What is the Budget Update Report?

• Local Authorities must set their budget by 11^thMarch each year.  This Report is an update on our planning for the 2023/24 Budget (Revenue & Capital).

The Revenue Budget

What is the Revenue Budget?

• The revenue budget sets out what the Council plans to spend on day-to-day services.
• These include running schools, caring for vulnerable people, collecting waste, maintaining highways and parks, and operating libraries and cultural venues.
• The revenue budget must also set out how these spending plans will be funded.
• Some services generate income to help cover their cost (like theatre admissions), and sometimes we receive grants for specific activities - this is called service specific income.
• After taking service specific income into account, our remaining costs (the Net Revenue Budget) are funded from General Grant (73%) and Council Tax (27%).  

How do you prepare the Revenue Budget?

• In summary we:

• Estimate the cost of delivering services next year
• Compare this to the funding we expect to receive next year
• If estimated costs are more than funding, then we have a "Budget Gap."

What happens if there is a Budget Gap?

• The Council is required by law to produce a balanced budget. This means we must plan to bring expenditure and funding back in line - they must match.
• This can be done by:

• Reducing Spend (making savings)
• Increasing income (for specific services)
• Reviewing the level of the Council Tax
• Considering using earmarked reserves - but this is not a long-term solution

Is there a Budget Gap for 2023/24?

• Yes, there is an estimated budget gap of £29 million for 2023/24
• This reflects estimated additional costs of £48.6 million and funding of £19.6 million.

What is the additional £19.6 million funding that are you expecting?

• £19.1 million is general grant and £0.5 million is planned use of reserves.
• Decisions about any council tax increase will be kept under review.

Are there any risks to funding levels?

• Yes, the £19.1 million grant increase is an "indicative allocation" that Welsh Government has given to Welsh Councils - a 3.5% increase on our current grant.
• There is a risk this could change - particularly with current economic challenges
• We will have a firmer idea when we receive "Provisional Local Government Finance Settlement" for 2023/24. This is likely to be in either October or December - we don't know for sure yet. It's affected by Welsh Government getting their own funding notification from UK Government (the Welsh Block Grant)

What are the £48.6 million additional costs you are expecting?

• The £48.6 million includes:

• £17.4 million for estimated price inflation.We are expecting significant increases in the cost of energy used to power street lighting, schools and the wider estate. We anticipate that the cost of fuel to run our vehicles will increase. We also recognise that our suppliers will need to pass on their own cost increases in the prices they charge us. This includes the impact of Real Living Wage increases on the price we pay for care.
• £8.8 million for anticipated demand increases.This includes an increase in people needing our support in Adult and Children's Social Care. It includes education-related costs like increasing pupil numbers, different pupil needs, the cost of schools in Local Development Plan Areas, and school transport pressures. We also know that homelessness will be a key area to keep under review in terms of demand.
• £13.6 million for estimated pay awards.This reflects a 3% pay award assumption for Council staff (including teachers)
• £8.8 million for other pressures.This includesthe costs associated with financing the capital programme, additional funding for asset maintenance, and increases to levies the Council pays (e.g. to the South Wales Fire Service). This sum also includes £3.5 million for emerging pressures as there is currently so much uncertainty.

Is the £48.6 million likely to change?

• Yes, this is a real risk which is why we have included £3.5 million for emerging pressures.
• There is always a degree of uncertainty in trying to predict demand, and we will need to keep this under close review.
• However, this year, more so than in previous years, the economic climate is playing a very big role in the level of uncertainty.
• Inflation is at a 40-year high, and forecasts have been changeable. Inflation affects likely pay awards, the cost of energy and fuel, and the cost we pay for services such as our £120+ million spend on commissioned care. We also recognise the impact the cost-of-living crisis is having on our citizens, and that this may increase need for services.
• One of the ways the Bank of England is trying to manage the inflation rate is by increasing interest rates, and this can affect the cost of financing our capital programme.
• Finally, there is speculation the UK may be heading for recession, and this could mean a tightening of public sector funding in future.

What about COVID-19?

• The pandemic had a big financial impact on the Council. Significant support from the Welsh Government's COVID-19 Hardship Fund helped cover additional costs and lost income. The Fund ended on 31^stMarch 2022.
• Cardiff's reliance on the fund had reduced significant by the end of 2021/22, but there are still challenges ahead, particularly in respect of service specific income, and so the 2022/23 Budget created a £10 million COVID budget.
• When it's sensible to do so, we will plan to reduce the £10 million budget. However, at this stage, it's too early to make that call.

Is there a similar situation in later years?

• Yes, the budget gap is estimated to be £91 million in total over the next four years.
• This is set out in the Council's Medium Term Financial Plan (MTFP) and summarised below:

How will this gap be bridged?

• The table below sets out an outline approach - the gap will need to be largely met from savings - £70 million.
• Although the budget gap has increased, Council Tax increases have been kept at levels modelled previously. They remain a modelling assumption and are subject to ongoing review.

What happens next?

• We will continue to keep the budget gap under close review - things can change quickly, and regular review is an important part of being prepared.
• We will develop work on savings proposals over the summer
• We will implement efficiency savings (savings that don't affect services) early where possible and appropriate.
• Progress, and further clarity on funding, will be reported later this year to inform consultation on the 2023/24 Budget.

