Item 7 Appendix 1 - Treasury Management Mid-Year Report 2024-2025
West Dunbartonshire Council · 19 February 2025
Back to Audit Committee — 19 February 2025 and its agenda
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Appendix 1 Mid-Year Monitoring Report 2024/25 Treasury Management and Prudential Indicators: 1 April 2024 to 30 September 2024 1. Introduction 1.1 The Council’s treasury management activities are regulated by a variety of professional codes and statutes and guidance: The Local Government in Scotland Act 2003 (the Act), which provides the powers to borrow and invest as well as providing controls and limits on this activity; The Act permits the Scottish Ministers to set limits either on the Council or nationally on all local authorities restricting the amount of borrowing which may be undertaken (although no restrictions have been made as yet during 2024/25). Statutory Instrument (SSI) 29 2004, requires the Council to undertake any borrowing activity with regard to the CIPFA Prudential Code for Capital Finance in Local Authorities, and therefore to operate the overall treasury function with regard to the CIPFA Code of Practice for Treasury Management in the Public Services; and the treasury activity with regard to the CIPFA Code of Practice for Treasury Management in Local Authorities. Statutory Instrument (SSI) 123 2016, set out statutory arrangements for local authority borrowing and lending and the requirement to maintain a loans fund and replace the statutory arrangements set out in Schedule 3 of the Local Government (Scotland) Act 1975 (Schedule 3). 1.2 The regulatory framework of treasury management requires that the Council receive a mid-year treasury review, in addition to the forward looking annual treasury strategy and backward looking annual treasury report. This report meets that requirement and also incorporates the needs of the Prudential Code to ensure adequate monitoring of the capital expenditure plans and the Council’s prudential indicators. The Treasury Strategy and Prudential Indicators were previously reported to Council on 27 March 2024. The current position is shown (where appropriate) and revisions to the 2024/25 estimate are provided where required. 1.3 In December 2021, the Chartered Institute of Public Finance and Accountancy, (CIPFA), issued revised Prudential and Treasury Management Codes. These require all local authorities to prepare a Capital Strategy which is to provide the following: - a high-level overview of how capital expenditure, capital financing and treasury management activity contribute to the provision of services; an overview of how the associated risk is managed; and the implications for future financial sustainability The Council’s Capital Strategy was reported to and agreed by Council on 6th March 2024.
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Appendix 1 1.4 This report sets out: Key changes to the Council’s capital activity (the prudential indicators); An economic update for the first part of the 2024/25 financial year; The actual and proposed treasury management activity (borrowing and investment); and The risk approach to treasury management (the treasury management indicators). 2. Key Prudential Indicators 2.1 This part of the report is structured to update: The Council’s capital expenditure plans and how these plans are being financed; The impact of the changes in the capital expenditure plans on the PIs and the underlying need to borrow; Compliance with the limits in place for borrowing activity; and Policy on the statutory repayment of loans fund advances 2.2 Capital Expenditure – Table A shows the current position and revised estimates for capital expenditure for 2024/25 only. Table A: £000 2024/25 Original Estimate Current Position 2024/25 Projected Outturn* General Services 76,757 16,439 63,013 HRA 73,385 22,787 63,995 Capital Expenditure 150,142 39,226 127,008 Financed by: Capital receipts 0 0 0 Capital grants 41,085 42,100 83,489 Revenue / other 250 250 250 Net financing need for the year 108,807 (3,124) 43,269 * it should be noted that the Projected Outturn figures include additional slippage from 2022/23 that were not known at the time of the Original Estimate 2.2.1 The movement in the level of anticipated capital expenditure is mainly due to the inclusion of additional slippage following the year end; a reduction in anticipated capital receipts; an increase in spend related to external funding offset by slippage levels identified to date. The anticipated spends and resources are regularly reported to Members through budgetary control reports. 2.3 Impact of changes in Capital Expenditure Plans – Table B shows the CFR, which is the underlying external need to borrow for a capital purpose while Table C shows the expected debt position over the period.
