A correspondent writes (views expressed below are the personal views of the correspondent).

“At Cabinet on Wednesday this week (agenda here), and at joint Scrutiny & Overview Committee on Wednesday of next week (agenda here), EDDC will be discussing the proposed budget for the next financial year.

Comments:

a. EDDC has already had cuts in central government revenue of £2.3m between 2011 and 2014 and a further cut of £0.8m last year. They are facing a further cut of £0.8m this year – so a total reduction of almost £4m from c. £7.5m to £3.6m between 2011 and 2016. The government is phasing out the Revenue Support Grant by 2020, so there are c. £3.6m of cuts to come in the next 3 years. To put this in perspective, the total revenue income / expenditure is c.£15m so this is a very significant proportion.

b. The government has stated that in the future it expects councils to be funded from business rates, but it has also given business rates for the Enterprise Zones (where the majority of business growth is expected) to the Local Enterprise Partnership (LEP) for 25 years, presumably as a means of them raising capital loans to fund development of the Enterprise Zones in East Devon these are the East Devon Growth Point and Cranbrook). So growth in Business Rates is unlikely to replace the Revenue Support Grants.

c. EDDC is planning to increase Council tax for the first time in 6 years by 1.99% (para 2.14). No explanation is provided about why this particular level has been chosen, though it appears to have been decided upon as being as close to the 2% as they can get without triggering a referendum.

d. Despite increasing council tax, they state that the New Home Bonus will be used to cover a further revenue shortfall this year (see paragraph 2.9 in the budget report in the agenda papers) in addition to the same £1.5m needed again to make up last year’s revenue shortfall.

e. EDDC plans to run the Capital Reserve fund to zero (para 4.7) in order to provide the bridging funds required to build the Honiton Offices before receiving moneys from the sale of the Knowle. This does not seem to me to be financially prudent – and the figures are further risked by unknown capital projects and the reduction in New Homes Bonus.

f. As usual, it is essential to review these finance documents to see what is missing. Whilst I do not have either the time or the knowledge to do this, I have spotted that the Sidmouth Beach Management funding is disappearing from the budget!!!

The most worrying thing is the increasing reliance on capital receipts to plug increasing shortfalls in revenue income. This does not seem financially prudent, for several reasons:

1. Revenue shortfalls continue every year and are cumulative, whilst capital receipts are one-off and not guaranteed in the future.
2. The NHB is the current means of plugging this gap, but is under review by government and likely to fall substantially per home. It also seems fairly likely that EDDC will never get close to the number of homes they have committed to deliver in the draft Local Plan – so EDDC won’t make the money they expect either.
3. On the other hand, EDDC will definitely be facing further cuts in central government funding of £3.6m per year – which is a lot more revenue shortfall to plug using a reducing NHB stream.

This is NOT a sound means of financing its ongoing costs. Put simply the council cannot afford to continue balancing its books by covering revenue shortfalls from capital receipts which are likely to decline substantially over the next few years.

This is the legacy of keeping Council Tax the same for 5 years running. The Tory leadership at EDDC did this because they accepted the Council Tax Freeze Grant, offered to councils (like EDDC) who kept their council tax the same year after year. The only problem with this is that a Council Tax increase (however unpopular) is a cumulative income increase (i.e. an increase this year creates additional revenue in each following year too) whilst the grant is a one-off payment. You would not decide that you could afford electricity by paying using one-off income like premium bond wins, so EDDC’s decisions appear to be both short-term and short-sighted.

Indeed, it appears that EDDC is addicted to one-off fixes from central government to the long-term detriment of the council’s finances.

However, continuing use of one-off capital payments to plug a widening gap in revenue is not a good direction for the future. If these capital receipts ever stop coming in, EDDC’s finances will be in real trouble.

With a current shortfall of £1.85m and a further reduction in government funding of £3.6m, EDDC will need to find £5.45m per year by 2020 (which is approximately 35%of expenditure) over the next 4 years – and it is difficult to see how EDDC can come even close to achieving these through efficiency savings or revenue increases or even both. EDDC’s plan appears to be too use the Transformation Strategy (pages 115-132) to fill this gap in funding through to 2020 – and whilst this does included a lot of small aspirational efficiency improvements, they all appear to be relatively minor in nature, with the bulk of the funding gap presumably covered by selling off assets (which again provide only one-off income boosts and failing to address the real issue of revenue shortfall). Of course, the detail of EDDC’s plans are deemed confidential – but is it any wonder that EDDC works so hard to keep the Agendas and Reports of its Asset Management Committee secret when it needs to sell assets in such quantities to plug this huge gap in its finances?

Eventually (presumably in 2020), there will be a £5m+ revenue funding gap, no more government Revenue Support Grant, no more New Homes Bonus and presumably no more assets remaining to sell – and then what happens?

It appears to me that this ongoing and increasing funding gap, temporarily bridged using first the Council Tax Freeze Grant and then the New Homes Bonus, is a direct consequence of Tory dogma to freeze council tax (which is a reduction in real terms). It also appears to explain why EDDC has been so set on having a Local Plan which includes huge numbers of new homes – because these new homes attract the New Homes Bonus and this appears to be their means of keeping the finances afloat.

I urge people to take an interest in what is happening at EDDC and to go and look at the budget and local plan documentation for themselves.

EDDC needs to start working towards being able to balance the revenue accounts without using NHB to cover the shortfall and to wean itself off one-off central government fixes to which it seems to be addicted.

The proposal to increase council tax by 1.99% is a start, but even with this proposal the revenue short-fall is still increasing compared to last year. And if increasing it by 2% or more triggers a referendum, all the better – as this will shine a light on the council’s finances and enable open debate about how the council’s services are best funded.

Whilst council tax rises will never be popular, to continue on this current slippery slope is to invite complete financial meltdown in 4 years time!!“