Agenda item

Report attached.

The Cabinet considered a report of Councillor Vanessa Alexander, Portfolio Holder for Resources and Council Operations, providing an update on the financial position for the Council’s Revenue and Capital Budgets for 2026/27 and the impact on the Medium-Term Financial Strategy (MTFS) 2026/27 to 2028/29.

 

Councillor Alexander provided a brief introduction to the report outlining the purpose of the MTFS, the implications of the Government’s Fair Funding Review 2.0, advice received from the Ministry of Housing, Communities and Local Government (MHCLG) to those authorities potentially adversely affected by the proposals, the timetable for the Local Government Financial Settlement and the possible funding solutions currently being considered by the Council.  The Cabinet was being proactive in its approach.  Ordinarily, it would not be prudent to set a budget that was reliant upon reserves, but alternatives were limited and this approach was supported by MHCLG.  The Council had sufficient reserves and would set realistic savings targets too.  There would be no cuts to service delivery and all jobs would be protected.  Further clarity over the situation would emerge over the next few months and this would be reported at future meetings.

 

Councillor Alexander thanked the Executive Director (Resources) and his team for their work.  The Leader of the Council noted that this was a challenging situation, but that the Council was well placed to deal with it, due to its prudent financial management.  The financial settlement was due to be announced in December 2025, following which the Council would set a balanced budget.

 

Councillor Cassidy commented that, had the Leader of the Opposition been present today, he might have taken up the opportunity to speak on this matter.  He anticipated that Councillor Khan would get in touch with the Leader or Portfolio Holder directly when available.  He also placed on record his thanks to the Executive Director (Resources) and his team.

 

Approval of the report was not deemed a key decision.

 

Reasons for Decision

 

The Council had approved its Revenue Budget for 2025/26 and Medium Term Financial Strategy (MTFS) 2025/26 – 2027/28 at the Full Council meeting on 27^th February 2025.

 

Since the MTFS 2025/26 – 2027/28 had been produced the economic and political climate had changed, therefore the assumptions, pressures and risks required updating as a number might have evolved.

 

A report had been presented to Cabinet on 10^th September 2025, detailing the current assumptions, risks and pressures and the process for the budget 2026/27.

 

The current report was to inform Cabinet of the revised MTFS for 2025/26 – 2027/28 to incorporate the information presented in the report mentioned above and to extend this for an additional year into 2028/29.

 

For several years, the Council had been waiting for key finance reforms, including the introduction of multi-year settlements.  These had been repeatedly delayed.  The last major change was over a decade ago with the introduction of the Business Rate Retention Scheme.  This ongoing uncertainty and reliance on one-year settlements had made long-term financial planning challenging.

 

In June this year, however, the Government had finally issued a consultation on their proposed approach to local authority funding reform.

 

Reform of Local Government Finance

 

The Government had issued its Fair Funding Reform 2.0 consultation paper in June 2025, which proposed fundamental changes to local government finance.

 

The proposals included:

 

• A revised funding formula with a stronger link to deprivation levels and population size;
• A full reset of the baseline for retained business rates in 2026/27;
• Ending the New Homes Bonus and reallocating the funding to the core settlement;
• Simplifying and merging multiple grant streams, including those for homelessness prevention, rough sleeping, and temporary accommodation;
• Introducing transitional funding, including a minimum funding floor, to protect councils from the full impact of the changes; and
• Gradually increasing local flexibility over setting fees and charges, although no firm proposals had been made yet.

 

The Government had proposed implementing the funding reforms over three years, starting in 2026/27.  These changes were expected to be delivered through a multi-year finance settlement, due to be published later this year.

 

Funding allocations would be based on a Needs Assessment, which estimated what each council required to deliver services.  From this, a Resource Adjustment was deducted — reflecting how much revenue a council could raise locally, mainly through Council Tax.

 

To calculate the Resource Adjustment, the Government would use a notional Council Tax level of around £2,000 for a Band D property in 2026/27.  This figure was based on the average Council Tax level across councils affected by the reforms and was used to ensure full equalisation.  Councils would not necessarily charge this amount, but it would be used to determine central grant funding and retained business rates, ensuring all councils could provide similar services regardless of their ability to raise Council Tax.

 

Business rates continued to be a key source of funding, alongside the New Homes Bonus. The Government was also reviewing whether pooling arrangements should continue from 2026/27.

 

The consultation included proposals for transitional funding to protect councils from the full impact of changes, including the business rates reset.  The new funding model would be phased in over three years, with full impact not felt until 2028/29.

 

Additional protection might be provided through a flat cash (0%) funding floor, meaning no council would see a cash reduction in core funding during the Spending Review period.  The Government intended to gradually introduce the new funding allocations so that by year three, each council would be on its revised allocation under the Fair Funding Review.

 

The Government had indicated that most councils would be protected by the flat cash floor, around 49 councils, including Hyndburn, might face larger reductions of between -5% and - 7%.

