scenario 4, whilst significant, amounts to just 3% of gross revenue expenditure.  If this level of savings were achieved across all services, it may be possible to close the budget gap with a minimal impact on service delivery.

 

7.6        Option 5 provides a more challenging savings target for 2023/24.  However, it will be seen from section 5 that the Council has sufficient reserves to manage a shortfall of this scale.  Reserves can however only be used once, so the ongoing impact of such an adverse scenario would have to be addressed through more significant budget savings in the future.

 

 

8.          CAPITAL STRATEGY

 

8.1        The capital programme plays a vital part in delivering the Council’s strategic plan, since it is only through long term investment that our ambitions for the borough can be realised.  The capital programme is a rolling five year programme.  The existing capital programme was approved by Council at its budget meeting on 23^rd February 2022.  An updated capital strategy and capital programme is due to be considered by the Executive in January. 

 

8.2        Major schemes include the following:

 

·         1,000 Affordable Homes programme

·         Private rented sector housing programme

·         Temporary accommodation

·         Biodiversity & Climate Change capital projects

·         Garden Community preliminary work.

 

8.3        Schemes may be included in the capital programme if they fall within one of the following categories:

 

·         Required for statutory reasons, eg to ensure that Council property meets health and safety requirements or maintain the condition/value of the asset;

·         Schemes focused on strategic plan priority outcomes that are self-funding.

A further two categories have also been defined, namely:

·         Other schemes focused on strategic plan priority outcomes;

·         Other priority schemes that will attract significant external funding.

Note that these further categories of expenditure will only meet the Prudential Code requirement for sustainable investment if specific revenue provision is made for their funding.

8.4        Prior to inclusion in the capital programme, all schemes are subject to an initial assessment.  The assessment of self-funding is to ensure we achieve the appropriate rate of return, which will be subject to the cost of borrowing.

 

8.5        All schemes within the capital programme are then also subject to appropriate option appraisals, requiring the preparation of a business case, before approval to spend is agreed.  Any appraisal must reflect the Prudential Code, which requires that capital investment should be funded in a way that is prudent, affordable and sustainable.

 

8.6        The current capital programme amounts to £230 million over the next five years.  In the light of inflation, this amount will need to be increased if the same outputs are to be delivered, and higher input costs will need to be factored into the appraisal of individual capital schemes to ensure that they are still affordable.

 

8.7        It is envisaged that the capital programme will primarily be funded from external borrowing.  In view of uncertainty about the future trajectory of interest rates and the availability of funds from the Public Works Loan Board, the Council has secured forward borrowing of £80 million, which will be drawn down between 2024 and 2026.  The balance of the capital programme will still need to be funded, with the cost of finance dependent on rates applying when the borrowing requirement arises.

 

New Homes Bonus

 

8.8        Prior to 2022/23, New Homes Bonus, which is a form of revenue grant from central government, was earmarked for capital expenditure.  This reduced the Council’s borrowing requirement and meant that Maidstone remained debt-free until 2019/20.  For 2022/23, Council agreed when setting the budget that the first £1 million of New Homes Bonus would be allocated for strategic policy and plan making, with the balance of £3.1 million transferred to a Housing Investment Fund, to be used to subsidise the Council’s Affordable Housing Programme.

 

8.9        There is an inherent requirement for subsidy within the Affordable Housing programme, as it involves providing housing at less than a market rent.  In due course, as the Affordable Housing programme is rolled out, the Council will be legally obliged to establish a Housing Revenue Account, which explicitly cannot be subsidised by the General Fund.  However, in the meantime, the Council is able to set funds aside to subsidise affordable housing as agreed when setting the 2022/23 budget.  Inclusion of the Affordable Housing Programme within the Capital Programme implies a continuing requirement for funds to be accumulated in this way.

 

8.10     At the time of writing, there is no certainty about the future of New Homes Bonus.  If it is reduced or withdrawn, alternative sources of subsidy will need to be identified for the Affordable Housing programme.

 

 

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 is being carried out and is due to close on 20th November 2022.  The results of the survey will be considered as part of the detailed budget and can be considered by Policy Advisory Committees.

 

9.2        Consultation with members will take in January 2023 on the detailed budget proposals.  Individual Policy Advisory Committees will consider the budget proposals relating to the services within their areas of responsibility.  The final budget will be presented to Council on the 22^nd February 2023.