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_Attachment18_Michael Quinn s Credit Crunch Executive Report.doc




                            DATE: 9 DECEMBER 2008


1.   The purpose of this report is to set out At its meeting of 11th September 2008 CMT
     considered a report on the implications of the economic downturn for Middlesbrough
     and to highlight the policy responses and measures being developed to mitigate the
     effects of the economic downturn. . After considering this report CMT considered it
     important to broaden its scope to cover the economic environment and wider
     implications for Middlesbrough.

2.   The report, therefore, considers the following:

     a) the wider economic context;
     b) the implications for Middlesbrough; and,
     c) what actions the Council can take in response to the current economic climate.


     Global financial crisis

3.   Any consideration of the current economic environment will naturally focus on the
     global financial crisis, the origins of which, in the American sub-prime mortgage
     market, are well documented. Record numbers of defaults on high-risk financial
     products resulted in the collapse of major financial institutions around the world.
     What was originally an economic downturn (the situation created when banks

      hugely reduced their lending to each other because they were uncertain about how
      much money they had) quickly evolved into global financial crisis.

4.    Changing attitudes to borrowing and lending have restrained global economic
      activity and growth. In recent months the global financial markets have been in
      turmoil, and conditions remain volatile, despite increasingly co-ordinated
      international government intervention. This activity, on an unprecedented scale,
      has been designed to prevent a complete collapse of the global financial system
      through an injection of capital and guarantees to encourage banks to begin lending
      to each other, business and households. These measures have also been
      combined with an internationally orchestrated interest rate cut by central banks,
      including, for the first time, China. The long-term effect of these interventions on
      investor confidence, and international stock markets will take time to register.

5.    These unprecedented events have combined with a set of unique economic
      circumstances, set against a backdrop of a gradual long-term adjustment in the
      world economy in favour of emerging markets like China, India, Russia and Brazil.
      In particular, the last year has witnessed record levels in the price of oil, fuel and
      food costs. Increasing commodities prices have also had a major global economic
      impact. Whilst these prices have stabilised and even begun to fall (in the case of oil
      quite dramatically), and some analysts predict oil, wheat and raw materials prices
      will continue to fall, it will take some time for this to filter into the real economy i.e.
      those things which directly affect human welfare, like employment, mortgages,
      consumer credit, pensions, household energy and food bills, etc.

      The UK economic outlook

6.    The UK is now universally accepted to be on the brink ofin recession, with the
      economy shrinking for the first time since 1992 in the period July to September,
      from a position of zero growth in the preceding quarter. . The International
      Monetary Fund recently reduced its UK growth forecast for next year from 1.7% to -
      0.1%. The Confederation of British Industry has also reported that confidence
      amongst British manufacturers has fallen to its lowest point since 1980, and has
      predicted a rise in unemployment by almost half a million to 2.12 million by the end
      of 2009. In short, the UK economy is shrinking, manufacturing output is falling,
      unemployment growing, consumer spending reducing, and the housing market
      collapsingin the midst of a sharp correction.1 The Bank of England’s primary
      concern has now shifted from inflation to a sharp and prolonged slowdown in
      domestic demand, and further interest rate reductions are anticipated with many
      economists forecasting a drop to less than 2.5% during 2009. Indeed the
      Government and the Bank of England have highlighted that the UK could enter a
      period of deflation which would have seriously adverse consequences.

      Pre Budget Report 2008

1Recession is most commonly defined as two quarters in a row of economic contraction, or negative
growth. It is possible to have two quarters of negative growth and another couple of quarters of decent
growth - so the economy actually grows year on year, despite going through a technical recession (BBC
News website)

7.       On 24th November 2008, the Chancellor of the Exchequer, Alistair Darling
         presented the Pre Budget Report. The Chancellor announced that the Government
         anticipates that the economy will start to recover in 2010 and that public sector
         spending will be maintained throughout the recession. The principal economic
         headlines are as follows:

         a) growth is forecast to be negative in 2009. From the second half of 2009, with
            support from fiscal policy stimulus, low interest rates and lower commodity
            prices, the economy is forecast to begin to recover, with growth pricking up
            further in 2010 and 2011;
         b) £3 billion of capital spending to be brought forward from 2010 to be spent on
            roads, schools and social housing; and,
         c) three month grace period for failing mortgage payers.

