Our revenue budget is inextricably linked to the financing of its capital expenditure and to the treasury management function that underpins and oversees the daily transactional arrangements for the Council and its services.
Consequently, when there is sustained pressure on the revenue budget this in turn causes pressure in capital finance and in the management of the capital programme and the debt and borrowing requirement that arises from it.
Capital programme
Our Capital Programme was approved by Cabinet on 23 February 2022 with General Fund and Housing Revenue Account expenditure of around £560m planned from 2022/23 through to 2030/31 (£515m 2022/23–2026/27).
The programme contains a range of projects including:
- new and refurbished schools
- expenditure for town centre regeneration
- roads and infrastructure expenditure
- planned expenditure as part of our climate change ambitions
When capital expenditure is approved the impact is factored into the revenue budget and treasury management decisions to take account of the recurring repayment of interest and principal debt to be paid each year by the Council.
Debt charges
We have a revenue budget for debt charges and the increases in the capital expenditure between 2022/23 and 2030/31 means that the revenue debt charge budget has also to be reviewed and increased.
The impact of the £515m of capital expenditure approved in February 2022 for 2022/23–2026/27 will require increases to the debt charge budget which will require to be considered as part of our Medium Term Finance Strategy and future years budgets.
Current assumptions in respect of the debt charges budget are as follows:
General fund debt charge budget requirements
| | 2022/23
£m | 2023/24
£m | 2023/24
£m | 2025/26
£m | 2026/27
£m |
|---|
| Projected debt charge |
19.976 |
21.760 |
22.990 |
23.867 |
24.158 |
| Budget |
19.607 |
21.607 |
22.607 |
23.607 |
24.607 |
| Variance |
0.369 |
0.153 |
0.383 |
0.260 |
(0.449) |
| Required budget uplift |
- |
2.000 |
1.000 |
1.000 |
1.000 |
The revenue budget gap forecast for 2023/24 is £10m based on the medium risk scenario and this includes a contribution to the debt charge budget in order to support the capital expenditure.
However, given the scale of the financial challenges that lie ahead for the public sector it is prudent to review the overall quantum of the capital programme and the ability of the Council to identify recurring debt charge budget increases.
Affordability indicators
Our Treasury Management Strategy that was approved by Council on 24 February 2022 contained a number of affordability prudential indicators associated with the capital programme.
One of the key indicators is the financing costs as a percentage of expected revenue streams for the General Fund and the Housing Revenue Account. The indicator currently shows that the capital financing costs for the Housing Revenue Account are higher than those noted for the General Fund and reflects the housing improvements and new house building that have taken place:
Capital financing costs (general fund)
| Capital Financing Costs (gross) as percentage of Expected Revenue Stream | 2022/23
£m
Projected | 2023/24
£m
Estimate | 2024/25
£m
Estimate | 2025/26
£m
Estimate |
|---|
| Revenue / Funding |
318.570 |
315.169 |
314.645 |
314.196 |
| Capital Financing Costs (£m) |
22.034 |
23.849 |
24.825 |
25.619 |
| Capital Financing Costs (%) |
6.92% |
7.57% |
7.89% |
8.15% |
The impact of financing costs for the Housing Revenue Account are currently being assessed and capital spending plans will be reviewed and updated as part of the annual housing reports.
Changes to the Council’s structure that will arise following the introduction of the National Care Service will mean that the £73m budget for adult social care could possibly be transferred from the Council, leading to a significant reduction in the overall value of the remaining Council budget. This will have a significant impact on this affordability indicator as the revenue funding will likely reduce while the capital financing costs will remain at planned levels.
The structural change has the potential to cause the Capital Financing Costs percentage figures to increase by around 3 to 5 percentage points which would then require a wider review of the affordability of the planned capital programme with action being taken to reduce the programme for the years ahead. This will create difficult decisions for services and members as finite revenue resources means that consideration has to be given to increasing the debt charge budget which if supported, will be at the expense of other revenue commitments and priorities.
The current increase in interest rates means that borrowing costs are around 50% higher than they were a few years ago leading to further pressure in the cost of capital.
Taking all of these factors into account, the affordability of the capital programme will be assessed as part of the 2023/24 budget process and will inform the next iteration of the capital programme that will be presented to members for consideration in February 2023. The affordability review will also include the impact of the cost of living crisis and recent financial market trends and whether specific projects should be paused, removed or reprofiled from the capital programme.
Resource spending review
The Scottish Government’s Resource Spending Review (RSR), contained details of the Service Concession Arrangement flexibility that relates to the Council’s PPP schools. The flexibility was provided due to the significant financial pressures experienced by local government as a result of the Covid-19 pandemic and more recently from the cost of living crisis. The flexibility recognises that councils have planned to pay for these school assets over the 30 year term of the PPP/PFI contract despite the assets being available for use beyond the 30 years once they are returned to the Council in 2038.
The flexibility permits councils to undertake internal accounting changes that extend the period over which the principal repayment of the unitary charge can be made which results in a one off credit to the Council. The credit is substantial and will be subject to a future report to Council where the income will be used to provide support to the Council and our communities.
Work on modelling the impact of the flexibility on the specific elements within our school estate is well advanced and a report seeking approval to implement the Service Concession Flexibility will be presented to Council in due course with the additional resource used to provide extra resilience to deal with the challenges that lie ahead.
Capital accounting review
The Resource Spending Review also formalised the review of local government capital accounting which will assess whether the current statutory mitigation arrangements that are afforded to councils should continue in their current form or be removed.
The review has the potential to significantly impact on councils future capital expenditure plans and adds yet another element of uncertainty into what is already a crowded, uncertain and volatile public finance environment. This review has the potential to present real and lasting adverse risks to the Council and further information will be provided once the Group has met and the terms of reference have been agreed.
Strategies and plans
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