Medium Term Financial Strategy (MTFS) 2022/23- 2026/27

To request Cabinet to recommend to Council the approval of the Medium-Term Financial Strategy (MTFS) 2022/23 to 2026/27 including the proposed MTFS principles and the medium-term financial context as set out in this report and appendix.

The Medium-Term Financial Strategy (MTFS) is a key part of the Council's Budget and Policy Framework which aims to ensure that all financial resources are directed towards delivery of Council priorities. The Strategy describes the financial direction of the Council for financial planning purposes and outlines the financial pressures over a five-year period but is reviewed annually to reflect the dynamic nature of local government funding.

On 4 February 2021 a one-year financial settlement was received for 2021/22.

On 7 September 2021, the government published 'Building Back Better: Our Plan for Health and Social Care'. This represents a plan to address the backlog in the NHS resulting from the COVID-19 pandemic and the long standing systemic and funding challenges for delivering adult social care. This plan represents the first stage of information being provided around the reforms; in particular, for adult social care.

The 2021 Spending Review will be delivered on 27 October 2021 and it has been confirmed that this will set out funding totals for the three-year period 2022/23 to 2024/25. The Government plans to then consult on proposals for distributing the additional funding for adult social care across local government. In addition, the Government will also publish a white paper on system reform for adult social care.

Medium term financial planning has never been more necessary or more challenging. The continuing impact of the pandemic crisis as well as Brexit and associated volatility on funding and demand requires the Council to establish financial plans over a longer time period. As with previous years there is no guidance from Government on future funding and financial reforms, which is a significant barrier to effective financial planning for the Council. The current context is exceptional and it will require continual monitoring, financial discipline and new and flexible approaches to financial planning and management.

The MTFS is based on a 5-year planning horizon within a ten-year investment framework, including projections to 2026/27 and these estimates will be kept under regular review.

To assist in meeting the financial challenges ahead, the principles which underpin the MTFS have been reviewed and these are proposed as follows:

• the overall financial strategy will be to ensure that the Council's resources are directed to the thrive agenda framework. Financial sustainability will be achieved and maintained through targeted investment, reducing costs and more efficient ways of working. The Council's MTFS will be reviewed on at least an annual basis
• the Council will consider a range of delivery mechanisms and funding sources to support capital investment to deliver thrive priorities, including the use of prudential borrowing, and will ensure that the full costs associated with financing the investment are considered when investment decisions are taken
• the Council will maintain its general reserve at a minimum of 3% of the net revenue budget to cover any major unforeseen expenditure. The Council will aim to balance its revenue budget over the period of the MTFS without reliance on the use of the general reserve
• the Council will maintain earmarked reserves for specific purposes which are consistent with achieving its key priorities. The use and level of earmarked reserves will be reviewed at least annually
• overall Council spending should be contained within original estimates. If following monthly revenue monitoring, service budgets are projected to exceed original estimates, plans should be prepared setting out the actions required to ensure spending at the end of the year does not exceed original budget estimates
• the Council recognises the impact of increases in council tax levels and fees and charges in an area of relatively low income and low wealth and will therefore balance the need for increases against the delivery of the thrive framework and the need for services
• the Council will meet its financial obligations and maintain financial sustainability through the setting of a balanced budget and the delivery of outturn within the overall budget each year

The MTFS estimates and plan for 2022/23 to 2026/27 have been reviewed and updated wherever possible. Full details are attached at Appendix 2.

The MTFS presents a very challenging financial position over the medium term. The outcome of the review gives an estimated revised financial gap over the five-year period of £63m including COVID impacts. This impact will be mitigated temporarily through the planned application of pandemic reserves of £18m and the plan assumes proposed use of £20m from the budget sustainability reserve over the next three financial years. Efficiencies and savings of £45m will be required over the medium term. It is essential these are delivered to ensure the financial sustainability of the Council.

Reserve levels are reviewed twice a year as part of budget and council tax setting and as part of the MTFS review. The outcome of the reserves review is the proposal to realign existing reserves to add funds to the budget sustainability reserve thus creating £20m of temporary funds to support a planned approach to achieve a balanced position over the next three years.

Further details on the changes to reserves can be found in appendix 1 and the MTFS document at appendix 2. Following review and realignment of earmarked reserves existing commitments will need to be reviewed and possibly reduced or removed.

The Council recognises that usage of reserves is one-off in nature and must be linked with expenditure and income plans to support financial sustainability in the medium term. Therefore, using reserves in this way means that it is essential to have a planned schedule of savings and efficiencies to achieve a balanced budget in future years and reinvest to achieve thrive priorities. The Investment Plan and HRA Business Plan will also be aligned and prioritised to ensure affordability and to manage risks.

