2005/06 Revenue Budget And Medium Term Financial Plan

Report: 10
Date: 22 Jul 2004
By: Treasurer and Commissioner

Summary

The report summarises the Mayor’s budget guidance for 2005/06. It also sets out an initial analysis of SR2004. The implications of the budget guidance are considered and an approach suggested to the development of the 2005/06 budget submission.

A. Recommendation

Members are recommended to

1. Note the Mayor’s budget guidance for 2005/06 and its implications in the light of SR2004.
2. Agree that the 2005/06 budget submission should exemplify four options:

   a) Budget in line with the medium term financial projection (MTFP)

   b) Precept increase of 9.9%

   c) Precept increase of 5%

   d) Precept increase of 2.5%.

3. Endorse the proposal that, in developing the budget submission, a target of £60 million savings be pursued.
4. Agree that proposals be developed for a process for identifying continuing savings over the next three years.
5. Note that the Step Change programme will be reviewed and options developed for implementation in 2005/06.
6. Agree that the Committee oversee the development of the budget and environment submission.

B. Supporting information

Budget guidance

1. The Mayor’s budget guidance for 2005/06 was issued on 30 June 2004. A copy is enclosed for members. It is also available on the MPA website.

There are 5 key elements to be included in the budget submission:

• Budget Plan for the three years 2005/06 to 2007/08
• Business Plan to 2007/08
• Budget and Equalities submission
• Budget and Environment submission
• Borrowing and Capital Spending Plan for the five years 2005/06 to 2009/10.

2. Business plans and budgets should be developed reflecting specific policy issues in support of the Mayor’s priorities. For the MPA the policy issues are set out below.

• · Plans to increase the numbers of police officers and police community support officers, while at the same time accelerating progress towards the target of 30% black and minority ethnic officers and 25% women officers, and plans for the deployment of additional officers.
• · Plans for the expansion of the Safer Neighbourhoods programme providing reassurance and working with Londoners to tackle anti-social behaviour and improve quality of life.
• · Plans to free up police officers for front-line duty by, where appropriate, using civilian staff for back room posts covered by police officers.
• · The implementation of plans that increase the safety and security of women, and the manifesto proposals on domestic violence and hate crime.
• · The manifesto proposals on a real time reporting system and the targeting of police resources.
• · Other initiatives designed to deliver improvements in public confidence in policing for all London’s communities and improve all Londoners’ feelings of safety and security.

3. The guidance specifies the information to be included in budget plans. This represents largely a continuing refinement of the requirements developed over the preceding four years.

4. It is recognised that budget options have to be developed in a situation where government grant remains uncertain. No minimum cash saving targets have been set but the budget submission must exemplify proposals which span the range:

• · A budget requirement restricted to the amount that could be funded by a 2.5% increase in the MPA’s share of the GLA council tax precept.
• · A budget requirement restricted to the amount projected for 2005/06 in the published final 2004/05 GLA budget.

5. The forward plan figures in the published final 2004/05 GLA budget exclude provision for the next stages of the Step Change programme. Additional funding is being sought from the Government and, as for 2004/05, the further expansion of police numbers beyond phase 1 is not covered by the above parameters and is to be treated separately.

6. The guidance specifically requires the development of a menu of options covering intermediate levels between the two ends of the range.

7. The requirement for a business plan to be included in the submission can be met through performance plans or corporate strategies provided they include the information specified in the guidance. It is recognised that such plans may only be in draft form when the submission has to be made. The development of the Authority’s corporate strategy will be overseen by the Planning Performance and Review Committee.

8. Separate guidance has been produced for both the budget and equalities, and budget and environment submissions. The latter is a new requirement for 2005/06. The budget and equalities submission is considered by the Equal Opportunities and Diversity Board. It is proposed that the Finance Committee should monitor the development of the budget and environment submission.

9. The guidance specifies the information to be included with the capital spending plan to accord with the prudential code for capital finance. The Finance Committee will consider the capital spending plan.

10. Progress on development of the budget submission will be the reviewed through budget steering groups with the Mayor supplemented by officer level meetings.