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Appendix 1 Table B: 2024/25 £000 Original Estimate 2024/25 Projected Outturn Opening CFR (1 April 2024) 891,537 794,231 New Borrowing 99,415 29,216 LTL repayment in year 0 (1,414) Closing CFR (31 March 2025) 990,952 822,033 movement in CFR 99,415 27,802 Net financing need for the year (Table A) 108,807 43,269 Loan repayments in year - excluding LTL (PPP) (9,392) (14,053) New Borrowing - Movement in CFR (from previous year) 99,415 29,216 Table C: £000 2024/25 Original Estimate Current Position 2024/25 Projected Outturn External Debt Estimated/Actual Debt at 1 April 2024 768,637 724,570 727,829 Maturing Debt (268,988) (141,500) (314,677) Movement in Borrowing New Borrowing - Maturing Debt 268,988 141,500 314,677 Borrowing adjustment in relation to over borrowing at year end 0 0 0 New Borrowing – CFR (Table B) 99,415 7,103 29,216 Debt at 31 March (1) 868,052 731,673 757,045 Long Term Liabilities (LTL) at 1 April 89,815 87,449 87,449 LTL repayment in year (Table B) 0 (589) (1,414) LTL at 31 March (2) 89,815 86,860 86,035 Actual Debt at 31 March (1) + (2) 957,867 818,533 843,080 CFR from Table B 990,952 n/a 822,033 Under/(Over) Borrowing 33,085 n/a (21,047) 2.3.1 The external debt figures included within Table C now includes both short term and long term debt. This is due to the current strategy of using short term borrowing to fund long term capital investment enabling the Council to take advantage of lower interest rates. The reduction in the estimated external debt for 2024/25 is due to a reduction in the net capital financing need for the year. 2.3.2 The CFR is calculated on a year-end position based on the Council’s balance sheet and therefore the current position is not shown. The CFR has reduced from the original estimate due to the forecast level of capital expenditure in 2024/25 being less than budgeted. The Chief Officer - Resources can report that the Council is currently on target to meet the 2024/25 revised estimates for both indicators.
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Appendix 1 2.3.3 Table C highlights that the borrowing of the Council is forecasting a minimal over-borrowed position against the CFR at 31 March 2025. 2.4 Compliance with the limits in place for borrowing activity – A key control over the treasury activity is a prudential indicator to ensure that over the medium term, gross borrowing will only be for a capital purpose. Gross external borrowing should not, except in the short term, exceed the total of CFR in the preceding year plus the estimates of any additional CFR for 2024/25 and next two financial years. This allows some flexibility for limited early borrowing for future years. The Council has approved a policy for borrowing in advance of need which will be adhered to if this proves prudent. The revised indicator is detailed in Table D and is illustrated by comparing the estimated gross debt as at 31 March 2024 with the CFR as at 31 March 2025. The Chief Officer - Resources reports that no difficulties are envisaged for the current year in complying with this prudential indicator. Table D: £000 2024/25 Original Estimate 2024/25 Projected Outturn CFR at 31 March 2024 Estimate/Actual (From Table B above) 891,537 794,231 Estimated movement in CFR 2024/25 (From Table B above) 99,415 27,802 2025/26 94,129 100,177 2026/27 49,419 49,419 Anticipated CFR at 31 March 2025 1,134,500 971,629 Gross Debt at 31 March 2023 (From Table C above) 957,867 818,533 2.4.1 The Operational Boundary is detailed in Table E below and is the limit beyond which external debt is not normally expected to exceed. In most cases, this would be a similar figure to the CFR, but may be lower or higher depending on the levels of actual debt. Table E: £000 2024/25 Original Estimate Current Position 2024/25 Projected Outturn External Debt 945,852 818,533 900,386 2.4.2 A further prudential indicator controls the overall level of borrowing. This is the Authorised Limit which is detailed in Table F and represents the limit beyond which borrowing is prohibited, and needs to be set and revised by Members. It reflects the level of borrowing which, while not desired, could be afforded in the short term, but is not sustainable in the longer term. It is the expected maximum borrowing need with some headroom for unexpected movements. This is the statutory limit determined under section 3 (1) of the Local Government Act 2003.