Cabinet is requested to recommend to Council:

• the approval of the Medium-Term Financial Strategy for 2022/23 to 2026/27 including the proposed MTFS principles and the medium-term financial context as set out in this report and appendix
• to agree the outcome of the reserves review and approve the reserves balances as outlined in appendix 1 to the report

For the following reasons:

• to contribute to the good financial management practice of the Council
• to assist the maintaining of the financial sustainability of the Council over the medium to long term

The Medium-Term Financial Strategy (MTFS) includes financial projections analysis and context that supports the Council's new policy approach 'Making Gateshead a Place Where Everyone Thrives'. The Council recognises there are huge financial pressures on not just Council resources, but those of partners, local businesses and residents. To deliver on the new policy approach over the next five years, the Council will remain resolute in its determination to make Gateshead a place where everyone thrives. This means the Council's decision-making including resource allocation through the budget will be policy and priority led and driven.

Background

The MTFS establishes the best estimates of the level of revenue resources available to the Council over the medium term and estimates the financial consequences of the demand for Council services. It assists financial planning and strategic financial management through providing the financial context within which the Council budget will be set.

Medium term financial planning remains extremely difficult due to the exceptional circumstances currently being faced by all local authorities. There is great uncertainty in relation to the level of future funding due to the changes in the local government finance system, current and long-term pandemic impacts as well as the UK leaving the European union. The unknown impacts alongside the level of risk to finances mean that forecasts will need to be closely monitored and potentially refreshed more frequently than usual as further consequences become clear.

The funding estimated to be received from Government and from council tax and business rate payers over the next five years is not sufficient to cover current level of spend plus new budget pressures. Local authorities are legally obliged to set a balanced budget each year and to ensure they have sufficient reserves to cover any unexpected events. Therefore, to legally balance the budget the Council must make spending plans affordable by matching it to the estimated funding available over that time. Staying the same is not an option. The Council is required to change to deliver its priority outcomes within the limited funding available.

The Council will ensure that reducing resources are used to maximum effect and allow the Council to continue to deliver new and better ways of working and invest to improve the efficiency of services provided. It is evident however the continuing reductions in funding and increases in demand will have an inevitable impact on both the nature and scope of services that the Council is able to deliver. The Council will aim to manage the process of change to its services effectively.

The Council will continue to have significant revenue and capital budgets to invest and deliver services consistent with the delivery of key priority outcomes of "Making Gateshead a Place where Everyone Thrives". The Council will retain its vision for the future of the Borough through promoting development and economic growth and this will assist in maintaining the medium-term financial sustainability of the Council.

Reserves review

The MTFS review allows for consideration of the Council's reserves policy and a review of the level of reserves to ensure there is adequate protection against unforeseen events. Following the outcome of the review of reserves the following changes are proposed;

Council General Reserve - £8.0m

It is proposed that £5.9m is transferred out from the general reserve to earmarked reserves, leaving a balance of £8.0m which meets the 3% minimum principle.

Financial Risk and Resilience - £9.9m

It is proposed that this reserve reduces by £4.4m following a review of earmarked risks. Projected balances are; (Insurance (£2m), grant clawback (£3m), workforce development costs (£3m), commercial risk (£1.5m) and budget flexibility (£0.4m))

A new Thrive reserve is proposed of £10.0m

This reserve will replace the two existing reserves to continue to support the delivery of Council Thrive priorities of Economic, Housing and Environmental Investment (£5m) and Poverty, Health and Equality Investment (£5m)

Budget Sustainability  - £20.0m

It is proposed that this reserve increases by £15.0m to provide temporary budget support over the next three financial years.

Using reserves in this way means that it is crucial to have a planned schedule of savings and efficiencies over the period to achieve a balanced budget that is sustainable in future years.

Consultation

The MTFS sets a financial context for budget consultation. The Council's budget planning framework is supported by the development of integrated impact assessments (IIAs) for draft budget proposals. These assessments include identifying possible disproportionate impact in relation to the protected characteristics as described within the Equality Act 2010 and identify potential mitigation where applicable.

The Council maintains its strong commitment to equality, believing that all groups and individuals within the community and its workforce have equal opportunity to benefit from the services and employment it provides. IIAs help the Council to arrive at informed decisions and to make the best judgements about how to target resources.

The Leader of the Council has been consulted on this report.

Alternative options

There are no alternative options.

Implications of recommended option

Resources:

• Financial Implications - the Strategic Director, Resources and Digital confirms that financial context is contained within the report and appendices. Any direct implications will form part of the budget planning framework and identification of budget proposals.
• Human Resources Implications - The need to support Council employees as much as possible through changes is recognised. Any direct implications will form part of the budget planning framework and identification of budget proposals.
• Property Implications - No direct property implications. Any direct implications will form part of the budget planning framework and identification of budget proposals.

Risk management implication

Risks arising from the direct impacts of this strategy will form part of the Council's approach to the budget planning framework.

Equality and diversity implications

An equality impact framework has been developed to assess budget proposals.

