To present the draft 2025/26 revenue budget, Medium Term Financial Strategy and the Treasury Management Strategy. 

 

The Council has a statutory responsibility to set a Budget and Council Tax in advance of the new financial year.  The 2025/26 Revenue Budget and Medium Term Financial Strategy 2025/26 to 2028/29 will be recommended to Council in February 2025

The member for finance and corporate services introduced the report.  It was confirmed that despite the challenges and reduction in grant funding the council had achieved a balanced budget for 2025/26. 

 

It was noted that in 2024/25 the council received £6.9m in Rural Services Delivery Grant funding and £0.2m in Services Grant, totalling £7.1m. The November 2024 policy statement confirmed the introduction of £1.53 billion in new grant funding for local government across 3 priority grants; recovery fund of £600m; a social care grant of £680m and children services prevention grant of £250m.  It was noted that these grants would be funded, in part, by the abolition of the Rural Services Delivery Grant of £110m and the Services Grant of £87m.  It was noted that the Rural Services Delivery Grant recognised the increased financial pressures in delivering services in a rural county.  

 

It was highlighted that the council is committed to ensuring that funding appropriately reflects rural needs and the additional cost pressures of service delivery and demand in rural areas.  It was confirmed that responses on the provisional settlement and local authority funding reform had been made and the council will also actively engage in the fair funding review in March 2025. 

 

The provisional settlement announced by Central Government on the 19th of December 2024 confirmed that Hereford would receive zero funds under the new recovery grants and a total of £369k under the new children's social care prevention grant.  This resulted in a net loss of £6.766m against the previous year.  It was highlighted that rural authorities only received £22.8m (3.8% of the available from the recovery grant) and there was a significant gap in the position of rural counties compared with urban authorities.  It was also noted that there was a £2.5m reduction in Central Government grant funding since 2024/25.  The reduction in Central Government grants results in less funding per head than urban areas despite the increased cost of service delivery to rural communities.

 

It was confirmed that the provisional revenue budget for 25/26 totalled £232m and the revenue budget proposal for 2025/26 was highlighted at Appendix C. It was noted that the Medium-Term Financial Strategy (MTFS) had a 3.99% increase in council tax planned.  However, due to the impact of central government’s reduction in the council’s preliminary settlement the council have had to accept a 4.99% increase in council tax was needed.  

 

It was highlighted that in February 2024 the council unanimously approved the implementation of council tax premiums for empty properties and second homes in line with regulation and guidance issued by the Secretary of State. The total council tax income of £146.5m in the 2025/26 draft revenue budget includes estimated income of £3.1m in premiums which apply to second homes and empty properties.

 

It was noted that the 2025/26 revenue budget included additional business rate income retained from the Hereford Enterprise Zone of £1.3m.  It was confirmed that any additional rate income retained above the budgeted income of £1.3m will be transferred to earmarked reserves to be reinvested locally to support economic growth and redevelopment in future years. It was further confirmed that if additional funding was confirmed in the final local government settlement (expected late January / early February 2025) the value of additional business rates income applied to the revenue budget in 2025/26 would be subsequently reduced.

 

It was highlighted that extended producer responsibility was a new central government grant and the provisional settlement confirmed the allocation of £1.1billion in income which will be allocated to local authorities in 2025/26. It was confirmed that the council’s allocation was £3.5m.

 

It was confirmed that the impact of the increase in the national living wage, employers National Insurance and movement in the CPI inflation had been considered as part of the draft budget, particularly in respect of care contracts.

 

The revenue budget proposals for 2025/26 were summarised at paragraph 40 totalling £231,995m. it was noted that unfunded pressured totalled £27.6m but these had been factored into their base budgets for 2025/26.   The key pressures were summarised and Table 3 which shows the value of these pressures split by each directorate.  It was confirmed that a contingency reserve of £11m had been established in 2024/25 as approved by cabinet in November 2024 and will remain under review.   This reserve recognises and mitigates the risk to the revenue budget of excessive cost pressures and volatility in demand across social care budgets.

 

In Children and Young People, it was detailed that it moved from a three year to a four year financial plan and the budget included £3.9m of realistic and achievable savings in this directory.  It was confirmed that it will also deliver a balanced position for 2024/25 with delivery of £2.3m in savings. 

 

It was also noted that the Dedicated Schools Grant (DSG) deficit was accounted for as an unusable reserve on the council's balance sheet as permitted by statutory instrument which will remain in place until the 31^st of March 2026.  This enables all local authorities to ring fence the DSG deficit in its statutory accounts.  It was confirmed that the cumulative deficit brought forward totalled £6.1m on 1^st April 2024. The Q2 (September) 2024/25 forecast showed an overspend of £7.6m, increasing the cumulative deficit to £13.7m by 31^st March 2025. 