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Appendix 1 Table F: £000 2024/25 Original Estimate Current Position 2024/25 Projected Outturn External Debt 1,031,839 818,533 982,239 3. Economic Outlook 3.1 UK * Following the 30 October Budget, the outcome of the US Presidential election on 6 November, and the 25bps Bank Rate cut undertaken by the Monetary Policy Committee (MPC) on 7 November, we have significantly revised our central forecasts for the first time since May. In summary, our Bank Rate forecast is now 50bps – 75bps higher than was previously the case, whilst our PWLB forecasts have been materially lifted to not only reflect our increased concerns around the future path of inflation, but also the increased level of government borrowing over the term of the current Parliament. If we reflect on the 30 October Budget, our central case is that those policy announcements will be inflationary, at least in the near-term. The Office for Budgetary Responsibility and the Bank of England concur with that view. The latter have the CPI measure of inflation hitting 2.5% y/y by the end of 2024 and staying sticky until at least 2026. The Bank forecasts CPI to be 2.7% y/y (Q4 2025) and 2.2% (Q4 2026) before dropping back in 2027 to 1.8% y/y. The anticipated major investment in the public sector, according to the Bank, is expected to lift UK real GDP to 1.7% in 2025 before growth moderates in 2026 and 2027. The debate around whether the Government’s policies lead to a material uptick in growth primarily focus on the logistics of fast-tracking planning permissions, identifying sufficient skilled labour to undertake a resurgence in building, and an increase in the employee participation rate within the economy. There are inherent risks to all the above. The worst-case scenario would see systemic blockages of planning permissions and the inability to identify and resource the additional workforce required to deliver large-scale IT, housing and infrastructure projects. This would lead to upside risks to inflation, an increased prospect of further government borrowing & tax rises, and a tepid GDP performance. Our central view is that monetary policy is sufficiently tight at present to cater for some further moderate loosening, the extent of which, however, will continue to be data dependent. We forecast the next reduction in Bank Rate to be made in February and for a pattern to evolve whereby rate cuts are made quarterly and in keeping with the release of the Bank’s Quarterly Monetary Policy Reports (February, May, August and November). Any movement below a 4% Bank Rate will, nonetheless, be very much dependent on inflation data in the second half of 2025. The fact that the November MPC rate cut decision saw a split vote of 8-1 confirms that there are already some concerns around inflation’s stickiness, and with recent public sector wage increases beginning to funnel their way into headline
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Appendix 1 average earnings data, the market will be looking very closely at those releases. Regarding our PWLB forecast, the short to medium part of the curve is forecast to remain elevated over the course of the next year, and the degree to which rates moderate will be tied to the arguments for further Bank Rate loosening or otherwise. The longer part of the curve will also be impacted by inflation factors, but there is also the additional concern that with other major developed economies such as the US and France looking to run large budget deficits there could be a glut of government debt issuance that investors will only agree to digest if the interest rates paid provide sufficient reward for that scenario. 3.2 Scotland** The Scottish Government’s budget next year is set to increase by £1.3 billion from the latest position for 2023-24. This is a rise of 2.6 per cent in cash terms or a 0.9 per cent rise after accounting for inflation. Most of this increase in funding comes from income tax. A combination of the Scottish Government’s policy choices, high inflation, fixed tax thresholds in cash terms and higher earnings growth in Scotland have all contributed to a sharp increase in income tax funding. However, the ongoing consequences of Scottish Government changes to social security and the linking of payment rates to inflation have increased spending commitments. Other Scottish Government policies such as the Council Tax freeze and increasing public sector pay have further added to the Scottish Government’s spending commitments. Capital spending is set to fall by 4 per cent in real terms between 2023-24 and 2024-25. Economic growth will remain fragile in the near term with living standards set to see the largest fall on record between 2021-22 and 2023-24 and not return to their 2021-22 level until 2026-27. The Scottish Government has introduced a new 45 per cent income tax band starting at £75,000 and also increased the top rate of income tax by 1 percentage point. These policies affect the top 5 per cent of taxpayers in Scotland. After taking account of behavioural changes, these policies will raise an extra £82 million in 2024-25. Scottish Government changes to income tax policy since 2017 mean someone in Scotland earning £100,000 will now pay £3,346 more in income tax than they would in the rest of the UK People with earnings over £28,850 in Scotland, slightly above median earnings, pay more income tax than they would in the UK. The latest policy decisions widen the gap further for those earning over £75,000 (the top 5 per cent of taxpayers). The increase in the projected income tax net position in 2024-25 of £712 million is mostly driven by data in 2021-22 to 2023-24.