Crime and disorder implications

No direct crime and disorder implications. Direct implications arising from the impacts of this strategy will form part of the Council's approach to the budget planning framework and consultation process.

Health implications

No direct health implications. Direct implications arising from the impacts of this strategy will form part of the Council's approach to the budget planning framework and consultation process.

Climate emergency and sustainability implications

The MTFS provides a framework with the express objective of achieving a sustainable financial position over the medium term. Addressing climate change remains a priority of the Council and the MTFS frames the resources available.

Human rights implications

No direct human rights implications.

Ward implications

All areas of the Borough are covered by the principles set out in this strategy

Background information

Provisional Revenue Outturn 2020/21 - 20 July 2021

The MTFS is a key part of the council's Budget and Policy Framework which aims to ensure that all financial resources are directed towards delivery of Council priorities. The Strategy describes the financial direction of the council for financial planning purposes and outlines the financial pressures over a five-year period but is reviewed annually to reflect the dynamic nature of local government funding.

The MTFS establishes the likely level of revenue resources available to the Council over the medium term and estimates the financial consequences of the demand for council services. It improves financial planning and strategic financial management through providing the financial context within which the Council budget will be set.

The review also allows for consideration of the Council's reserves policy and level of reserves to ensure there is adequate protection against unforeseen events.

The objectives are to;

• consider the scale of financial challenges over the medium term and take appropriate actions in order to achieve financial sustainability and a balanced budget year on year
• ensure the Council has planned adequate funding to deliver against priorities
• prioritise capital schemes based on deliverability of tangible outcomes whilst considering the context of the overall capital and revenue affordability

The principles underlying the MTFS 2022/23 to 2026/27 are as follows:

1. the overall financial strategy will be to ensure that the council's resources are directed to the Thrive agenda framework. Financial sustainability will be achieved and maintained through targeted investment, reducing costs and more efficient ways of working. The council's MTFS will be reviewed on at least an annual basis
2. the Council will consider a range of delivery mechanisms and funding sources to support capital investment to deliver thrive priorities, including the use of prudential borrowing, and will ensure that the full costs associated with financing the investment are taken into account when investment decisions are taken
3. the Council will maintain its general reserve at a minimum of 3% of the net revenue budget to cover any major unforeseen expenditure. The Council will aim to balance its revenue budget over the period of the MTFS without reliance on the use of the general reserve
4. the Council will maintain earmarked reserves for specific purposes which are consistent with achieving its key priorities. The use and level of earmarked reserves will be reviewed at least annually
5. overall Council spending should be contained within original estimates. If, following monthly revenue monitoring, service budgets are projected to exceed original estimates, plans should be prepared setting out the actions required to ensure spending at the end of the year does not exceed original estimates
6. the Council recognises the impact of increases in council tax levels and fees and charges in an area of relatively low income and low wealth and will therefore balance the need for increases against the delivery of the thrive framework and the need for services
7. the Council will meet its financial obligations and maintain financial sustainability through the setting of a balanced budget and the delivery of outturn within the overall budget each year

The Council's strategic approach Making Gateshead a Place Where Everyone Thrives, provides a framework to demonstrate how the Council will work and make decisions in the future which will be policy and priority-led and help resource the impact being made on delivery of the Health and Wellbeing Strategy. It is predicated on the following Council pledges:

• put people and families at the heart of everything that we do
• tackle inequality so people have a fair chance
• support our communities to support themselves and each other
• invest in our economy to provide sustainable opportunities for employment, innovation, and growth across the borough
• work together and fight for a better future for Gateshead

The Council's MTFS sets out the financial context for the Council's resource allocation process and budget setting. The Councils new Performance Management Framework supports the aims within the Strategy by aligning performance with the overall approach to the budget to support the financial sustainability for the Council ensuring that resources are deployed on the outcomes for making Gateshead a Place Where Everyone Thrives.

There are huge financial pressures on not just Council resources, but those of partners, local businesses, and residents. To deliver on the strategic approach over the next five years, the Council will need a radical rethink about how it works and key priorities, how resources are spent, how the council works with partners, organisations, businesses, trade unions, employees and the local people and communities of Gateshead.

The Council is facing numerous financial challenges from external factors which it needs to overcome if it is to remain on a sustainable financial footing. (Also see PESTEL analysis in supporting information)

Lack of Funding Reform to Address Areas with High Needs/Low Tax Bases

Longer-term reform of local government funding has been delayed and a structural solution is needed to meet the many statutory duties and demands placed on local authorities. Over the last decade, Government strategy to reduce reliance on grant and localise funding has resulted in moving ever-larger amounts of funding away from councils who have the highest need to those who can grow the most resource locally. The change of emphasis in how funding has been allocated has benefited councils with low needs, a large and growing council tax base, and a thriving business estate, by comparison to authorities like Gateshead with high needs and low council tax and business rate base.