The Capital Programme

What is capital expenditure?

• Capital expenditure refers to acquiring or improving assets. It has a longer-term focus than revenue expenditure.
• Examples of capital expenditure include building a new school or resurfacing the highway.

What is the Capital Programme?

• The capital programme sets out our expenditure plans and how we will pay for them over a five-year period. It aligns with the Council's aims and is an investment programme to meet the long term challenges facing the city.
• The current programme includes support for city regeneration, modernising school buildings, responding to the climate emergency and delivering a significant house building programme.

What period does the current programme cover?

• Council approved the current five-year capital programme in March 2022. This set the programme for 2022/23 as well as an indicative programme until 2026/27. 
• We now need to plan for setting the 2023/24 programme. We also need to update later years of the indicative programme, and roll it forward to cover 2027/28.

How do you plan for capital projects?

• The size and complexity of capital schemes means there are a wide range of factors to consider - this requires robust business cases and viability assessments.
• It is critical that all key risks are fully understood before embarking on a project.

How is capital expenditure paid for?

• Councils receive grant funding (specific and general) to support capital expenditure. This is similar to the Revenue Budget, but there are also some very important differences.
• One of these is that rules allow Councils to borrow to fund capital expenditure -if that borrowing is considered affordable, prudent and sustainable.
• Another is that Councils can fund capital expenditure from selling assets and using the proceeds - called capital receipts.

What is the position in terms of borrowing?

• Borrowing places pressures on the revenue budget. This is because the Council must repay debt with interest. The affected revenue budget is called the "capital financing budget."
• Broadly speaking, each £1 million of capital expenditure places additional pressure of £75,000 on the revenue budget. This assumes the asset will last a long time (25 years). The impact on revenue is higher if assets aren't expected to last that long.
• Capital financing already accounts for a significant proportion of the revenue budget. Even with no further borrowing, this budget will increase over the medium term.
• This is a key consideration when judging whether any further borrowing is affordable - because the revenue budget is already under significant pressure.

What is the position on capital receipts?

• Selling assets can: 

• Provide funds to support the capital programme.
• Reduce revenue costs associated with maintaining and operating assets.

• The current capital programme already includes challenging targets in respect of capital receipts. Updates to the receipts target are included in the annual property plan.
• Capital investment plans include several major development projects based on capital receipts contributing to their cost. There can be a risk where spending begins before receipts have been realised, and this will need regular review as part of the annual property plan.

What will you consider in updating the capital programme?

• The key consideration is affordability.
• With little to no scope to increase borrowing or capital receipts to fund schemes, we will need to prioritise.
• We will also need to think about economic factors that might affect the costs of schemes. This will include things like materials supply issues, increasing construction costs, supplier availability and the potential for increasing interest rates to affect the cost of borrowing.
• The Council has and continues to be successful in bidding for external grants to support specific schemes. This is a crucial way of supporting overall affordability - but sometimes bid arrangements for these funding streams make long-term planning difficult.

Is there anything else that may affect plans?

• Funding has been set aside to undertake feasibility analysis in relation to several schemes linked to theTransport White Paper, International Sports Village, Core Office Strategy, 21st Century Schools and responding to the climate emergency.
• These include

• Enhanced services delivery options from alternative locations from the dog's home
• Review of the Materials Recycling Facility
• Ensuring sustainable burial space in the city
• Working with partners to secure funding to create a Youth Zone
• Options re: maintenance backlogs such as at Saint David's Hall and City Hall
• Renewable energy projects following a post project appraisal of existing schemes

• Subject to approval of business cases, due diligence and affordability, these may be considered for approval as part of future iterations of the investment programme in conjunction with emerging priorities.

Can some investment to pay for itself through savings or new income streams?

• Yes, these are called invest to save (ITS) or invest to earn (ITE) schemes. These are schemes where capital investment results in savings or income that help to meet the borrowing costs. There are restrictions on the Council investing in commercial type projects e.g those undertaken primarily for a financial return.
• A robust business case is key to ensure that the income / savings materialise at the levels required to meet the borrowing costs. If they don't, there is a risk that the revenue budget will end up picking up those costs for many years into the future.

In light of the above, what is the planned approach to updating the capital programme?

• For the General Fund (areas other than the Housing Revenue Account), there will be no new investment unless its:

• Reprioritised from the existing programme - in other words something else must fall out / reduce.
• Accompanied by significant external match funding - and that funding is confirmed
• On an invest to save basis following a business case approved by Cabinet

• If the cost of schemes already included in the indicative programme has increased, this will need to be managed within current allocations by mitigating impacts or reviewing timing.
• For the Housing Revenue Account:

• New investment will need to consider long term business plan affordability modelling.
• New build schemes should be subject to individual viability assessments.
• The approach to rent-setting will be a key factor in affordability assessments.

• It will be essential to keep progress towards capital receipts under review.
• All proposed investment should be in line with the council's Stronger, Fairer, Greener delivery programme, and all alternative solutions for funding and achieving the same outcome, should be explored before additional Council funding is considered. There will also be a need to demonstrate value for money in the approach to delivering outcomes.

What next?

• Directorates will be asked to commence with the approach outlined above, starting with a robust review of the current programme.