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Budget Gap 2023/24 - Question and Answers

Budget Gap 2023/24 - Question and Answers

The Revenue Budget

What is the Revenue Budget?

  • The revenue budget sets out what the Council plans to spend on day-to-day services.
  • These include running schools, caring for vulnerable people, collecting waste, maintaining highways and parks, and operating libraries and cultural venues.
  • The revenue budget must also set out how these spending plans will be funded.
  • Some services generate income to help cover their cost (like Cardiff Castle), and sometimes we receive grants for specific activities - this is called service specific income.
  • After taking service specific income into account, our remaining costs (the Net Revenue Budget) are funded from General Grant (73%) and Council Tax (27%).  

 

How do you prepare the Revenue Budget?

In summary we:

  • Estimate the cost of delivering services next year
  • Compare this to the funding we expect to receive next year
  • If estimated costs are more than funding, then we have a "Budget Gap."


What happens if there is a Budget Gap?

  • The Council is required by law to produce a balanced budget. This means we must plan to bring expenditure and funding back in line - they must match.
  • This can be done by:
    • Reducing Spend (making savings)
    • Increasing income (for specific services)
    • Reviewing the level of the Council Tax
    • Considering using earmarked reserves - but this is not a long term solution

 

Is there a Budget Gap for 2023/24?

  • Yes, there is an estimated budget gap of £23.5million for 2023/24
  • This reflects estimated additional costs of £75 million less additional funding of £51.5 million.
  • Based on indicative funding levels received earlier this year, the gap was previously estimated at £53 million. However, on 14th December 2022, Welsh Government published updated 2023/24 funding figures for Local Government – as part of Provisional Local Government Settlement. The funding levels announced were higher than earlier indications (9% instead of 3%). This has helped reduce the estimated budget gap to £23.5 million

 

What are the £75 million additional costs you are expecting?

  • The £75 million includes:
    • £27.9 million for estimated price inflation.We are expecting significant increases in the cost of energy used to power street lighting, schools, and the wider estate. The cost of fuel to run our vehicles has increased. We also recognise that our suppliers will need to pass on their own cost increases in the prices they charge us. This includes the impact of Real Living Wage increases on the price we pay for care.
    • £6.7 million for anticipated demand increases.This includes an increase in people needing our support in Adult  Social Care. It includes education-related costs like increasing pupil numbers, different pupil needs, and the cost of schools in Local Development Plan Areas. We also know that homelessness will be a key area to keep under review in terms of demand.
    • £29.7 million for estimated pay awards. This includes the difference between estimated and actual 2022/23 award, as well as an estimate for 2023/24 award.  Awards cover staff across all services, including for example, teachers, social workers and refuse collectors.
    • £10.7 million for other pressures. This includes the costs associated with financing the capital programme, , and increases to levies the Council pays (e.g. to the South Wales Fire Service). This sum also includes cost pressures affecting the current year including home to school transport costs, delayed post-Covid income recovery and unprecedented pressures in Children’s Services.

 

How will the Council bridge the budget gap?

  • The three main things the Council can consider to bridge the gap are savings, council tax and use of reserves
  • As in previous years, most of the gap will be bridged through making savings.
  • The Council is committed to protecting front line services and so is aiming to deliver at least £8.5 million in efficiency savings. These are savings that deliver the same services for less resource and so have no direct impact on residents. However, the scale of the gap means that it will not be possible to close it through efficiency savings alone - some changes to service are likely to be required. Citizens are currently being asked to give their view on this as part of the recently launched budget consultation.
  • Current modelling reflects a 3% Council Tax increase - which would deliver £4.9 million towards bridging the £23.5 million gap. This will not be finalised until early March 2023.
  • The Council will also keep under review an appropriate level of support from earmarked reserves. However, using reserves to bridge the gap means storing up a bigger problem for the following year because once you’ve used reserves they are gone - but the pressure that they were funding carries on.
  • It’s important to emphasise that this is preparatory work and that plans to bridge the gap will not be fully finalised until the budget is set in early March next year. The results of the recently launched Budget Consultation will be an important consideration in finalising those plans.

What happens next?

  • We will continue to keep the budget gap under close review - things can still change , especially in the current volatile economic circumstances. Regular review is an important part of being prepared.
  • We will continue to try and identify further efficiency savings (savings that don't affect services) and to implement them early where possible and appropriate.
  • We will continue to look at a managed reduction in the number of staff employed, using voluntary severance to generate savings, whilst keeping compulsory redundancies to a minimum.
  • We will reflect on the results of public consultation and take them into account when drafting the final 2023/24 Budget proposal for consideration by full Council in the Spring.