Quantum of Social Care Funding

There are acute problems nationally. The care and support system remain under enormous pressure and the quantum of funding does not meet the increasing demands of both adults and children's social care. The 2021/2022 settlement allowed for the continuation of several previously one-off Social Care grants. This additional funding, whilst welcome, fails to provide both the longer-term stability and level of funding required to meet the continued pressures being experienced within Social Care, exacerbated by the current pandemic. The Prime Minister recently announced (7 September) an additional £12bn per year on average for health and social care across the UK over the next three years. These reforms will be funded by a new UK-wide 1.25% Health and Social Care National Insurance Levy. This will be ringfenced and invested into health and social care across the UK. Implications for local government and Gateshead are yet to be finalised, including what this means for the future of existing grants.

Brexit Impacts

The medium and long-term implications of Brexit remain unclear and are still emerging and will continue to do so for some time to come, but they can be summarised as shortage of labour, shortage of goods and materials including longer lead in times and price increases.

Ten Years of Austerity

An early consequence of a decade of funding cuts has been cuts to preventative spend. As funding fell and demand for services grew, many councils have been forced to abandon spend on preventative measures in order to fulfil their statutory duties. The cumulative impact of years of cuts has a significant impact on communities. This Council has consistently lobbied the Government over the disproportionate cuts to funding which impact unfairly on local authorities with high levels of deprivation, and low tax bases.

Short-term and Late Funding Settlements /One-off tranches of Funding

One-year local government settlements hinders councils' ability to plan over the period of the MTFS, something which is crucial to deliver investment, valued local services and support to vulnerable residents. This situation is compounded by the lateness of financial settlements in the budget setting timetable with major grant funding announcements as late as February and some made after the budget is set in February.

Whilst additional funding is always welcome, short term annual funding leaves councils and partners unable to plan service delivery over the medium/long term. It hinders the ability to recruit and put long term stabilising measures into action. Furthermore, many of these specific grants are competitive, ringfenced, lower value which are then resource intensive to bid for and manage.

Continuing economic uncertainty of the pandemic

The pandemic has both exacerbated and magnified the precarious state and volatility of local government funding which was already under strain. Despite receiving emergency funding, it is likely that the Council will experience longer-term impacts of the pandemic, the impacts of increasing demand for services, and potential reduced Business Rates and Council Tax income. Currently, it is not clear how long government funding support will last not only to the Council directly but support to the wider businesses and residents of the borough.

Pressure on Reserves

Reliance on use of reserves for permanent budget requirements is not a prudent and sustainable approach in the long-term but can be used, where appropriate, to pump prime invest to save initiatives or in a planned approach to bring permanent budget savings. The Council's balances are at a minimum and with many competing demands these must be managed effectively.

Revenue outturn 2020/21

During 2020 the Council had to react to the challenges on the pandemic and lockdown restrictions. Cabinet agreed in July 2021 a net revenue budget of £221.286m. The overall outturn position for the Council resulted in a surplus of £7.908m. The positive year-end position is a testament to the collective approach taken by groups and services to identify pressures early in the financial year and ensuring that action was taken on a timely basis to ensure the threat to a balanced budget was addressed. The outturn position reflects the timing of covid funding received in advance by the Council.

Revenue budget 2021/22

On 23 February 2021 Cabinet agreed a net revenue budget of £238.758m which included £8.117m of budget savings. The annual budget savings cycle is a continuous approach with budget developments brought to Cabinet for consideration throughout the year to allocate resources to Services and consider consultation outcomes. Complex pandemic impacts remain and therefore effective financial management will be essential.

Medium term financial planning remains extremely difficult due to external economic factors coupled with the delays to finance reforms. The level of funding beyond 2021 is unknown resulting in greater risks in relation to the localisation of business rates and the local council tax scheme. The unknown impacts alongside the level of risk to finances mean that these forecasts will need to be closely monitored and potentially refreshed more frequently than usual as consequences become clear. Staying the same is not an option. The Council is required to change to deliver its priority outcomes within the limited funding available.

The financial impacts of the pandemic are expected to continue this year and beyond. The Council has set aside funding from reserves to cover cost pressures and lost income and therefore these impacts are neutral early in the MTFS estimates. This will need to be kept under review. Impact on council tax and business rates funding has been included as these are being managed over three years. Impacts are kept under regular review within the revenue budget monitoring framework.

As part of the Spending Review the Chancellor announced a public sector pay freeze in 2021/2022, except for NHS workers and workers earning less than £24,000 per annum. For planning purposes provision is included for the impact of pay awards and estimated impacts of the National Living Wage which are unfunded by government.

