To report the forecast position for 2025/26 at Quarter 2 (September 2025), including explanation and analysis of the drivers for the material budget variances, and to outline current and planned recovery activity to reduce the forecast overspend.

The member for finance and corporate services introduced the report. It was noted Quarter 2 was being presented in a different external environment compared to three months ago.  Following preparatory steps for the 26/27 budget setting the council’s initial assessment of the Government’s fair funding review indicated there was a potential gap between the council’s income and expenditure of £27.3m.

The Quarter 2 revenue outturn position showed a net overspend of £7m, with planned management action this would reduce to £3.7m. The forecast outturn position for 25/26 by directorate was set out at Table 1 of the report.    The report highlighted the continuing budget pressures to support increase in demand across social care budgets, temporary accommodation and Special Educational Needs and Disabilities (SEND) transport services.  

Recovery actions expected to reduce the forecast overspend in Quarter 4 included; £2.8 million allocation of the Budget Resilience Reserve to mitigate the impact of cost pressures and volatility in demand in Directorate Budgets; continued review of the council’s contract arrangements and shareholding in Hoople Ltd; additional cost pressures in the Community Wellbeing Directorate emerging in Quarter 2 will be subject to further review and challenge in Quarter 3 before additional allocation from the budget resilience reserve is approved; and challenge of forecast expenditure over the remainder of the financial year through Directorate expenditure control panels.

In the financial year ended 2024/25, £4m of the Budget Resilience Reserve was applied to cost pressures in the Community Wellbeing Budget which reduced the balance carried forward to the current financial year to £7m. 

It was noted that Expenditure controls remained in place to support recovery activity and robust control over expenditure in 2025/26. Directorate panels would continue to review expenditure on goods and services as well as changes in staffing arrangements to maintain the increased level of rigour and challenge over expenditure for the remainder of the financial year.

Table 2 sets out the updated financial position for 25/26 and the projected overspend of £3.7m. 

Council approved £3.9 million of savings for 2025/26 Children & Young People Directorate.  A review of the delivery and status of the approved savings had been undertaken and confirmed that £1.6m (40%) of the total approved savings target for the year had been delivered at Quarter 2. A further £2.3m (60%) had been assessed as ‘on target/in progress’ for the year. No savings were currently assessed as ‘at risk’.

It was noted that in June 2025 a focused review of the original proposals and planned activity was undertaken during Quarter 1 and revised savings plans were developed. The revised savings of £11.9m were in Table 4.  As at 30 September 2025 (Quarter 2), £6.4m (54%) of the £11.9m brought forward savings had been delivered with a further £4.1m (34%) forecast to be delivered in year; £1.4m (12%) remained at risk, with focused activity underway to resolve or mitigate in year.

It was confirmed that the Dedicated Schools Grant (DSG) was accounted for as an unusable reserve on the council’s Balance Sheet, permitted by statutory instrument, which remains in place until 31 March 2028. The Quarter 2 forecast anticipated a 2025/26 in-year deficit of £17.5m based on September 2025 activity data, leading to a cumulative DSG deficit of £37.5m by 31 March 2026.

The 2025/26 approved capital budget of £155.2m had been revised to £115.1m. This revised capital budget included £11.7m of unspent project budgets brought forward from 2024/25, removal of a project valued at £6m, £14.5m additional grants and a reduction of £60.3m where budgets had been reprofiled to future years. A detailed summary was set out in Table 5 of the report. 

The Quarter 2 forecast spend position was £112.1m which represented a variance of £3m against the revised capital programme budget of £115.1m. Explanations of variances by individual projects were set out in Appendix B, Table A. 

The council projects with significant grant funding were set out at paragraph 28. 

Comments from cabinet members.  Congratulations were extended to Children’s Services for being £1.4m underspent at Quarter 2 which combined with consistent improvement showed a real achievement.  Regarding the increase in demand with particular pressure in domiciliary care, this was linked to hospital discharges and the service was undertaking a focused piece of work to understand the root causes, to strengthen processes and the provision for those coming out of hospital and through the front door in adult social care.  

Group leaders gave the views of their groups.  Noted it was a challenging picture and there was an increased forecast overspend in Quarter 2 despite management action of using reserves.  There was support for reducing SEN transport costs but pressures for 25/26 were also on top of last years.  It was raised whether there would be any outstanding reserve amounts to be returned to reserves and if reserves were being used to meet the real cost of the service. 

Query raised regarding Appendix D, Annex 2 table, an explanation was requested regarding Transformation Savings.  It was raised that the MERS and Transformation targets were being replaced with a new ‘Directorate Budget Efficiency’ target and how that aligned with the original savings target. 

Concern was raised regarding the doubling of SEND transport between Quarter 1 and Quarter 2.  Assurance was sought that the forecasting was credible. Also concern that pressure in adult social care was building and if the council had sufficient understanding of this significant increase. 

It was positive to see only a £3m underspend but queried the increase in risk on delivery on the capital programme.  Regarding interest, more than £2.25m was expected, reassurance was sought regarding the governance and transparency arrangements for using this money. 

Information was sought regarding the section 106 monies.

In response to group leaders, regarding provision of SEN, the Budget Resilience Reserve was set up to manage risk and would continue to review reserves as part of the council’s ongoing work. 

Regarding a review of SEN, confirmed this was part of the Quarter 1, the council remained committed to reviewing the source of the undelivered savings, including Transformation directorate area savings which had delivered recurrent savings but recognised the challenges of transformation savings as they were not ‘quick wins’.

In response to the query on SEN transport, it was confirmed that the forecast at Quarter 2 represented the SEND activity data for the Autumn term and that was now difficult to predict due to national increases.  It was highlighted that Herefordshire was not the only council dealing with SEN, home to school transport and adult social care issues. 

Regarding interest, it was noted that cash balances were reducing over the year and any excess would be considered against the decision to borrow and cash flow requirements. The council expected to take on any additional borrowing in year which was aligned to the DSG cash flow. 

Regarding current year reserve pressures, these were being considered a part of the budget setting activity for 26/27.

It was noted a written response would be provided regarding the query raised on section 106 delivery and capital projects. 

Regarding adult social care the service is aware of the challenges of looking after people for longer and increased numbers in demand.

It was noted that whilst the capital of the Dedicated Schools Grant sat off the council’s balance sheet, the interest on the Dedicated Schools Grant debt was around £600k per £10m.  This interest sat on the council’s balance sheet and was a revenue pressure of around £2.4m every year. 

It was noted that this Autumn had seen an increase of 100 passengers per day for SEN transport. 

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

That Cabinet:

a)    Reviews the financial forecast for 2025/26, as set out in the appendices A-D, and identifies any additional actions to be considered to achieve future improvements; and

b)    Notes the management action identified to reduce the forecast outturn position for 2025/26; and

c)    Agrees the continuation of management actions to reduce the forecast overspend as identified in this report