Appendix 'A'
The Financial Outlook for the County Council 2014/15 to 2017/18
1. Introduction
In 2010 immediately following its election, the newly elected Conservative led
coalition government conducted a Comprehensive Spending Review (CSR). The
Council responded with a three year budget to cover the period 2011/14. 2013/14 is
the final year of that period.
This report looks ahead to the next four years, and considers the potential scale of
the financial challenge facing the County Council over the period 2014/ 2018. At this
stage, it must be emphasised that there remains considerable uncertainty regarding
our projections of the County Council's funding for the next four years.
The Spending Review (SR) 2013 will be published on 26 June 2013, and is
anticipated to set out the overall envelope of resources for local government over the
next two financial years, with indications for the following two years. However,
although this will provide an overall position for local government, it will not provide
detailed information relating to individual councils or even types of council. This will
be the case until the local government settlement is announced at the end of
December 2013.
It is clear that these reductions in public spending will impact significantly on the
County Council. Indeed, the County Council has already had to save £217m over
the three years of its current three year budget. This has been delivered through a
combination of measures:
Type of Savings
Below the Line savings and Service Efficiencies
Charges
Policy Changes to Services
Total
£m
111.7
7.9
97.4
217.0
%
51.5
3.6
44.9
100
2. The scale of the financial challenge ahead
The level of the financial challenge over the next four years is driven by two key
issues – increased costs and reduced resources. The table overleaf sets out the
impact of forecast cost increases on the County Council over this four year period,
and shows that, unless action is taken costs are forecast to rise by 22%, or £169m
over the next four years.
At the same time, the County Council is facing reductions in the level of resources it
receives through the Business Rates Retention Scheme. The government has stated
that local government will see (as a minimum) the same level of reductions in the
next four year period as within the 2010 Comprehensive Spending Review, and this
has formed the basis of the forecast in resources. This equates to a 28% reduction in
funding received through the business rates retention scheme.
However, subsequent government announcements have indicated that as a
minimum, a further 2% reduction may apply in 2014/15 as part of the Spending
Review 2015. Indeed, it is widely reported that the Secretary of State for
Communities and Local Government has agreed a 10% reduction for local
government in 2015. The combined impact of these announcements is an additional
5% reduction in resources for local government than anticipated.
The publication of the Spending Review 2013 will assist in providing the overall
envelope for local government and enable projections to be narrowed down. A verbal
update on the SR2013 will be provided at the meeting. The impact of a range of
funding outcomes for the County Council is set out in the analysis below.
2.1
Forecast Increases in the County Council's Costs
£m
Notes
The starting point – the 2013/14
Revenue Budget
776.34
Add : Forecast Changes to Costs

Potential impact of pay
awards

Potential impact of increased
employers contribution as a
result of the triennial valuation
of the Pension Fund
8.4 A greater understanding of the impact of the
triennial valuation will be available in
September 2013. The forecast reflects a
continuation of the 1% increase in
contributions for each of the three years as
agreed in 2011.

Impact of the introduction of
the single tier pension
6.0 The government announced the introduction
of the single tier pension with effect from 6
April 2016 on 18 March 2013. This reflects the
increase in National Insurance which will fall
on the County Council.

Forecast impact of
conversion to academies

Fallout of 2013/14 council tax
grant
2.3 This essentially reflect the loss of just under
£0.6m a year grant for central services which
currently support schools within the LEA who
convert to academies. This is an estimate
which is entirely dependent upon the rate of
conversion.
3.7 The 2013/14 council tax freeze grant was for
2 years only, this reflects the loss of resources
in 2015/16.