Savings proposals will have staffing implications. These will be managed through the Council's Redundancy Policy and Procedure as necessary. At this stage it is proposed that any cost of redundancy payments and the release of pensions (if applicable) as required by the LGPS Regulations will be met from within the overall corporate resource position at outturn each year, should the position allow. This position will be kept under review and updated as part of the Budget proposals to Cabinet.

Significant challenges in Social Care

Adult social care experience pressures year on year in relation to increasing demand for services due to the increase in population of older people and pressures due to fee increases in the commissioned sector in order to meet the fair cost of care criteria. These pressures are expected to continue for the medium to long term. In addition to these recurring pressures Adult Social Care is experiencing new and significant pressures. It is anticipated that there will be a financial impact of Covid in relation to areas such as increased demand on mental health services, increased demand due to delayed health interventions such as operations, increased requests for packages due to family being unable to support relatives, earlier admissions to care as a result of increased frailty combined with the lack of access to community support and workforce pressures.

Cost pressures are also being felt in relation to the discharge to assess model that is currently operating and how this will be funded in the longer term.

With regards children's social care, The End Child Poverty coalition reports the North East as having the second highest rate of child poverty at 37% and this has seen the steepest rise in the last 5 years. All 12 North East local authorities feature in the top 20 local authorities nationally that have seen the sharpest increase in child poverty between 2014/15 and 2019/20.

Around 16% of Gateshead residents live within the most deprived 10% of neighbourhoods in England and many of the families open to Children's Social Care and Early Help live in the most deprived areas of the borough. The research of Bywater, Featherstone and others leaves little doubt of the clear evidence linking the impact of deprivation to risk for children, and subsequently higher levels of demand for statutory social care and early help services.

Locally in Gateshead some significant activity pressures are emerging. Over the course of the pandemic since March 2020 to present there have been substantial increases in referrals and demands and for services. For too many of our families, life with a range of issues such as domestic abuse, poor mental health, the impact of trauma, coupled with significant poverty creates a complex and unequal system which leaves many families ill equipped to provide the safe nurturing environment for their children that they crave, and their children need.

More recently Gateshead Council had circa 433 looked after children (end July 21) costing on average £39,000 per child annually. This compares to 379 children on 31 March 2019. The national and local increase in safeguarding pressures is the result of a complex myriad of factors, including longer term pandemic impacts are still to be recognised. The internal residential estate in Gateshead has grown in recent years, however this has not been able to meet the increased demand seen in the system because of overall numbers of children. As of July 2021, the number of children in residential care reached 42 compared to 33 in March 2019, a 27% increase.

The outsourcing of placements comes at a higher cost, the most expensive of which costing £9,800 per week currently. This is not only occurring due to increased complexities of need for the children in the system but also due to the increased numbers of children requiring placements. Increased activity set out above has resulted in a significant impact on the social care workforce with caseloads per social worker increasing which will also need to be kept under review.

Looking ahead threats

• any unachieved budget savings in the agreed savings programme leading to pressure the following financial year
• continued growth in demand in Adult and Children's Social Care Services and funding reforms are insufficient to address this
• unfunded pay pressures such as public sector pay award and the Governments National Living Wage aspirations, which also impacts on negotiations with care providers and commissioning costs
• the performance of traded and investment income linked to wider economy
• significant uncertainties on the pandemic impact on income from business rates and council tax and fees and charges
• the financial impacts of the UK's vote to leave the European Union (EU) and the current uncertainty which is likely lead to instability in the short to medium-term
• challenges in recruitment and reductions/ shift in work force from working in social care/ linked to competing industries such as retail, hospitality
• addressing the health, employment and poverty inequalities that the pandemic has added to
• increased demand for welfare, mental health services and debt advice
• increased demand for business advice and support

Looking ahead opportunities

• review all Council services to focus resources on the delivery of priority outcomes and shaping the Council to how it needs to be in the future to withstand other pressures and delivery priorities
• embrace and imbed new ways of working arising from the pandemic such as putting the customer first, more efficient working practices staff resilience and adaptability
• opportunity to accelerate climate change targets through reduced building use and travel
• accelerating and building on working with communities in hubs alongside the voluntary sector and other partners
• embracing the move to self-service and online services to provide a quick and streamlined service
• opportunities to rationalise council buildings and assets
• working closer in partnership with key partners such as the voluntary sector, health partners and the Police and Crime Commissioner to help residents to thrive
• following the housing review the ability to drive forward housing delivery and provide a good service to tenants

The MTFS has been prepared on best estimates using the current funding methods as a guide. Key risks are included in the supporting information. Following a new approach to MTFS and budget planning the table shows the financial gap expected over five years but also a proposed use of reserves. These are shown in more detail within the review of reserves section.

The budget approach will be over a three-year period 2022/23 to 2024/25. The scale of the challenge requires a radically different approach to the budget. With reducing resources, the Council cannot keep doing everything, so the approach needs to be more clearly linked to the hierarchy of delivering on thrive priorities through the Health and Wellbeing Strategy, the emerging Economic, Housing and Investment Strategies.

