2005/06 Draft Budget Submission and Medium Term Financial Plan

Report: 3
Date: 11 October 2004
By: Treasurer and Commissioner

Summary

The report introduces the 2005/06 draft revenue budget submission attached. The submission represents work in progress. The implications of the current position for the council tax precept are presented. Further savings or reductions in spending proposals, eg for the continuation of the Step Change programme, will need to be identified. The reserves requirements are also subject to further review. The overall position will be reviewed in any case following the announcement of the provisional grant settlement in November. The draft submission is to be approved by the full Authority on 28 October and the final submission after the grant settlement at the Authority’s meeting on 7 December.

A. Recommendation

1. Members are asked to review the draft revenue budget submission and suggest any amendments at this stage

2. The Committee is asked to consider if it wishes to provide any specific advice to the Authority for its consideration of the draft submission on 28 October.

B. Supporting information

Introduction

1. The 2005/06 draft budget is due to be submitted to the Mayor by 8 November 2004. The submission will therefore have to be approved by the full Authority on 28 October. The submission will be reviewed following the provisional grant settlement, expected to be announced around mid November, and finalised at the Authority meeting on 7 December 2004.

2. The latest draft of the revenue budget submission is attached to this report. This is still work in progress but it sets out the current position in preparing the draft budget for 2005/06 and medium term financial projections to 2008.

3. The latest drafts of the capital element of the submission, the environment budget submission and Step Change options are separate items on this agenda.

Guidance

4. The revenue budget is being drawn up in accordance with the Mayor’s guidance, which is summarised at section A of the draft submission. The guidance requires the submission to exemplify budget 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 (the lower end of the range).
• A budget requirement restricted to the amount projected for 2005/06 in the published final 2004/05 GLA budget (the upper end of the range).

5. The guidance requires that options for the continuation of the Step Change programme are provided separately. The effect of options on the overall budget and precept are summarised later in this report.

6. At its meeting on 22 July 2004 the Finance Committee agreed that in addition to the two ends of the range described in paragraph 3 above the budget submission should also exemplify budget requirements equivalent to 9.9% and 5% precept increases. The Committee also endorsed the approach proposed by the MPS to set planning control totals for business groups based on the 2005/06 medium term projection abated by the allocation of a £60 million savings target (subsequently increased to £70 million).

Budget proposals

7. The draft budget which has resulted from this process is detailed in section D of the draft submission and its schedules. The overall budget, including associated specific grant adjustments, exceeds the control total by £21.8 million. This represents the extent to which the exercise has fallen short of the £70 million target.

8. Budget changes are set out in schedule 3.2 of the submission, which details committed increases and decreases and new initiatives. The detail of savings is shown in schedule 3.12. The Committee will need to scrutinise these schedules particularly.

9. A number of potential increases in expenditure have been excluded as part of the process. These are referred to in paragraph 15 of the submission and members’ attention is particularly drawn to that paragraph. The MPS will provide a separate briefing on some of the issues.

Grants

10. The position in relation to government grants is covered at section E of the draft submission. There is continuing uncertainty as to the precise implications of the spending review (SR2004).

11. The submission currently assumes that there will be a ceiling on the increase in formula-distributed grant of 5%. Informal indications suggest that this may be optimistic. If the ceiling is only 4.5% this would reduce our grant allocation by £9.1 million, equivalent to a 1.7% addition to the precept requirement.

12. A shortfall on formula grant might be mitigated by additional flexibility through specific grants. No provision has been made for additional resources to cover existing costs of counter terrorism although the case is being pressed with government. There remains the possibility that the MPA will receive some residual funding for Airwave. Where specific grant which is projected in the draft budget is not in the event forthcoming it is essential that budgeted expenditure is reduced on a matching basis.

Reserves

13. Section F of the submission sets out a review of the adequacy of, and any flexibility in, the Authority’s financial reserves. The general reserve should be maintained at its current minimum policy level. All earmarked reserves other than the pensions reserve are still required for the purposes for which they were established.