         Business conditions

8.       The Bank of England Agents’ Summary of Business Conditions (September 2008)2
         highlighted the following:

         a) consumption growth eased reflecting weaker retail sales and consumer services;
         b) investment intentions declined sharply;
         c) the cost of finance rose and availability diminished;
         d) retailers and distributors reported significant, unanticipated stockbuilding of a
            variety of consumer durables, especially new and used cars, furniture and TVs;
         e) demand for exports weakened slightly but was still relatively strong;
         f)   growth in domestically orientated manufacturing fell and there was further deceleration
              in construction and services output;
         g) labour demand softened and recruitment difficulties eased;
         h) capacity pressures (such as workforce and retail space) continued to fall;
         i)   growth in total labour costs remained well contained;
         j)   annual input price inflation and output price inflation remained elevated3; and,
         k) annual consumer price inflation was steady.

         Mortgage market, house prices and house building

9.       The Bank of England Agents’ report also identified continued deceleration in housing
         demand. It is now more difficult for mortgage lenders to access finance on the
         wholesale money markets. As a result, consumers have struggled to finance house

2  This publication is a summary of monthly reports compiled by the Bank of England's Agents, following
discussions with around 700 businesses. It provides information on the state of business conditions, from
firms across all sectors of the economy. The report does not represent the Bank's own views, nor does it
represent the views of any particular firm or region.
3   Input prices (materials and fuel manufacturers buy), Output prices (what manufacurer’s sell).

     purchases, which has stifled demand. This has resulted in a major downward trend
     in house prices across the UK.

10. Falling house prices and a major reduction in the volume of house sales have
    significantly impacted on new house building rates. Completion rates have dropped
    considerably this year. Developers have postponed building work on new sites,
    announced major job cuts, and witnessed plummeting share values. The changing
    market is forcing all investors to make more careful decisions and they have
    become increasingly risk-averse. Whilst the October 2008recent interest rate
    reduction (from 54.5% to 4.53%) is considered a positive move for the market
    economy as a whole, it will only be effective in terms of the housing market if
    lenders pass this reduction on to customers. For this to happen banks will need to
    reduce the rates at which they lend to each other, which is likely to happen only
    when confidence returns to the financial markets.

     Government Spending

11. Initially, commentators thought that the impact of the Government’s £500 billion
    financial system rescue package would result in spending reductions elsewhere,
    governed by the success, or otherwise, of the rescue package. However, the
    Government has proposed a substantial and sustained increase in public spending
    to offset the contraction in the private sector. Exactly which public sector capital
    projects will be targeted, and how long such an approach can be sustained in a
    deep recession, with increased public borrowing, falling tax income and increased
    spending on benefits and tax credits, remains to be seen. A number of
    commentators have suggested that expenditure will be targeted towards major
    national infrastructure projects. Others have suggested that the 2009 spending
    review will herald a squeeze on public expenditure for years ahead as the
    Government attempts to rebalance the economy.


The following paragraphs consider the implications of the current economic environment
     for Middlesbrough. The analysis is based on the observations of officers across the
     various Council service areas. Whilst there is some cross-over between the various
     Council service areas, for convenience, the issues are considered under the
     following headings:

     a) the town’s physical and economic regeneration;
     b) social, educational and environmental issues; and,
     c) resources issues.


     Sustaining house building rates

13. Middlesbrough needs to sustain recent improvements in housebuilding rates to
    retain and attract population. The town’s reliance on brownfield development puts it
    at a distinct disadvantage as indications are that if developers are to bring forward
    new schemes at all they will be aimed at the middle to upper-end of the market.
    Additionally, developers have become much more risk averse and greenfield and
    suburban sites are likely to continue to prove more attractive. Middlesbrough’s
    inability to bring forward more attractive development opportunities during the 1990s
    resulted in its build rates plummeting in comparison to those of its Tees Valley
    neighbours. It also took Middlesbrough longer to recover from the slump of the
    early 1990s, as the development industry had built up its commitments in easier to
    develop, less risky markets. All this had a major impact on out migration as
    Middlesbrough’s neighbours were better placed to respond to demand from moving
    households once the economic climate improved.