11. As the submission is developed functional bodies should maintain a dialogue with and provide information to key stakeholders so that they are better able to respond to the Mayor’s formal consultation later in the budget process.

12. The MPA has to deliver its budget submission by 8 November 2004. The Authority will need to approve the submission at its meeting on 28 October.

SR2004

13. Assessment of the implications of the budget guidance requires assumptions about the Authority’s likely grant entitlement for 2005/06 and subsequent years. A key determinant of grant is the national spending provisions reflected in the SR2004 spending plans announced by the Chancellor of the Exchequer on 12 July 2004.

14. The Authority agreed earlier in the year a joint MPA/MPS submission to SR2004 based on the Step Change programme and the medium term financial projections. A case for further counter-terrorism funding was submitted at the same time. More recently a report commissioned from Avail Consultants was also provided to the Home Office identifying a funding shortfall of £23-45 million for national, international and capital city functions of the MPS.

15. Total grant funding for the MPA increased by only 2.8% in 2004/05, 3.3% for formula-driven funding. As a result the MPA was denied £56 million of its grant entitlement under the formula. This reflected a poor funding settlement nationally for the police service. The Government spending plans for 2005/06 published as the third year of SR2002 suggested that there would be no improvement on 2004/05. On this basis it would have been imprudent to assume a grant increase next year of more than about 3%.

16. In the event the new plans incorporated in SR2004 suggest that the Home Secretary has secured a significant improvement in Home Office funding in general and police funding in particular. The Departmental Expenditure Limit (DEL) for the Home Office shows an increase in 2005/06 of 6% with an average annual increase of 5.4% over the three year review period. There is as yet no published disaggregation of this total over Home Office services so it is not possible to identify the increase relating to police. However the Chancellor in his statement said that ‘with the Immigration and Nationality Department budget now flat, the rest of the Home Office budget will see an annual real terms increase of 4 per cent.’ The element of police grant funding included within general local government grants which appears under ODPM in the Government’s plans reflects an increase of 4.9% in 2005/06 but experience suggests that it is unsafe to extrapolate this to predict total police funding.

17. Until we see further detail we do not know the increase in the police provision nationally, nor how much of that provision will be applied to central services or ring fenced for specific purposes. In particular it is not possible to say how much grant will be available for distribution by way of the allocation formula and whether that will allow the Home Secretary to reinstate meaningful floors and ceilings, which would allow the MPA to receive some benefit from the formula changes of recent years. If a gap can be created between the floor and the ceiling a 5% ceiling would not be an unrealistic expectation.

18. Formula grant will be restricted partly by the existence of additional specific grants. Two announcements were made on 12 July which will almost certainly be subject to specific grant arrangements but may also be of significant benefit to the MPA.

19. Firstly it was announced that the number of community support officers and neighbourhood wardens nationally will increase to 20,000 by 2008. This is an increase of 15,000 on the numbers already provided for. There remain a number of questions about this new provision:

• Does it represent full funding? The previous provision only covered 50% of the costs.
• What will be the basis of allocation? On the basis of proportionate shares the MPA would expect to receive 3-4,000.
• What will be the balance between CSOs and wardens? The MPA and MPS would strongly support CSOs rather than wardens.

20. Notwithstanding these unanswered questions this would appear to represent a significant contribution towards the further roll-out of safer neighbourhoods.

21. The second specific announcement was of a further £50 million allocated to the Home Office for counter-terrorism. Again it would be expected that a significant proportion of this funding would come to the MPS.

22. One further issue was confirmed by the SR2004 announcement. In response to the Gershon review the Home Office, in consultation with APA and ACPO, has been developing a new efficiency strategy for the police service. The spending review confirms that this will be based on a requirement for 3% annual efficiency savings of which 1.5% will be cashable. For the MPA this would represent cashable savings of approximately £40 million.

23. The Home Secretary is expected to reveal further details of the spending review when he presents the Home Office strategic plan next week. Any additional information will be reported to the Committee orally.