14. The need for a pensions reserve will be significantly affected by the new pensions financing arrangements expected to be introduced from April 2006. At this stage there is still uncertainty about the immediate impact of that change. However it is appropriate to apply the reserve in accordance with its objectives to cover the lump sum commutation costs arising from an increase in the number of police officers expected to retire in 2005/06. On this basis the reserve could meet £11 million of costs reflected in the draft budget. The future pensions reserve requirements will be further reviewed as soon as there is clarity about the new financing arrangements.

Precept implications

15. The following table sets out the implications for the council tax precept of the latest expenditure and savings proposals from the MPS, together with the current grant estimates and proposed use of the pensions reserve.

16. The position as currently reflected in the draft budget submission therefore closely approximates to the higher intermediate budget option agreed by the Finance Committee in July. To achieve a precept increase of just 5% would require a further reduction of £25 million, with an additional £13 million to get the precept increase down to 2.5%. If these reductions had to be made substantially against expenditure they would inevitably include a significant reduction in police officers.

Step Change options

17. At the time of writing this report the MPS had not exemplified a range of options for the continuation of the Step Change programme in accordance with the requirements of the Mayor’s budget guidance. A single proposal only has been provided which would require funding from the precept, after allowing for additional grant expected in relation to PCSOs, of £46.6 million in 2005/06. This alone would mean an 8.9% increase in the precept on top of the 9.8% increase identified at paragraph 13 above.

Council tax capping

18. The Government has demonstrated this year its intention to cap council tax increases which it considers excessive. The criteria for determining an excessive increase in 2004/05 were as follows:

• in relation to the GLA group, including MPA, an increase in budget above 6.5% and council tax increase above 8.5%
• for precepting police authorities (does not apply directly to MPA) an increase in budget above 7% and an increase in council tax above 13%.

All the indications from government are that the capping limits will be set at lower levels for 2005/06.

19. If the budget as currently drafted had also to incorporate the continuation of the Step Change programme on the basis currently proposed by the MPS, it would clearly be unsustainable in the context of council tax capping. Therefore before the submission is finalised in December further Step Change options must be produced with more realistic funding requirements and pressure must be maintained to identify further savings which could be incorporated in the 2005/06 budget.

Medium term financial projections

20. The schedules included in the budget submission reflect projections for 2006/07 and 2007/08. A commentary on the medium term position will be incorporated in the final draft submission considered by the full Authority.

Robustness of the estimates

21. The budget guidance requires the Treasurer to provide a report on the robustness of the estimates as submitted. The detailed estimates have not been submitted in time for the Treasurer to carry out a systematic review of the budget proposals. His report will therefore be provided in due course but certainly for inclusion with the submission to be approved by the full Authority at its October meeting.

22. However a number of areas of potential risk can be identified at this stage:

• In the current year budget monitoring has revealed persistent overspending in some business groups. An assessment will be required as to the likelihood of these continuing into 2005/06.
• As indicated at paragraph 9 above there is continuing uncertainty about next year’s grant entitlement with a definite risk that the grant estimates reflected in the draft submission may be overstated. The position will be reviewed in November following the announcement of the provisional grant settlement.
• Savings totalling £65.8 million are included in the estimates. Positive management will be needed to ensure they are delivered.
• The costs and disruption if the GLA were actually capped would be unacceptable. The Mayor will therefore have to be reasonably confident that his final budget is not going to be capped. The present budget proposals with the addition of Step Change as currently exemplified will have to be modified in this context.

Conclusion

23. Members are asked to review the current budget proposals as reflected in the draft budget submission attached, bearing in mind the further work still required, namely:

• A review following the provisional grant announcement in November
• A further review of reserves requirements following clarification of the new pensions financing arrangements
• Production of alternative Step Change options
• The need to identify further savings and/or reduce expenditure proposals.

C. Equality and diversity implications

These are addressed explicitly through the separate equalities and budget submission which will be considered by the Authority at its 28 October meeting.

D. Financial implications

The budget will set the approved framework for expenditure and income during 2005/06.

E. Background papers

MPA/MPS 2005/06 Budget Files

F. Contact details

Report author: Peter Martin , MPA

For information contact:

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

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