A review of reserves will result in the need to reconsider existing reserve commitments. Some commitments may need to reduce or not proceed. The outcome of the reserves review is to propose formation of a £20m Budget Sustainability Reserve from realigning existing reserves that it is proposed be used to support the budget approach over the next three years. Consequently, the Council's general reserve will be at 3% minimum levels.

Based on local estimates outlined in this report, this Council estimates that overall, it will need to close a financial gap of £63m in the next five years (including covid impacts). This impact will be mitigated temporarily through the proposed planned application of £20m budget sustainability reserve over the next three financial years. Efficiencies and savings of £45m will be required over the medium term.

This financial gap can be summarised as follows (there may be slight differences due to rounding's):

This is an extremely challenging medium-term forecast. Using reserves in this way means that it is crucial to plan and deliver a schedule of savings, efficiencies and reinvestment to achieve a balanced budget in future years and to achieve Thrive priorities.

Capital investment must also be kept under review and clearly aligned to priorities and financial sustainability to ensure affordability and to manage risks. All budget growth (excluding social care demand or fees) must be funded through planned savings.

The Council's Housing Strategy recognises that the future success of Gateshead is dependent on ensuring that all its different neighbourhoods thrive and are great places to live and visit. This requires the right mix of safe and secure housing that people can afford, together with good schools, parks, sports and cultural facilities, roads and transport links, and streets and public spaces free of litter and anti-social behaviour. This will be brought together in the development of the next Gateshead Local Plan which is currently underway

The housing pipeline is continuing to deliver new homes across Gateshead, with 333 new homes completed in 2020/21. The Council recognises that the scale of new housing development needs to increase. A new Residential Growth Strategy is currently being developed that will confirm the priority actions to be undertaken over the next 5 years to maximise additional housing supply on existing and new sites, and to bring long term empty homes back into use. This strategy will also align with the Council's medium-term position and investment plan.

The recently completed Housing Review of all its housing functions and responsibilities has resulted in the re-integration of the management and maintenance of its 18,500 homes back into the Council, and the closure of its housing ALMO (The Gateshead Housing Company). A major review of the HRA Business Plan and associated Asset Management Strategy has ensured 5 and 30 year financial and investment plans moving forward. Known income and expenditure has been considered alongside key assumptions in relation to borrowing and debt repayment, right to buy receipts, operational performance, and efficiencies. The revised HRA Business Plan confirms the priority given to ensuring the Council's homes are safe and fully compliant with building legislation and regulation. It will also make a significant contribution to the Residential Growth Strategy, with a planned HRA funded development programme of 400 new homes over the next 10 years.

Schools are funded through ring-fenced resources (Dedicated Schools Grant DSG and several other grants including the Pupil Premium) and children's services funding is included within the core council funding known as the Settlement Funding Assessment.

The Government introduced a national funding formula (NFF) for mainstream schools from 2018/19, with some local discretion available within formula. Government have recently sought views on the approach to completing further reforms to the NFF and how to transition away most effectively from local formulae to all schools' funding allocations being determined directly by the NFF in the years ahead.

At 31 March 2021 the overall reserves balances for all maintained schools in Gateshead totalled £8.91m, an increase of £3.43m from March 2020. This increase was due to several factors many Covid related. This position masks that overall, the number of schools with projected deficits is increasing, but with the current turbulent times and the additional Covid related grants the position is difficult to estimate.

To support with the pandemic demands schools are currently getting additional grants such as Recovery Premium and National Tutoring Programme aimed at helping children recover lost income as a result of the pandemic. It is uncertain how long this funding will continue as allocations are usually single year allocations. The National Tutoring Programme funding risks claw back if schools do not spend it in line with the very specific conditions of grant.

The impact of future wage inflation and the impact of the increase in national insurance contributions is also not known. The DfE are considering that the 1.25% in national insurance contributions might be funded, however in the past the DfE have funded teachers pay and pension costs, but not those relating to non-teaching staff.

It is also thought that the full impact of the pandemic on both pupils and school employee's health has not yet reached a peak and this will have financial implications, manifesting itself in terms of increased staff absence, increased pupil absences and an increase in children being permanently excluded from school.

The number of education health and care plan (EHCP) requests continues to increase, and even with the creation of additional special school places at the new Gibside Special School, the waiting list of special school places and specialist provision continues to increase with demand outstripping supply.

The Council's capital investment plans are set out in the capital strategy and programme, with the latest approved programme covering the period between the 2021/22 and 2025/26 financial years. The effective use of capital resources, including asset management, is fundamental to the Council achieving its medium- and long-term strategic objectives. Capital investment has a significant impact upon the local economy and helps to ensure that the Council can continue to provide the best possible services and outcomes within Gateshead.

