Agenda item

Capital and Investment Strategy Monitoring Q1

Report of the Director - Finance and Corporate Services



The Finance Business Partner presented the Capital and Investment Strategy Q1 report.


In relation to the economic forecast, the Finance Business Partner said that the economic outlook was more positive with inflations falling from 11.1% in October 2022 to 6.8% in July 2023 and forecast to be around 5% by the end of the year. She said that interest rates were expected to remain higher for longer and that the Council’s Treasury Advisors predicted that interest rates had peaked at 5.25%, with a first cut predicted in Q3 2024 and further cuts to 3.75% in 2025. She said that unemployment had increased in recent months to 4.3% but would likely need to reach 5% before it impacted on growth and wages.


The Finance Business Partner referred to Investment Income and said that the Council had budgeted for £1.36m in interest receipts this year and broadly expected to achieve this. She said that the council had assumed interest rates of 4.5% and most short-term investments, particularly the money market, were exceeding this. The long-term diversified funds had not been as positively affected but overall the Council had achieved an average interest rate of 4.78% in Q1 compared with SONIA at 4.37%.


The Finance Business Partner referred to Appendix C which showed the list of investments held by the Council at the end of June and Appendix A which highlighted the fluctuations in value of diversified funds and the current £1.3m drop in value since purchase. She explained that the funds were volatile and needed to be held long-term and that the Council would not look to sell them at this time and so would not realise the loss.


In relation to Capital Expenditure and Financing, the Finance Business Partner informed the Group that the Council projected an underspend of around £6m, with savings on Bingham Arena and the Crematorium and the need to reprofile the provision for support for Registered Housing Providers to future years. She said that Council’s underlying need to borrow for capital expenditure was forecast to reduce from £13.26m in 2022/23 to £10.9m in 2023/24.


In relation to Borrowing and Prudential Indicators, the Finance Business Partner took the Group through Appendix B which listed the Prudential and Treasury Indicators and noted that the Liability Benchmark reflected that the Council had no need to borrow over the medium term.


In relation to Commercial Investments, the Group were informed that it was important that local authorities avoided over reliance on speculative activity and as such the Council had set a target that this should not exceed 30% with the current position at around 15%.


In conclusion, the Group were informed that Treasury Management continued to be fraught with difficulty and whilst the UK economy was recovering inflationary pressures remained. If inflation did not reduce then interest rates would likely increase and whilst this would have a positive effect on investment returns, uncertainty in the economy was having a negative impact on the capital value of some of the Council’s investments.


Councillor Om referred to the green rated investments in Appendix C and the Finance Business Partner explained that the interest rates on these varied daily and that the Council generally sought to keep balances low.


Councillor Birch asked about lending to other local authorities and the Service Manager Finance explained that whilst the Council’s Treasury Advisors provided credit ratings for non local authority investments, these were not available for local authorities. As such, the Council would conduct its own due diligence alongside advice from its Treasury Advisors. In relation to security of investment, she noted the Government would normally step in if a local authority experienced financial difficulty meaning that any investment would not be at risk.


The Group referred to diversified funds and the Service Manager Finance said that it was expected that these would increase over the long term and were currently being impacted by the current volatility. The Finance Business Partner said that as the Council did not intend to sell them, it had not realised a loss and that this was only shown as a paper loss.


Councillor Thomas asked whether the Council charged itself interest on internal loans and the Service Manager Finance explained that the Council did recognise a loss of investment opportunity on the loan income but did not charge itself interest.


Members of the Group referred to the £5m loan to the East Midlands Combined Authority and the Service Manager Finance confirmed that this had been repaid and would update the Group about who managed the funds for the Combined Authority.


It was RESOLVED that the Group considers the Capital and Investment Strategy update position as of 30 June 2023.

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