Impact of inflation on the
prices paid to third parties
18.5 The forecast includes a cautious approach of
a 1% pay award for the first two years, rising
to 2% for the second two years of the
forecast. A 1% pay award costs £2.1m.
79.2 This is essentially price increases on
contracts. A large proportion of our contracts
are based on the RPI and we have factored in
a 3% increase in each of the 4 years, based
on what the financial markets are pricing in
(shown to be a more reliable forward indicator
of inflation). Some contracts (for example
£m
Add : Impact on costs of Forecast
Changes to Demand for Services
Total of Forecast Increases in
Costs
Budget Requirement by
2017/18 if no action taken to
reduce costs
Notes
social care) have a more specialist inflation
calculation, and these have been calculated
on an individual basis.
50.9 Over the four year period, increases in the
numbers of service users within Adult
Services is estimated to bring pressures of
£44.5m, some 87% of the total forecast of
demand.
169.0
Reflecting an increase in costs of nearly 22%
945.34 over the four year period
Of course, in addition to facing increases in costs, the County Council must also
consider changes to its resources.
2.2
Forecast Reductions in the County Council's Resources
£m
The starting point – the level of
resources within the 2013/14
Revenue Budget
Made up of:
 Council tax
 Revenue Support Grant
 Local share of the business
rates
 New Homes Bonus
Forecast Changes to Resources:
Council Tax
Revenue Support Grant and Local
share of the business rates
New Homes bonus
Notes
776.34
360.21
248.81
165.53
1.79
+4.0 Reflecting the estimated increase in the
number of homes paying council tax. This
reflects no increase in council tax levels. A 1%
increase in council tax would raise £3.6m per
year.
-113.5 Reflecting a 28% reduction in funding, as set
out above.
+1.4 Reflecting current projections of new homes
growth.
Overall Impact on resources
-108.1 A net reduction in resources of 14%
Forecast of resources in
2017/18
668.24
2.3
The Overall Impact on the County Council
The combined impact of increases in costs, and reductions in resources is a gap of
£277m which will have to be met by either reducing costs or increasing resources.
The summary of the Financial Outlook for the County Council over the four year
period is set out below.
The Overall Position
Budget Requirement by 2017/18
Forecast of resources in 2017/18
£m
945.34
668.24
Gap
277.10
2.4 Risks to the Projection of Costs and Resources
In planning for the next four years, it is vital that the Council takes account of the
risks within the forecast. The forecast of costs and resources is based on the latest
intelligence, and will be subject to change. The key areas of risk, and the potential
impact, are set out below.

The risk of inflation being higher than currently forecast. There is a strong view
that in order to bring economic prosperity, inflation will increase. Whilst we have
factored in the market view, both the timing and level of any increase will impact
upon the strategy. A 1% increase in inflation above forecast will increase the level
of savings required by £25m over the four years. Clearly, if inflation does not run
at 3% each year the pressures will not be as great.

The risk of demand being higher than forecast. The impact of welfare reform on
the County Council's services is not clearly understood, and may have a bigger
impact than factored here. In addition, if the forecasts of growth in relation to
adult services prove to be understated, by, say 10% overall over the four year
period, this would increase costs by £5m.

The risk of resources being lower than forecast. Our central view is based on the
level of resource reductions the county council has experienced over the current
3 year strategy and the government's published intentions. Whilst the chancellor
has made it clear that local government can expect to see the same level of
reductions in the next period, it is not guaranteed. As described above, the
funding levels for local government over the next four years are highly uncertain.
The forecast above is currently considered to be the best case scenario. Indeed,
many other Councils are forecasting annual reductions of 10% over the next four
years.
If the overall level of resources from the government were reduced by a further
2% in 2014/15 and a further 3% for the following year, this would increase the
level of savings required by a total of £20m over the four years.
2.3
Impact of Risk on the Financial Challenge Ahead
Given the uncertainties around the four year forecast, in particular in relation to
resources, it is not unreasonable to plan for the savings required over the four year
period to be in the order of £300m.
In the order of £80m of savings will need to be found in 2014/15, with savings of
£73m required in each of the following three years.
3. The Proposed Approach
2013/14 is the final year of the current three year budget, and it is suggested that the
Council seeks to develop a four year budget which will cover the life of the
administration. This will enable certainty for our communities, staff and partners, and
enable a considered and planned approach to the significant downsizing that will be
required. By taking a longer term view, a greater focus can be placed on measures
to prevent increases in costs from occurring (for example, through preventative and
early intervention measures) than an annual approach would allow.
By their nature such developments require time to develop, implement and see the
benefits in terms of both outcomes and reduced costs. As the decisions the County
Council faces become increasingly difficult, the lead in time to deliver such savings
also becomes longer. The earlier difficult decisions are taken, the greater the chance
of delivering savings on time, as this allows more effective planning, communication
and risk management thereby preventing the need for further savings to be made in
haste at a later date.
Next Steps
It is proposed that the Management Team work with the Cabinet to develop
proposals for a four year strategy for the County Council's services, which will set out
how the levels of savings above will be achieved within the context of the changing
policy environment. This will enable the development of budget proposals, which
seek to deliver a streamlined, effective County Council where resources are targeted
to the greatest priority, and enable the County Council to ensure an effective
prioritisation of resources when the budgets are set over the coming years.
Over the summer and autumn, Management Team will work with Cabinet Members
to support them in formulating the Cabinet's formal budget proposals. These will then
be available for consideration by the Budget Scrutiny Working Group. The Cabinet's
proposals will be published no later than 9 January 2014.
Summary
Clearly there is a considerable level of speculation in the above, but if over the next
four years we are to make the sorts of savings we are currently predicting then
change at the margins is not an option.