Implications of budget guidance

24. The starting point for developing the 2005/06 budget and medium term plan is the approved budget for 2005/06 and the existing medium term financial projections. These are summarised in the following table. Points to be borne in mind are:

• Expenditure projections for 2005/06 and 2006/07 do not include any Step Change implementation beyond the 2004/05 approvals.
• 2005/06 and 2006/07 expenditure does not reflect any new savings.
• Specific grants are based on the best information available when the 2004/05 budget was approved. There are question marks over some of the provisions for 2005/06 and these figures will need to be monitored in the context of the assumptions about grant entitlement generally.
• General grants will be dependent upon SR2004 and 2005/06 grant settlement decisions, hence the two illustrative assumptions. The spending review information available so far, as set out in paragraphs 13 to23 above, suggest that the grant increase is likely to be nearer the 5% assumption than the more pessimistic view.

25. The guidance implies that we should be exemplifying the effect of the two parameter options and, probably, at least two intermediate levels, subject to discussion with the Mayor. The following table therefore illustrates two further options:

• An option where the precept is kept (just) below a 10% increase.
• An option where the precept increase is restricted to 5%.

26. Either of these results might be enforced in the final analysis by Government criteria for council tax capping.

27. Subject to the views of the Mayor it is proposed that the budget submission should exemplify the four options set out above.

28. To the extent that further implementation of the Step Change programme is not covered by additional grant, savings would be required beyond the figures set out above for each level of precept increase.

29. The Mayor’s expectations in relation to the policy priorities identified in the budget guidance will need to be discussed with him. Subject to that discussion specific issues to be addressed will include:

• A review of the Step Change programme in the light of initial experience of neighbourhood policing to develop options for further implementation.
• Revisiting proposals for civilianisation. These were reflected in the 2004/05 budget as part of the initial Step Change plans but they have not so far been pursued because of questions over operational feasibility.
• The resource implications of real time reporting.

30. The first budget steering group with the Mayor is scheduled for 15 July 2004 and further information will be reported to the Committee following that meeting.

Budget process

31. Major inputs to the budget development will include:

• The 2003/04 outturn review and monitoring information in relation to 2004/05.
• A review of growth reflected in the 2005/06 MTFP financial projection.
• Identification of savings proposals.
• Consideration of current and anticipated future budget pressures not included in the MTFP. For example the cost of free rail travel is already expected to exceed the 2005/06 provision by some £8 million. The financial implications of implementing recommendations of the Bichard inquiry and the MPA’s Morris inquiry inevitably are not reflected in the medium term projection.
• A specific review of police pensions budget and reserves in the light of current experience and proposals for future financing arrangements.
• Continuing assessment of likely grant levels.
• A review of reserve requirements.
• Mayoral advice on acceptable precept levels.
• Government pronouncements on council tax capping.

32. It is clear that savings will need to be reflected in next year’s and subsequent year’s budgets at a minimum of £40 million to meet the Home Office efficiency target. The proposed budget options for 2005/06 would require a higher level of savings even on the more optimistic view of grant prospects.

33. The MPS are proposing to target £60 million savings initially. These will be developed by business groups which will be set planning control totals based on the 2005/06 medium term projection abated by an allocation of the savings target. This will be a new process for the MPS, reflecting further moves to delegate and devolve from the corporate centre to business groups which should allow greater ownership of, and accountability for the budgets finally delivered by business groups. The technique, however, is already common in other parts of the public sector, particularly local government.

34. Continuing delivery of savings needs to reflect a longer term perspective. The MPS is currently engaged in a redirection review which is seeking to identify options for releasing resources. This will need to be reported to the Committee as part of the budget process. It is likely that options coming out of the review will not be capable of implementation in 2005/06 but will need to form part of a medium term plan.

35. The Authority may also wish to supplement this process by seeking an independent external view of potential options.

36. It may be inevitable that savings for 2005/06 have to based to a degree on short term expediency but the aim should be to develop a coherent savings strategy for the medium term.

C. Race and Equality impact

There will be a specific budget and equalities submission as part of the overall budget submission to the Mayor.

D. Financial implications

The budget will provide the approval for expenditure and income during 2005/06.

E. Background papers

Government Spending Review 2004.

F. Contact details

Report author: Peter Martin, Treasurer MPA

For more information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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