Principle 5 – Secures financial efficiency, resilience and the ability to withstand financial shocks

The medium-term plans of the twelve current councils have been analysed to understand the financial challenges already being faced.

The existing projected budget gaps have been adjusted to allow for the use of one-off funding such as reserves and balances and establish the true base budget shortfall for each council.

Note – these figures do not allow for the cost of servicing Woking’s unsupported debt which is estimated at around £150m per annum.

Growth/demand pressures

Adult social care

Like all authorities across the country, the provision of support for Adult Social Care has provided a considerable financial challenge to Surrey County Council. This has only been partly offset by the introduction of the Adult Social Care precept which has allowed an additional council levy of 2% to be added to bills each year ringfenced for this specific area of expenditure.

With significant increases in the elderly population and the complexity of needs, major pressures are currently around the cost of care package commitments, contract inflation and workforce pressures.

Children’s services

Similarly, like many authorities across the country, the provision of support for children with additional needs continues to be one of the biggest challenges and pressure for Surrey. Much of the cost is met through the high needs block of the dedicated schools grant (DSG), whilst the staffing pressures relating to assessments, management and associated transport costs cause pressures in the general fund.

The largest areas of pressure currently relate to the cost of home to school travel assistance, which links to the significant growth in the number of children with additional needs and disabilities in specialist provision and the statutory transport requirements for those children. Increased costs of social care placements account for the majority of the remaining pressures.

In addition, the costs of social care placements continue to be a budget pressure across the MTFS period. Although the number of children in care has fallen, the cost of very specialist placements continues to rise, in a highly-competitive commercial market.

These demand pressures on social care and general inflationary pressures have been built into the MTFS assumptions within each Surrey council’s budget.

Homelessness & impact of changes to Homelessness Prevention Grant (HPG) distribution

The formula for allocating HPG is being updated from 2026-27 as part of the upcoming spending review. The proposed changed will redistribute funding away from Surrey and indicate the likely shift of funding which will occur through Fair Funding Reform.

Debt

Background

The level of local authority debt across the Surrey geography is extremely high, and ongoing financing costs are disproportionate to the size of the combined net revenue budgets of the existing authorities.

In June 2023, Woking Borough Council issued a Section 114 Notice, due primarily to the level of debt. In March 2025, the MHCLG responded to the Inspector’s Best Value report for Spelthorne Borough Council, indicating that they intend to move forward with an intervention package linked to debt-related financial issues.

County-wide, authorities hold £5.7bn of external debt at the end of January 2025, and have a combined underlying borrowing requirement, known as the Capital Financing Requirement, based on historic capital investment decisions of £7.8bn.

The underlying need to borrow (CFR) can be further analysed as follows:

• £0.7bn (9%) of debt relating to Housing Revenue Accounts
• £3.4bn (44%) of General Fund debt, used to support capital programme delivery
• £3.7bn (47%) of debt relating to commercial activities/investments

The 2025/26 budgets of the local authorities include combined general fund interest payable and Minimum Revenue Provision (MRP) budgets of £327m.  This equates to 22% of the combined Net Revenue Budgets.  This percentage will increase significantly and be concentrated in those unitaries containing high debt levels.  In some borough and districts the gross financing costs are in excess of 100% of their net revenue budget.

Woking Borough Council have deferred £96m of capital financing costs (MRP) in 2025/26, along with having a Capitalisation Directive of £75m relating mainly to interest costs.  This means that without continued EFS from government, there is a budget gap of at least £171m to be inherited by one of the new unitaries. 

The commercial picture across the county is complex, with over 150 directly owned investments and at least 37 subsidiary companies.  Further analysis will be needed on the underlying value of these investments and their associated debt to understand the level of ‘stranded’ debt. 

It is accepted that within Woking the level of stranded debt is circa £1.5bn, which will continue to rise with ongoing exceptional financial support (EFS). 

Across the 12 authorities, there is income of c£150m budgeted from interest and investment income that not only helps repay the debt on commercial investments but underpins the delivery of services to residents.  Any option to transfer or dispose of commercial assets could lead to further budget pressures.

Debt position

A fundamental objective of local government reorganisation is to create a set of unitary authorities in Surrey that are financially sustainable and provide value for money. As part of this, government is keen for the authorities in Surrey to find solutions to the ongoing risk that this level of capital financing costs create and look to set up new authorities without an ongoing need for EFS.

The timescales for the final submission to government have not allowed sufficient time to cover off the detailed analysis required for any consideration of formulated proposals to address the current and future debt position.

It has been agreed that a principle should be that, aside from Woking Borough Council, all councils have set balanced budgets for 2025/26, including budgeted financing costs and relevant commercial income. 

Whilst there is a need for further discussions with government post this submission on options around managing this level of debt in Surrey, Surrey Leaders continue their position as outlined in correspondence with the minister, with a focused requirement for the writing off of the ‘stranded’ debt identified above in relation to Woking Borough Council as part of the government’s considerations within the forthcoming Spending Review.

Without this, any unitary created as part of the LGR process that has Woking Borough Council within its boundaries, and that inherits its current debt position, will not be financially-viable, and would require ongoing EFS from government.

We would welcome further discussions with government for dealing with the debt that enables successful unitary government in Surrey. In the meantime, we would ask government to look at the current form of any ongoing EFS, ensuring that the level of stranded debt is not increased in Woking or any successor authority.  Equally, existing and future authorities should be offered an incentive through permanent Public Works Loan Board (PWLB) discounts where authorities choose to sell commercial assets to repay PWLB debt early as part of prudently managing debt and liability profiles.

While the business case has identified efficiencies that can be delivered through local government reorganisation, these will be primarily needed to support financial sustainability, given the rising demand and delivery of vital services to residents and communities in Surrey, as well as to mitigate the anticipated impact on funding from the government’s fair funding review.