 

The Capital Programme

What is capital expenditure?

  • Capital expenditure refers to acquiring or improving assets. It has a longer-term focus than revenue expenditure.
  • Examples of capital expenditure include building a new school or resurfacing the highway.

 

What is the Capital Programme?

  • The capital programme sets out our expenditure plans and how we will pay for them over a five-year period. It aligns with the Council's aims and is an investment programme to meet the long term challenges facing the city.
  • The current programme includes support for city regeneration, modernising school buildings, responding to the climate emergency and delivering a significant house building programme.

 

What period does the current programme cover?

  • Council approved the current five-year capital programme in March 2022. This set the programme for 2022/23 as well as an indicative programme until 2026/27. 
  • We now need to plan for setting the 2023/24 programme. We also need to update later years of the indicative programme, and roll it forward to cover 2027/28.

 

How do you plan for capital projects?

  • The size and complexity of capital schemes means there are a wide range of factors to consider - this requires robust business cases and viability assessments.
  • It is critical that all key risks are fully understood before embarking on a project.

 

How is capital expenditure paid for?

  • Councils receive grant funding (specific and general) to support capital expenditure. This is similar to the Revenue Budget, but there are also some very important differences.
  • One of these is that rules allow Councils to borrow to fund capital expenditure -if that borrowing is considered affordable, prudent and sustainable.
  • Another is that Councils can fund capital expenditure from selling assets and using the proceeds - called capital receipts.

 

What is the position in terms of borrowing?

  • Borrowing places pressures on the revenue budget. This is because the Council must repay debt with interest. The affected revenue budget is called the "capital financing budget."
  • Broadly speaking, each £1 million of capital expenditure places additional pressure of £75,000 on the revenue budget. This assumes the asset will last a long time (25 years). The impact on revenue is higher if assets aren't expected to last that long.
  • Capital financing accounts for around 5% of the revenue budget. Even with no further borrowing, this budget will increase over the medium term.
  • This is a key consideration when judging whether any further borrowing is affordable - because the revenue budget is already under significant pressure.

 

What is the position on capital receipts?

  • Selling assets can: 
    • Provide funds to support the capital programme.
    • Reduce revenue costs associated with maintaining and operating assets.
  • The current capital programme already includes challenging targets in respect of capital receipts. Updates to the receipts target are included in the annual property plan.
  • Capital investment plans include several major development projects based on capital receipts contributing to their cost. There can be a risk where spending begins before receipts have been realised, and this will need regular review as part of the annual property plan.

 

What will you consider in updating the capital programme?

  • The key consideration is affordability.
  • With little to no scope to increase borrowing or capital receipts to fund schemes, we will need to prioritise.
  • We will also need to think about economic factors that might affect the costs of schemes. This will include things like materials supply issues, increasing construction costs, supplier availability and the potential for increasing interest rates to affect the cost of borrowing.
  • The Council has, and continues to be successful in bidding for external grants to support specific schemes. This is a crucial way of supporting overall affordability - but sometimes bid arrangements for these funding streams make long term planning difficult.

 

Can some investment pay for itself through savings or new income streams?

  • Yes, these are called invest to save (ITS) or invest to earn (ITE) schemes. These are schemes where capital investment results in savings or income that help to meet the borrowing costs. There are restrictions on the Council investing in commercial type projects e.g those undertaken primarily for a financial return.
  • A robust business case is key to ensure that the income / savings materialise at the levels required to meet the borrowing costs. If they don't, there is a risk that the revenue budget will end up picking up those costs for many years into the future.

 

In light of the above, what is the planned approach to updating the capital programme?

  • For the General Fund (areas other than the Housing Revenue Account), there will be no new investment unless its:
    • Reprioritised from the existing programme - in other words something else must fall out / reduce.
    • Accompanied by significant external match funding - and that funding is confirmed
    • On an invest to save basis following a business case approved by Cabinet
  • If the cost of schemes already included in the indicative programme has increased, this will need to be managed within current allocations by mitigating impacts or reviewing timing.
  • For the Housing Revenue Account:
    • New investment will need to consider long term business plan affordability modelling.
    • New build schemes should be subject to individual viability assessments.
    • The approach to rent-setting will be a key factor in affordability assessments.
  • It will be essential to keep progress towards capital receipts under review.
  • All proposed investment should be in line with the Capital Ambition delivery programme, and all alternative solutions for funding and achieving the same outcome, should be explored before additional Council funding is considered. There will also be a need to demonstrate value for money in the approach to delivering outcomes.

 

What next?