To provide an update on the key headlines from the Spending Review June 2025 and potential impact of local authority funding reform on the council’s future financial position.

ChildrenCHTHE MEMBER the The member for finance and corporate services introduced the report.  The report  provided an update on the changes to the financial and economic context including key headlines from the spending review of June 2025, potential impacts of local authority funding reform and to set out the timetable and approach for the development of the 26/27 budget and MTFS for 26/27 to 29/30. 

The key priorities in 25/26 were set out as delivery of services within the approved revenue budget, robust monitoring of in-year performance against the approved revenue budget, delivery of savings of £3.9m in 25/26 revenue budget and £11.9m of savings delivered recurrently in prior years, and development of the 25/26 revenue and capital investment budgets. 

It was noted that the updated estimate of funding represented a potential loss to the 25/26 baseline position of £12m over a three-year period. The impact of reduction in funding through the fair funding review resulted in a revised estimated funding gap of £27.3m in 26/27 which would rise to £54.4m in 28/29.   

The spending review 2025, was the first multiyear spending review since 2021.  The key announcements included local government funding, settlement indication, transformation fund allocations for local government, adult social care, children’s social care, pothole funding, council tax reform, education, dedicated schools grant, special educational needs and disabilities deficits. 

The last full assessment of relative needs and resources was 12 years ago and the relationship between the assessment and actual allocation through the Settlement Funding Assessment (SFA) had weakened.  It was noted that the government were considering further grants including nearly £10b of social care funding to be included in the SFA, subjecting those grants to the Fair Funding Review 2 (FFR2) process.  Meaning the FFR2 would have a significant impact on local authority funding, making it difficult to predict.  The full outcome of the consultation and impact of funding for Herefordshire would not be confirmed until the provisional settlement announcement in late December 2025.   

It was noted that the allocation of the new SFA was made up of an assessment of relative need and assessment of the relative resource, and these were the two key determinants of the FFR2 outcome for each authority. 

In 25/26 the council received £79m (base line for FFR) and this excluded council tax.  The estimated loss for Herefordshire would be £12m compared with the base line for this year over the three year period to 28/29. 

It was noted that reviewing the expenditure requirement in the context of the new SFA highlighted an increased potential funding gap over the medium-term period of £27.3m in 26/27, £40.6m in 27/28 and £54.4m in 28/29.  The estimated revised potential gap was the result of growth in demand and cost for services increasing at a higher rate than the increase in council tax and central government funding.

Herefordshire council’s share of the fixed national pot of funding was determined by Herefordshire’s share of relative need.  The review of Herefordshire’s share of relative needs assessment in 2025 compared with the national average share of statistical neighbours, suggested that the council did not fare favourably from the assessment of relative needs and the allocation of funding.  Herefordshire council was 40% lower than its statistical neighbours. 

The second key determinant of the SFA was the relative resources adjustment, which was the assessment of each authority’s ability to raise income from council tax. The assumed national council tax level for a band D was £2,199 per tax base unit.  Whereas Herefordshire’s band D average was £1,969 in 2025.  Therefore, the adjustment assumed that the council raised more income from council tax than it currently does, putting the council at a further disadvantage in the allocation of funding through the FFR2. 

It was highlighted that the quarterly report clearly demonstrated the commitment to transparency by highlighting the potential impact of the Fair Funding Review 2.  It was confirmed that the council would continue to lobby government regarding its funding review. 

Comments from cabinet members.  It was highlighted that the council was the lowest funded on each metric (page 86 of the agenda pack) compared to its statistical neighbours.  It was confirmed that work was underway with both MPs and to raise awareness with central government.  It was also noted that Herefordshire is the third most rural county in England, and the funding review does not consider the cost of delivering services in rural areas. 

Group leaders gave the views of their groups.  It was noted that the government’s funding review was concerning and that Herefordshire was badly treated.  It was positively noted that political parties and Scrutiny Management Board (SMB) would be engaged in the budget.  Group Leaders were happy to work with the administration.

It was queried if cabinet were now working on an assumption of 4.99% regarding council tax.   

In response to group leaders, it was noted that the original MTFS had a shortfall of £4.1m and if that financial picture had remained, the 3.99% council tax would have been reasonable.  However, due to the shortfall in funding from the SFA of £27.3m, the decision to remain at 3.99% would need to be reviewed. Furthermore, it was highlighted that the Fair Funding Review expected councils to base its council tax to 4.99% as a minimum.   

Lastly, it was highlighted that all member’s input would be welcomed in addressing the shortfall.

Councillor Stoddart proposed the recommendations, and it was unanimously resolved that:

That Cabinet:

a)    Notes the key estimates assumptions which inform the financial forecast and the updated projected funding gap over the medium-term period 2026/27 to 2028/29; and

b)    Agrees the proposed approach and timetable for revenue and capital budget setting for 2026/27