All capital investment decisions will have implications for the revenue budget. The revenue costs over the lifetime of each proposed capital project are considered when the project is being developed to ensure that the impact can be incorporated within the council's financial plans and to demonstrate that the capital investment is affordable. Revenue implications may include the costs associated with supporting additional borrowing as well as any changes to the running costs associated with the asset or wider benefits to the council such as the delivery of ongoing revenue budget savings or additional income through the generation of business rates, council tax or energy revenues.

The Council continues to explore external funding possibilities when developing capital projects to minimise the borrowing requirement as far as possible. Within the MTFS, assumptions have been made around the level of external funding in the future, but detailed work programmes will not be committed to until the allocations have been confirmed. Projects and investment plans may therefore be re-prioritised depending on the availability of external funding.

The generation of capital receipts can help to provide resources to support additional capital investment or can help to reduce the borrowing requirement and therefore the cost to the revenue budget. The generation of capital receipts to support the capital programme has historically been challenging, representing low land values and high remedial costs due to land contamination. It is currently assumed that £1m p.a. will be achieved through capital receipts and further consideration is needed into how the few potentially higher value sites can be brought forward to achieve improved capital receipts to support the delivery of capital schemes.

Significant challenges and priorities for the Council's capital investment over the medium term that are set out in the Council's key strategies include:

• investing in assets to enable the Council to meet its key objective of Making Gateshead a Place Where Everyone Thrives
• investment in housing to ensure the supply of housing best meets current and future needs and aspirations to create thriving, mixed communities throughout Gateshead
• investment to achieve the Council's climate change aspirations
• continuing to regenerate the Gateshead Quays and Baltic Business Quarter area as part of the Council's Accelerated Development Zone, working with our development partner to build upon the successful delivery of iconic projects such as the Sage Gateshead and Baltic to create a significant new mixed-use development to help unlock economic growth and generate additional business rates and raise the profile of Gateshead
• continuing to support the regeneration of Gateshead Urban Core to deliver a centre with the stature and vibrancy of a city and continuing to invest in improvements to local centres across Gateshead
• improving the council's corporate ICT infrastructure, equipment and systems to improve connectivity, security and resilience and ensure that the council remains fit for the future and can provide services as efficiently and effectively as possible
• investing in strategic infrastructure to support growth within Gateshead. This includes investment in areas such as transport infrastructure to provide an integrated transport system which meets demand and improves connectivity and accessibility as well as investment in the Council's schools to help increase capacity
• investing in the provision of energy infrastructure to support the expansion of the Town Centre District Energy network to provide lower cost, lower carbon energy to support regeneration and economic development, generate income and provide long term resilience against rising energy prices
• meeting essential health and safety and mandatory obligations, such as Equality Act improvements, to improve the accessibility and sustainability of council owned assets

The financial planning framework provided by the MTFS will provide the context for a council investment plan that will inform the allocation of resources within the capital programme.

Local authorities must consider the level of reserves needed to meet estimated future expenditure when calculating the budget requirement. The Strategic Director, Resources and Digital is required, as part of the budget setting process each year, to provide a statement on the adequacy of reserves that is subject to an external audit review to assess value for money and a going concern opinion.

The Council keeps a level of reserves to protect against the risk of any uncertainties or unforeseen major one-off events. This is considered best practice and demonstrates sound financial planning. The use of financial reserves will not in itself resolve a budget problem, but it can allow for smoothing of impacts or allow the Council time to address issues.

The audited statement of accounts shows all the reserves balances held by the Council, but it should be noted that not all of these can be used to support the budget. Reserves can be;

• held for accounting purposes. These are not true cash balances and are unable to be used to support the budget and are classed as unusable in the Council's statement of accounts and therefore will not be detailed in the sections below
• the General Fund is split between a General Reserve and reserves attributable to schools (LMS Budget Share Reserve)
• strategic earmarked reserves the Council has chosen to hold for a specific purpose
• ring fenced reserves which can only be used for a specific purpose and are not available to support council tax or budget setting of general Council services

Reserves policy

The Council's policy on reserves is as follows:

• the Council will maintain its general reserve at a minimum of 3% of the net revenue budget to cover any major unforeseen expenditure. The Council will aim to balance its revenue budget over the period of the MTFS without reliance on the use of the general reserve
• the Council will maintain earmarked reserves for specific purposes which are consistent with achieving its key priorities. The use and level of earmarked reserves will be reviewed annually
• the council's general reserve is available to support budget setting over the period of the MTFS and usage should be linked to the achievement of financial sustainability over the medium term

Review of reserves

A review of reserves is undertaken twice a year and covers:

• the purpose for which the reserve is held
• an assessment of the appropriate level of the reserve to meet potential future liabilities, in line with the Council's reserves policy and aligned to the risk management framework
• procedures for the reserve's management and control
• a process and timescale for future reviews to ensure continuing relevance and adequacy

The balances as at 31 March 2021 remain subject to audit. As part of the MTFS refresh, a review of reserves has been undertaken and it is proposed that current reserves are realigned to supplement the Budget Sustainability Reserve creating £20m in funds to support a planned approach to achieve a balanced financial position over the next three years. The realignment is shown in the table below.