 

Current information suggested that Hyndburn’s Core Spending Power could fall by between - 5% and -7% in year one, followed by flat funding in years two and three.  The Government had suggested this would be a sensible planning assumption.

 

The Fair Funding 2.0 consultation had closed on 15^th August 2025.  The Executive Director (Resources), the Portfolio Holder (Resources), and the Leader had reviewed the proposals and submitted a response on behalf of the Council.

 

Despite the scale of these changes, the Government had not yet provided exemplifications showing the impact on individual councils.  More detail was expected in the upcoming Policy Statement on Local Government Finance, but final funding allocations were unlikely to be known until the Provisional Finance Settlement was announced in December.

 

Update of the Medium Term Financial Strategy 2025/26 – 2028/29

 

Since the revenue budget had been approved at full Council on 27^th February 2025 and recognising that the Council was operating in an ever-changing environment, work had continued to update the MTFS and extend it to include 2028/29 financial year.

 

Table 1 below shows the updated standard scenario MTFS:

 

Table 1: Medium Term Financial Strategy 2025/26 – 2028/29

 

	2025/26	2025/26	2026/27	2027/28	2028/29
	Budget	Forecast	Estimate	Estimate	Estimate
	£'000	£'000	£'000	£'000	£'000
Service Budgets	16,394	16,486	16,551	17,103	17,651
Non-Service Budgets	869	772	1,364	1,464	1,464
Corporate Savings Target	(164)	(164)	-	-	-
Net Revenue Expenditure	17,099	17,094	17,915	18,567	19,115
Transfers to Usable Reserves	1,264	1,264	-	-	-
Transfers from Usable Reserves	(929)	(929)	(92)	-	-
Net Revenue Expenditure after use of Reserves	17,434	17,429	17,823	18,567	19,115
Less: Government Grants	(2,803)	(2,803)	(2,420)	(2,469)	(2,518)
Less: Business Rates Retained	(8,568)	(8,568)	(6,606)	(6,738)	(6,873)
Less: Council Tax Income	(6,064)	(6,064)	(6,352)	(6,585)	(6,827)
In Year Funding Gap	-	(5)	2,445	2,775	2,897
Cumulative Funding 'Gap'	-	(5)	2,440	5,215	8,112

 

 

The MTFS figures were based on the assumptions set out in the report presented to Cabinet on 10^th September 2025 including the following:

 

• Pay award of 2.5%.
• General inflation of 3.0%.
• Utilities inflation of 3.0%.
• Increases in sales, fees and charges income of 3.0%.
• Decrease in non-ringfenced Government grant income in line with the expected Fair Funding Review outcomes.
• Retained business rates income frozen; and
• Increase in Council Tax base of 0.66% with a 2.99% increase in Council Tax rate.

 

Table 1 included the latest cost estimates for each of the risks presented to Cabinet in September 2025.  It highlighted the significant financial pressures the Council was expected to face over the next three years.

 

While these risks were reflected in the table, provision had already been made for Housing Benefit pressures.  An additional £400,000 had been included in the 2025/26 budget to address caseload pressures linked to supported and exempt accommodation.  These costs were not expected to rise further, due to anticipated planning controls and tighter housing regulation.

 

Table 2 below sets out the details of cumulative movements in each year of the MTFS table:

 

Table 2: Movements in the MTFS since February 2025

 

	2025/26	2026/27	2027/28	2028/29
	Forecast	Estimate	Estimate	Estimate
	£'000	£'000	£'000	£'000
Service Budgets:
Payroll Inflation Increase	-	57	58	59
Expenditure Adjustments	92	72	74	75
Reduction in Fees and Charges Income	-	141	145	149
Increase in Service Grant Income	-	(817)	(642)	(620)
Pension Employer’s Contribution	-	133	132	133
Total Service Budgets	92	(414)	(232)	(204)
Non-Service Budgets:
Investment Interest	(97)	-	100	100
Increase in Leasing and MRP Costs	-	397	397	397
Reduced Borrowing Costs for LUF		(210)	(210)	(210)
Capital Financing	-	4	4	4
Total Non-Service Budgets	(97)	191	291	291
Change in Reserve Movements		195	277	277
Total Revenue Budget Movements	(5)	(28)	336	364
Funding Assumptions:
Business Rates	-	1,429	1,457	1,486
Council Tax	-	9	19	28
Government Grants	-	439	447	456
Total Funding Assumptions	-	1,877	1,923	1,970
Total Budget Movements	(5)	1,849	2,259	2,334

 

 

The report included more comprehensive information in respect of the following areas of risk:

 

• Funding Risks & Local Government Finance Reform; and
• Service Expenditure Risks (comprising the following):

 

The values of these risks in the MTFS would be updated as more information became available.

 

Reserves

 

The development of the Council’s MTFS had to consider the level of available reserves.