 

In Economy and Environment directorate it was confirmed there will be investment in the directory which will provide sufficient resource and capacity to support growth in the economy in 2025/26 and will deliver key projects through the capital programme.  It was noted that a review of the development planning control income target for 2025/26  was undertaken, which highlighted this should be reduced by £1m.  

 

It was also noted that additional funding received in 2024/25 through the increase in Rural Services Grant provided additional funding for drainage works across the county of £445k, Lengthsman scheme services £250k and improvements to Public Rights of Way at £250k. It was highlighted that despite the loss of the Rural Services Grant this year, this commitment will continue in 2025/26 to maintain delivery in these priority areas across the county.  However, expenditure for these schemes in future years will be subject to confirmation of future funding arrangements, the multiyear settlement and a review of the council's public realm services contract. 

 

It was noted that there were significant pressures in the provision of mainstream home to school transport and SEND transportation services.  It was highlighted that the government intends to reform the SEND system.  However, ahead of any substantial reform it was confirmed that the council must manage increasing demand and cost pressures in transport services.   It was confirmed that additional investment in a council owned fleet of vehicles in the proposed Capital Programme for 2025/26 is planned to further mitigate this revenue budget pressure.

 

In corporate services it was confirmed that the 2025/26 revenue budget reflected investment in the Corporate Services Directorate to support continued delivery of transformation across the council.

 

In Central budget it was noted this comprises financing transactions, Minimum Revenue Provisions (MRP) and other corporate budget items including: pension costs, cost in respect of the administration of housing benefit and council tax and business rate collections and income from the council's business rate pooling arrangement.

 

It was noted that the 2024/25 revenue budget included the challenging savings target of £19.5m comprising of directorate savings of £11.6m and council wide savings of £7.9m.  It was confirmed that work was underway to maximise delivery of the balance of the £5m savings assessed as at risk.

 

It was confirmed that the only savings proposed in the 2025/26 revenue budget were £3.9m of savings in the Children and Young Peoples directorate in year 2 of the financial plan.

 

It was noted that table 5 highlighted the mitigations.  It was confirmed that mitigations of £3m, included £1.4m contribution from the budget resilience reserve (or contingency reserve) in 2025/26 to bridge the gap of year 2 savings identified in the Children Young Peoples directorate. This contribution will repaid in years three and four of the revised plan, alongside delivery of the balance of £2.3m of savings. 

                  

Transformation expenditure in the corporate service directory will be mitigated in 2025/26 through the application of £0.6m of capital receipts.

 

It was highlighted that for the 2023/24 financial year Herefordshire council was the first and only council in the country to receive an audit opinion on the financial statements and its value for money arrangements by the statutory deadline of 30 September 2024.   It was confirmed that the auditors annual report for 2023/24 noted that arrangements for identifying, developing, monitoring and reporting on savings were appropriate and that the council used appropriate key assumptions together with sensitivity analysis when developing its 2024/25 budget. It was noted that these arrangements underpin the 2025/26 budget. 

 

The audit report provides valuable independent assurance that the council has robust financial arrangements in place to identify all significant financial pressures and risks to financial resilience and support the sustainable delivery of services in accordance with strategic, director and statutory requirements.

 

It was noted that the key financial risks and mitigation actions were detailed at paragraph 122. 

 

It was confirmed that the Medium-Term Financial Strategy (MTFS) highlighted a balanced position for 25/26, a small surplus in 26/27 and a small gap between funding and expenditure requirements in 27/28 and 28/29. It was confirmed that these future gaps represented 0.4% and 1.8% of the net budget required in each of those years respectively.  Therefore it is expected that activity to deliver efficiencies to bridge this gap will be easily achievable.

 

It was noted that due to future uncertainty and planned reforms the cabinet will consider whether it's appropriate to review the MTFS during 2025/26 in advance of the budget setting process for next year.

 

Comments from cabinet members. 

 

Support was expressed for the cabinet member for finance and corporate services alongside the finance team.  It was noted that the government had removed the Rural Services Grant, which it had promised to re-purpose. However, the council had received less than £400k, meaning that cut amounted to 30% of the non-social care funding received from government.  It was clarified that the removal of £6.766m, left the council with a £2.5m reduction in its central grant funding.

 

It was noted that deprivation in Herefordshire was real.  It was confirmed that the average Herefordshire earnings remained significantly lower than the average for both the West Midlands and England. It was raised whether the government had no understanding of rural deprivation.  It was clarified that the government had looked at a different way of measuring social deprivation.  It was confirmed that the council had engaged heavily with the RSN (Rural Services Network), CCN (County Councils Network) and the society of county treasures to highlight the impact of this on Herefordshire and to put this forward to central government.  The council will also include that in the fair funding review in March 2025. 