A breakdown of each reserve following review and the reason it is needed is outlined below;

The Strategic Director, Resources and Digital has reviewed the level of the general reserve and it is considered that a 3% minimum level should be retained given the current level of risk and uncertainty.

It is important to note that the position above includes significant temporary funding held to mitigate pandemic impacts. The impacts are expected to continue into this year and beyond, so the Council set aside £17.991m covid grant funding within reserves to cover cost pressures and lost income over the next two years. Grant funding of £28.239m were provided by government to specifically replace lost funding to council tax and business rates. This funding was included in financing of the 2021/22 budget to help achieve a balanced budget.

Ringfenced reserves

Ringfenced reserves balances are shown in the table below for information.

Following review and realignment of earmarked reserves existing commitments will need to be reviewed and possibly reduced or removed.

For financial resilience the council may need to consider replenishment of the general reserve over the MTFS period.

The overall level of financial resources available to the council is finite and therefore the continued use of reserves above a certain level cannot be sustained in the longer term without placing the Council's financial position at risk. The MTFS recognises that the council's financial reserves are maintained at a prudent level to protect present and future Council services.

The Council accepts that while balancing the annual budget by drawing on general reserves can be in certain circumstances a legitimate short-term option it is not considered good financial management to finance recurrent expenditure in this way in the medium to long term. The Council recognises that usage of reserves is one-off in nature and must be linked with expenditure and income plans to support financial sustainability in the medium term.

The medium term presents an extremely challenging position for the Council and the vital services it provides. The external and local context outlined in the report show that it is vital these challenges are kept under review and managed over the period to ensure financial sustainability. The Council has a strong track record of financial performance and will continue to use resources available in the best possible way to help residents of the borough thrive.

Risk assessment of key threats

A comprehensive financial risk assessment is undertaken for the revenue and capital budget setting process to ensure that all risks and uncertainties affecting the Council's financial position are identified. These are reviewed each year as part of the refresh of the MTFS. The key strategic financial risks to be considered in developing the MTFS are as follows:
 

PESTEL analysis

This is a strategic tool to evaluate the external environment of an organisation by breaking down opportunities and threats into several factors. The table below highlights some considerations impacting on the Councils medium term strategy and plans

Political

• change in Government policy direction and regulation including social care and NHS can impact on social care models and shared funding arrangements and without adequate funding can be an added pressure
• labour laws /National Living Wage can impact on legal views and costs
• environmental laws impact on planning, council buildings and costs
• stability of political parties will ensure policies do not change regularly
• national infrastructure and transport links decisions can impact on local economy
• PWLB rates can have a significant impact on capital projects and affordability
• Brexit - uncertainty of European Grants and unknown impacts on the economy
• welfare reform/housing demands/Universal Credit - government changes are likely to have an impact in relation to potential bad debt of council tax income and housing rents and the services needed by residents
• Local Government Funding Reform - the aim to making councils more self-sufficient and less reliance on grants

Economic

• national and local economic growth rates
• energy prices increasing or decreasing
• price pressures/ supply chain pressures
• labour market availability and shifts
• exchange rates
• inflation rates both CPI and RPI - Levels of inflation and medium-term trajectories of it have an impact on capital and revenue investment projects on rising costs and contractual commitments
• interest rates on investments, borrowing and debt
• national and local Unemployment rates
• the Council plays a strong role in ensuring a strong and vibrant local economy which can in turn lead to better jobs and skilled local people
• levels of employment influence the need for resident welfare support as well as other type of local government support

Socio-cultural

• local health indices
• deprivation levels - Gateshead is currently ranked 47th out of 317 local authorities in England in the overall IMD 2019, where one is the most deprived (rank of average score)
• local population demographics - having a young, healthy workforce or aging population with complex needs changes service needs
• child poverty can influence the levels of looked after children and family support
• health of local workforce

Technological

• pace of change impacts on upgrades to systems and customer expectations for accessing services
• level of digital skills locally will determine who can access online services and who need more support such as telephone or face to face service provision
• appetite for innovation can influence service adaptation to customer needs
• new technology improves ability to introduce/improve agile working - making workforce more flexible

Environmental

• weather and impacts
• local Climate Change agendas
• government Climate Change aspirations
• local pollution
• aspirations to be Environmentally Friendly
• environmental impacts ripple through everything the Council does and as such all reports to Cabinet must consider these implications

Legal

• discrimination law
• consumer law
• employment law
• health & safety laws
• changes in regulation and legislation in relation to local government
• licenses and permits