 

As of 31^st March 2025, the Council held £30.224 million in usable reserves.  During 2025/26, net movements - comprising income from grants and capital receipts, offset by planned drawdowns for expenditure were forecast to result in a net increase of reserves of £10.188 million.  A further £28.483 million was expected to be used to fund capital expenditure during the year, leaving an estimated £11.929 million in usable reserves by 31^st March 2026.

 

Of this, £5.799 million was already committed for use in 2026/27 and future years, leaving an uncommitted balance of £6.130 million.  This could be used to help manage future funding gaps in the revenue budget over the MTFS period.

 

Details of the Council’s reserves were regularly reported to Cabinet.  An updated analysis of reserves was provided as Appendix A to the report, which showed the current forecast movements in reserves for 2025/26, along with the future year’s commitments and the available balances that could be used to fund the future budget gaps in the MTFS as shown in Table 1 above.

 

The strategy for the use of reserve balances was set out in more detail in the report and covered the following matters:

 

• Unallocated Reserves;
• Underspends/Invest to Save Reserve;
• Revenue Funding for Capital Schemes;
• Business Rates Volatility Reserve; and
• Other Earmarked Reserves.

 

It should be noted that reserves were a finite source of funding and should not be relied upon to support the Council’s budget, other than as part of the clear strategy to achieve a balanced budget in the medium term.

 

The Council also held what was known as “Unusable Reserves”.  These reserves were held for accounting processes and did not represent balances available to use to fund Council services.  The Council held circa £45million at 31^st March 2025, which included the revaluation reserve, capital adjustment account and pensions reserve.

 

Scenario Analysis

 

As mentioned above, the MTFS was prepared using a range of assumptions, which impacted on both income and expenditure.  Changes in these assumptions could have a significant effect on the Council’s forecast funding gap and the level of savings that might be required over the medium term.

 

It was good practice to undertake sensitivity analysis by changing some of the key assumptions used in the MTFS.  Whilst the purpose of this analysis was not to forecast the future, it was to better understand the Council’s sustainability in an uncertain environment.

 

For Hyndburn this was achieved by preparing 3 scenarios, pessimistic (worst case), optimistic (best case) and standard (base case).  The tables shown above represented the standard scenario, which was the scenario that best represented what were currently thought to be the most likely outcomes and was the scenario on which the revenue budget was set each year.

 

Table 3 below summarises the expected funding gap for each of the 3 scenarios over the MTFS period:

 

Table 3: Scenario Analysis – Funding ‘Gaps’ Over MTFS Period

 

	2026/27	2027/28	2028/29
	£'000	£'000	£'000
Optimistic Scenario	1,805	1,495	968
Standard Scenario (in tables above)	2,445	2,775	2,897
Pessimistic Scenario	3,348	4,563	5,637

 

 

As the table indicated, there was a broad range of potential scenarios for 2026/27, ranging from a deficit of £1.805m to a deficit of £3.348m.  Central Government had indicated the intention to release a multi-year settlement as part of the Local Government Provisional Finance Settlement announcement in December 2025.  This would give the Council greater clarity over the budget challenge across the MTFS period. 

 

All assumptions for each of the three scenarios were detailed in the report presented to Cabinet on 10^th September 2025 and were summarised in Appendix B of the current report.

 

Next Steps

 

The timetable for the budget process had been set out in the report to Cabinet on 10^th September 2025.

 

The Finance team continued to work with budget holders to undertake a thorough review of all budgets to identify any potential additional budget pressures or savings.

 

These would be discussed with the Corporate Management Team and Cabinet over the coming months and decisions made on which items would be put forward in the final revenue budget and MTFS.

 

A series of Cabinet budget working group sessions had been timetabled to ensure engagement and communication was effective throughout the budget process.

 

Corporate Management Team and Service Managers would work with Cabinet members to develop an action plan to achieve the identified budget gap over the next two to three years, as shown in Table 1.  This action plan would be linked to the Council’s Corporate Plan and establish the requirements for the efficient future delivery of Council services.

 

The Council awaited details of the outcome of the Fair Funding Reform 2.0 consultation and the announcement of the Local Government Finance Settlement and for this reason, this was very much a draft MTFS Forecast, which would be updated as more information became available.

 

There were no alternative options for consideration or reasons

 

Resolved                                    -    That Cabinet:

 

(1)    Notes the updated financial position for the 2026/27 revenue budget;

 

(2)    Notes the updated Medium Term Financial Strategy 2026/27 to 2028/29;

 

(3)    Notes the risks and pressures included in the Medium Term Financial Strategy, to be considered through the further development of the MTFS;

 

(1)    Notes the forecast General Fund reserves position over the period of the Medium-Term Financial Strategy; and

 

(2)    Notes the next steps highlighted in Section 8 of the report and the requirement to produce an appropriate action plan that will ensure the Council can meet its legal requirement to set a balanced budget in 2026/27 and address budget gaps in future years.