 

It was noted that the Rural Services Network had reported recently that this is widening the gap between urban and rural areas with urban areas now benefiting from 41% more funding per capita than the rural areas. It was confirmed that £22m had been retained by rural areas, less than 10%. 

 

It was confirmed that it was Cabinet’s attention to set the council tax at 3.99% but due to the Rural Services Grant being removed and not wanting to reduce services which would have impacted residents, the decision was taken to increase council tax for 2025/26 to 4.99%. 

 

It was noted that the government settlement is only 16% of the revenue budget and 84% is from council and business tax income. It was queried how Herefordshire council compared with other councils in respect of such low level of support.  It was confirmed that more information will be provided. 

 

It was confirmed from the RSN analysis that rural authorities received £22.8m or 3.8% of the available total of the Rural Services Grant with Durham and Cumbria receiving £15.3m, and the balance being split amongst district councils. 

 

It was raised that whilst the government had said it will support the costs of national insurance and national living wage for one year, it is unclear if it will in the multiyear settlement.  It was noted the costs had increased by 23% for domiciliary care from 2023 to 2024 and respite residential care had increased by 50% in that time, therefore the figure for 2025 will likely be higher again, resulting in an inevitable financial gap.  It was confirmed that the direct earning costs had been assessed at £1.5m which had been factored into the budget, but confirmation was awaited from central government in the final settlement.  It was also confirmed that indirect earning costs had been factored into the budget as a demand led area and had been included in the allocation to each directorate.  Lastly, it was confirmed there was a contingency reserve for demand led services which could be used provided the criteria was met. 

 

Group leaders gave the views of their groups. Parties acknowledged the hard work from officers and staff in preparing the draft budget. 

 

It was acknowledged that savings had been achieved despite initial reservations and multiyear settlements will be welcomed from next year. However, it was raised that cuts to funding had been made year on year and didn’t start under the Labour government. 

 

It was raised that 65% of the budget goes to Adults and Children’s directorates and it was noted that more is paid out to these two service areas than the total amount of council tax received.   

 

Concern was expressed regarding the lack of government understanding in respect of rural county’s needs.  The impact of losing the Rural Services Grant was acknowledged and it was noted that grant funding was stood still or ring fenced, meaning the loss of the Rural Support Grant will be disproportionately felt in some areas. 

 

Queries were raised regarding investment in a new operating model for the county’s buses and how the bus summit proposal had progressed.  It was also queried what happened to the £102m local transport funding that was allocated to Herefordshire Council. 

 

It was queried where the losses in the Rural Services Grant fell against service areas.  Further detail was requested regarding the costs, where are these being absorbed in service areas, are the savings deliverable and what is able to be funded.  It was also requested for the income sources to be made clearer and where the council is growing that income.  It was recognised that it was fair to see savings shown in the children’s directorate.  However, concerns were raised that no savings were being shown from transformation activity. 

 

It was noted there was no targeted additional support funds for hardest hit households, except for the council tax reduction scheme whereas the previous administration had introduced other schemes to support hard hit families. It was also noted that the income stream from empty and second homes was positive but there was significant risk as a first-year income stream. 

 

In response to queries it was confirmed that it was right to support vulnerable people with council tax and it highlights the level of demand on that service. 

 

It was confirmed that a meeting had taken place with bus providers and that will help inform the position of those providers when the bus summit is held.  The bus summit date would be confirmed this week. 

 

It was confirmed that the council had written to the previous government regarding the £102m allocated and were advised they were awaiting a funding review. It was further confirmed that a letter was being sent this week to the new secretary of state for transport,

 

Regarding the points on the budget, the impact of the reductions on revenue and how transformation of services leads to improvements and cost efficiency, it was confirmed it may be beneficial for these points to be covered at the Scrutiny Management Board on 14 January.  It was confirmed that cabinet had already scrutinised itself in preparing this draft budget and there were no hidden cost savings or cuts in the revenue budget. 

 

In respect of additional help for hard hit families, it was queried when the extra support was provided by the previous administration.  It was also confirmed that the council has a range of services and support in place already. 

 

Lastly, it was confirmed that whilst the loss of the Rural Services Grant impacted Herefordshire, it was also about the reduction in funding for rural counties across the country.   

 

Councillor Stoddart proposed the recommendations, and it was unanimously resolved that the following be recommended to Council

 

That Cabinet:

a) approves the 2025/26 draft revenue budget, which includes the key pressures for each Directorate and savings proposals, for consultation with Members, the council’s relevant scrutiny committees, business rate payers and the public; and

 

b) acknowledges that the funding assumed in this draft budget is an estimate of expected funding; to be confirmed following publication of the Final Local Government Finance Settlement for 2025/26