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Appendix 1 Social security spending is forecast to increase from £5.3 bn in 2023-24 to £8.0 bn in 2028-29. By 2028-29, we expect the Scottish Government to spend £1.5 bn more on social security than BGA funding received from the UK Government. We forecast living standards to remain broadly flat in 2024-25 as inflation will largely offset growth in nominal household disposable income. Higher interest rates will continue to reduce disposable income over the next year. *** In part, this is because the widespread use of fixed-rate mortgages means that the recent rises in interest rates are passing through to mortgage costs with a longer lag than in the past. The Scottish Government has announced a new income tax rate of 45 per cent for those earning above £75,000 and increased the top rate of income tax by 1 percentage point. These changes are estimated to raise a total of £82 million in 2024-25. Our estimates of how much additional revenue will be raised include an adjustment for an assumed behavioural response. Without this response revenues would be £118 million higher. Although there is uncertainty around the scale of a behavioural response, the size of the estimated response is small in relation to how much income tax revenue is raised overall and any error in our estimate of the behavioural response would have a smaller effect on the Scottish budget than, for example, an error in our earnings forecast 3.3 International update * There is also the additional concern that with other major developed economies such as the US and France looking to run large budget deficits there could be a glut of government debt issuance that investors will only agree to digest if the interest rates paid provide sufficient reward for that scenario. Donald Trump’s victory paves the way for the introduction/extension of tariffs that could prove inflationary whilst the same could be said of further tax cuts and an expansion of the current US budget deficit. Invariably the direction of US Treasury yields in reaction to his core policies will, in all probability, impact UK gilt yields. So, there are domestic and international factors that could impact PWLB rates whilst, as a general comment, geo-political risks abound in Europe, the Middle East and Asia. * Link Group Interest Rate Forecast 11 November 2024 ** Scottish Fiscal Commission Report 19 December 2023 & revised version April 2024 & Report of 27 August 2024 *** Bank of England (2023) Monetary Policy Report – November 2023 3.4 Based upon the above information, the Council’s treasury advisor, Link Group, has provided the following interest rate forecast as at November 2024. With no changes made after this date, it sets out a view that short, medium and long-dated interest rates will fall back over the next year or two, although there are upside risks in respect of inflation and a continuing tight labour market, as well as the size of gilt issuance.
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Appendix 1 Table G: - Source: Link Group 3.5 Downside risks to current forecasts for UK gilt yields and PWLB rates currently include: Labour and supply shortages prove more enduring and disruptive and will depress economic activity (accepting that in the near-term this is also an upside risk to inflation and, thus, rising gilt yields). The Bank of England acts too quickly, or too far, over the next two years to raise Bank Rate and causes UK economic growth, and increases in inflation, to be weaker than we currently anticipate. UK / EU trade arrangements – if there was a major impact on trade flows and financial services due to complications or lack of co-operation in sorting out significant remaining issues. Geopolitical risks, for example in Ukraine/Russia, China/Taiwan/US, Iran, North Korea and Middle Eastern countries, which could lead to increasing safe-haven flows. 3.6 Upside risks to current forecasts for UK gilt yields and PWLB rates are as The Bank of England is too slow in its pace and strength of increases in Bank Rate and, therefore, allows inflationary pressures to build up too strongly and for a longer period within the UK economy, which then necessitates an even more rapid series of increases in Bank Rate faster than we currently expect. The Government acts too quickly to cut taxes and/or increases expenditure in the light of the cost-of-living squeeze. The pound weakens because of the UK’s growing borrowing requirement resulting in investors pricing in a risk premium for holding UK sovereign debt. Longer term US treasury yields continue to rise strongly and pull gilt yields up even higher than currently forecast. 4. Treasury Management Activity 4.1 This part of the report is structured to update: The Council’s expected borrowing need and details of under/(over) borrowing;
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Appendix 1 Debt rescheduling and new borrowing; Debt charges; and Investments 4.2 The Expected Borrowing Need – This was set out in Table C (above) and demonstrates that at 31 August 2024 the Council is currently projecting and over-borrowed position. It should be noted that due to current economic climate the borrowing rates are significantly different than this time last year, with long term borrowing rates for periods greater than 25 years currently between 5.30% and 5.55%, depending on length of term for borrowing (as at 27 November 2024). This introduces an element of interest rate risk, as longer term borrowing rates may rise further; however, this position is being carefully monitored. 4.3 Debt rescheduling and new borrowing – The Council has not undertaken any debt rescheduling during the part of 2024/25 (to 31 September 2024). In the year to date naturally maturing debt of £141.500m has been repaid which has been mainly funded by loans from other local authorities. 4.4 Debt Charges – The revised estimate for debt charges for both the General Fund and the HRA is shown in Table H. Table H: £000 2024/25 Original Estimate Current Position 2024/25 Revised Estimate Borrowing 22,092 10,993 21,985 Other Long Term Liabilities 21,985 10,237 20,474 Total 44,077 21,230 42,459 4.5 Investments – The objectives of the Council’s investment strategy are to ensure the re-payment of the principal and interest of its investments on time with the level of investment return being a secondary objective. Following on from the economic background above, the current investment climate has one over-riding risk consideration which is the risk of default. 4.5.1 The Council held £28.000m of cash investments at 30 September 2024, and the constituent parts of the investment position are detailed in Table I: Table I: £000 Country < 1 Year 1 – 2 Years 2 – 3 Years Banks UK 8,000 Nil Nil Money Market Fund UK 20,000 Nil Nil Local Authorities UK 0 Nil Nil Total UK 28,000 Nil Nil 4.5.2 Table J details the revised budget position for investment income. The original estimate has increased by £0.168m due to ongoing interest rates changes.
