Agenda item

The Director of Corporate Services (DoCS) advised that the report set out the Authority's borrowing and lending activities during 2025/26. In accordance with the Chartered Institute of Public Finance and Accountancy (CIPFA) Treasury Management Code of Practice and to strengthen Members’ oversight of the Authority’s treasury management activities, the Resources Committee received a treasury management mid-year report and a final outturn report. Reports on treasury activity were discussed on a quarterly basis with Lancashire County Council Treasury Management Team and the Authority’s DoCS and the content of these reports were used as a basis for this report to the Committee.

Economic Overview

The first half of 2025/26 saw:

·         A 0.3% pick up in Gross Domestic Product (GDP) for the period April to June 2025. More recently, the economy flatlined in July, with higher taxes for businesses restraining growth.

·         The 3-month comparison to the same three months last financial year rate of average earnings growth excluding bonuses had fallen from 5.5% to 4.8% in July.

·         Consumer Prices Index (CPI) inflation had ebbed and flowed but finished September at 3.8%, whilst core inflation eased to 3.6%.

·         The Bank of England cut interest rates from 4.50% to 4.25% in May, and then to 4% in August.

·         The 10-year gilt yield fluctuated between 4.4% and 4.8%, ending the half year at 4.70%.

From a GDP perspective, the financial year got off to a bumpy start with the 0.3% monthly fall in real GDP in April as front-running of US tariffs in quarter one (when GDP grew 0.7% on the quarter) weighed on activity. Despite the underlying reasons for the drop, it was still the first fall since October 2024 and the largest fall since October 2023. However, the economy surprised to the upside in May and June so that quarterly growth ended up 0.3% compared to the previous quarter. Looking ahead, ongoing speculation about further tax rises in the Autumn Budget on 26 November would remain a drag on GDP growth. GDP growth for 2025 was forecast by Capital Economics to be 1.3%.

With the November Budget edging nearer, the public finances position looked weak. Public net sector borrowing of £18.0bn in August meant that after five months of the financial year, borrowing was already £11.4bn higher than the Office for Budget Responsibility’s (OBR) forecast at the Spring Statement in March. The overshoot in the Chancellor’s chosen fiscal mandate of the current budget was even greater with a cumulative deficit of £15.3bn. This was due to both current receipts in August being lower than the OBR forecast (by £1.8bn) and current expenditure being higher (by £1.0bn). Over the first five months of the financial year, current receipts had fallen short by a total of £6.1bn (partly due to lower-than-expected self-assessment income tax) and current expenditure had overshot by a total of £3.7bn (partly due to social benefits and departmental spending). Furthermore, what mattered now was the OBR forecasts and their impact on the current budget in 2029/30, which was when the Chancellor’s fiscal mandate would bite. As a general guide, Capital Economics forecasted a deficit of about £18bn, meaning the Chancellor would have to raise £28bn, mostly through higher taxes, if she wanted to keep her buffer against her rule of £10bn.

CPI inflation fell slightly from 3.5% in April to 3.4% in May, and services inflation dropped from 5.4% to 4.7%, whilst core inflation also softened from 3.8% to 3.5%. More recently, inflation pressures had resurfaced, although the recent upward march in CPI inflation did pause in August, with CPI inflation staying at 3.8%. Core inflation eased once more too, from 3.8% to 3.6%, and services inflation dipped from 5.0% to 4.7%. The Bank of England did not anticipate CPI getting to 2% until early 2027, and with wages still rising by just below 5%, it was no surprise that the September meeting saw the Monetary Policy Committee vote 7-2 for keeping rates at 4%.

The Authority’s treasury advisors MUFG Corporate Markets assisted the Authority to formulate a view on interest rates. The Public Works Loans Board (PWLB) rate forecasted were based on the Certainty Rate (the standard rate minus 20 base points (bps)) which had been accessible to most authorities since 1 November 2012.

MUFG Corporate Markets’ latest forecast on 11 August set out a view that short, medium and long-dated interest rates would fall back over the next year or two, although there were upside risks in respect of the stickiness of inflation and a continuing tight labour market, as well as the size of gilt issuance.

Treasury Management position and policy

The underlying need to borrow for capital purposes was measured by the Capital Financing Requirement (CFR), while usable reserves and working capital were the underlying resources available for investment. The treasury management activity was influenced both by the position at the beginning of the year and the plans in year. The position at the start of the financial year is summarised in the Table below:

The table showed that the level of loans was above the borrowing requirement. This was the result of the Authority adopting a policy of setting aside additional Minimum Revenue Provision (MRP) to generate the cash to repay loans either on maturity or as an early repayment.

It was not anticipated that the new capital expenditure would be funded from borrowing in the year while it was anticipated that there would be some reduction in the level of reserves held.

Borrowing

There had been no new borrowing in the first six months of the financial year. This was consistent with the position that the current borrowing was already above the CFR and that the capital programme did not include any expenditure to be financed from borrowing.

The long-term debt outstanding of £2m had been borrowed from the Public Works Loan Board (PWLB). A table included within the report showed the maturity profile of the Authority's borrowings, along with an interest rate paid.

If the loans were to be repaid early there would be an early repayment (premium) charge. At the reporting date the Authority could achieve an interest saving of £2k for early repayment of the loans above however, with the Authority budgeting a borrowing requirement to fund the capital programme from 2026/27, the additional interest on new loans would outweigh the £2k saving from early repayment.

Investments

Both the CIPFA Code and government guidance required the Authority to invest its funds prudently, and to have regard to the security and liquidity of its investments before seeking the highest rate of return, or yield. The Authority’s objective when investing money was to strike an appropriate balance between risk and return, minimising the risk of incurring losses from defaults and the risk of receiving low investment returns and having the value of reserves eroded by inflation.

In the period the Authority had invested funds in the Debt Management Office’s (DMO) Debt Management Account Deposit Facility (DMADF) overnight facility and other local authorities. Each working day the balance on the Authority's current account was invested in this to ensure that interest was received on surplus balances within an acceptable risk framework.

At 30 September, there was a balance of £12.385m invested in DMADF overnight facility while the average for the period for DMADF deposits was £18.757m. The current rate for these investments was 3.95% 25bps below the Bank of England base rate.

To increase the rate earned, the authority had placed fixed term investments with other local authorities. To attract a higher rate of interest than was available on the call account these investments would need to be fixed for a longer period of time. During the year the following investments had been in place:

At 30 September, there was £35.0m fixed term investment in place, therefore the total investment held at 30 September was £47.385m.

The overall rate of interest earned during this period was 4.65% which was favourable when compared with the 7-day Sterling Overnight Rate (SONIA) which averaged 4.20% over the same period.

All investments were made in accordance with the current Treasury Management Strategy and the CIPFA Treasury Management Code of Practice.

Current interest rates available for lending to other Local Authorities were detailed within the report.

Prudential Indicators

In order to control and monitor the Authority’s treasury management functions, a number of prudential indicators were determined against which performance may be measured. The indicators for 2025/26 were approved by the Authority on 17 February 2025 which were detailed in the report alongside the current actual.

Revenue Budget Implications

The 2025/26 revenue budget for treasury management activity showed that anticipated income would exceed expenditure by £1.295m. Considering the activity for the first six months of the year and estimated cash-flow for the remainder of the year the latest forecast was as below:

The interest receivable was above budget as the investment balances and interest rates were higher than anticipated when setting the budget. The forecast assumed interest rates achieved through deposits with the DMADF the call account averaged 3.87% for the remainder of the financial year.

Resolved: That the Committee noted and endorsed the report.