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Appendix 1 Table J: £000 2024/25 Original Estimate Current Position 2024/25 Revised Estimate Investment Income 530 349 698 4.5.3 A regulatory development to address risk is the consideration and approval of benchmarks relating to investment security, liquidity and the level of return. Benchmarks are currently widely used to assess the level of return and investment performance, however the application of security and liquidity benchmarks are more subjective in nature. Security - The Council’s maximum security risk benchmark for the current portfolio in relation to investment periods of up to one year (when compared to historic default tables) was set at 0.00% and the Chief Officer - Resources can report that there have been no defaults of principal sums invested in the year to date. Creditworthiness - Significant levels of downgrades to Short- and Long- Term credit ratings have not materialised since the crisis in March 2020. Liquidity – The Chief Officer - Resources can report that liquidity arrangements were adequate during the year to date and that the liquidity facilities and benchmarks set by the Council as noted below were maintained: o Bank overdraft - £1.000m; and o Liquid short term deposits of at least £5.000m available on an overnight basis. Return on Investments – The Chief Officer - Resources can report that the investment return to date average 4.73%. Table K illustrates how this average return compares with the local benchmarks. Table K: Benchmark Benchmark Return Average Return Compound 12 month SONIA* 5.28% 4.73% Council’s Instant Access Account 5.10% 4.73% * SONIA is Sterling Overnight Index Average and has replaced LIBOR & LIBID 5 Key Treasury Management Indicators 5.1 This part of the report is structured to update: Actual and estimates of the ratio of financing costs to net revenue stream; Upper limits on interest rate exposure: The maturity structure of borrowing; and Total principal sums invested. 5.2 Actual and estimates of the ratio of financing costs to net revenue stream – This indicator (as shown below in Table L) identifies the trend in the cost of capital against the net revenue stream.
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Appendix 1 Table L: 2024/25 Original Estimate 2024/25 Revised Estimate General Fund 24.60% 14.44% HRA 42.68% 55.34% 5.3 Upper Limits on Fixed and Variable Rate Exposure – These indicators identify a maximum limit for fixed and variable interest rates based upon the debt position and were set at 100% and 50% respectively for 2024/25. The Chief Officer – Resources reports that the Council operates within these limits. 5.4 Maturity Structures Of Borrowing – These maximum limits are set to reduce the Council’s exposure to large fixed rate loans (those instruments which carry a fixed interest rate for the duration of the instrument) which are due to naturally mature in any given period as detailed in Table M and show that the Council operates within limits set. Table M: Maturity Structure of Fixed Interest Rate Borrowing 2024/25 Original Limits Current Position Under 12 months 50% 37% 12 months to 2 years 50% 7% 2 years to 5 years 50% 23% 5 years to 10 years 50% 2% 10 years to 20 years 50% 2% 20 years to 30 years 50% 4% 30 years to 40 years 50% 2% 40 years to 50 years 100% 18% 50 years to 60 years 100% 4% 60 years to 70 years 100% 0% 5.5 Total Principal Funds Invested – These limits are set to reduce the need to temporarily borrow to cover any unexpected expenditure, and show limits to be placed on investments with final maturities beyond each year-end. The Council currently invests sums for periods greater than 365 days in Clydebank Property Company and hub West Scotland as detailed in Table N. Table N: 2024/25 Original Estimate Current Position 2024/25 Revised Estimate Principal sums invested > 365 days (maximum limit £5m) £0.483m £0.483m £0.483m