14. Recent canvassing of developers reveals that they believe the situation in
    Middlesbrough to be as challenging as the rest of the UK. Most developers intend
    to trade through the downturn and continue to build out current sites through
    phased developments. The indications are that programmes will be altered to reflect
    market conditions. There remains, however, strong long term interest from
    developers in terms of future site availability, in anticipation of a recovery in the
    housing market. In addition the preparation of development briefs could help to
    promote and facilitate sites allocated in the Development Plan Document.

     Projected Housing Completions 2008/09

15. A housing trajectory prepared for 1st April 2008, had projected that there was
    potential for approximately 580 gross dwellings to be completed in 2008/09. Since
    April, the full impact of the economic downturn has become apparent. This has had
    a major impact on housing delivery. In the first third of the financial year (April to
    July 2008) only 21 dwellings were completed. Recent data on house building starts
    and completions across the Tees Valley suggests that the economic downturn is
    having a disproportionate impact on the town and it is now falling behind some of its
    sub-regional neighbours. Given this it seems highly unlikely that the Local Area
    Agreement target in respect of net additional homes provided (National Indicator
    154) will be achieved in the period 2008/09 and possibly beyond that. This also has
    implications in relation to the Council’s Housing and Planning Delivery Grant as
    completions fall below anticipated levels.

     Bringing forward key Council-owned development sites

16. By bringing forward attractive development opportunities the Council would send a
    strong positive signal and help maintain investor confidence in the town. Cutting the
    supply of land could damage the prospects of a strong return when the market
    improves. On the other hand, there are clearly risks in marketing in the current
    economic climate and it may be prudent to await an upturn in the economy in order
    to achieve a larger capital receipt. A further option on larger sites is to seek to
    structure the deal on the sale of land that allows overage for when the market

     Planning services fee income

17. The Council’s Planning and Building Control services are heavily dependent upon
    fee income generated from planning applications (both residential and commercial)
    to sustain service delivery. There is an emerging downturn in some types of
    applications at present, particularly major schemes. However, planning fee income
    for 2008/09 is projected to meet targets. The Planning service introduced a charge
    for pre planning application negotiations in June 2008. Developers would appear to
    be much more circumspect about undertaking speculative discussions on schemes
    at present and it is likely that there will be an impact on budgets, which will need to
    be monitored.

      Planning obligations and developer contributions

18. Linked to the slow down in the housing market, as described earlier in the report,
    the impact of reduced house building will be a reduction in investment in affordable
    housing, transport, education and highway infrastructure through developers’
    planning contributions (section 106 agreements). Environment Service activity in
    relation to section 38 housing infrastructure supervision will also be affected.4
    Additionally, following the Peer Review of the Planning Service in Summer 2007 it
    was proposed to develop a comprehensive approach to generating contributions
    from developments through planning obligations. However, in response to the
    economic downturn developers have been placing local authorities under pressure
    to drop requirements for such obligations to assist in making developments viable.
    In the current climate it is not considered sensible to start the statutory process
    required to introduce such obligations as this would send out negative signals about
    Middlesbrough’s approach to dealing with the adverse trading conditions the
    development industry faces.

      Tees Valley Credit Crunch Task Force

19. The Tees Valley local authorities and RSLs have set up a Credit Crunch Task Force
    with O-NE and the Homes and Communities Agency to assess the implications of
    the economic downturn for the sub-region and to develop a policy response. The
    main activities of the group to date have been:

      a) to ascertain housing starts, completions and clearances in order to fully get up
         to speed with what is happening on the ground;
      b) to identify the sites most at risk as a result of the credit crunch; and,
      c) to develop ideas to maintain regeneration and planning objectives for each
         individual site during the downturn.

20. The policy response focuses on developing four particular measures:

4 Section 38 agreement – a common way of creating new highways by agreement between developers and
the local Highway Authority under section 38 of the Highways Act 1980 – theses agreements are most
often made with housing developers, who agree to build the roads to standards laid down by the LHA. In
return the Council agrees to adopt the roads and to maintain them thereafter as public highways.

        a) establishing an RSL consortium (which has met) to consider partnership
           working with housebuilders to ensure that regeneration sites are not
        b) the development of a Flexible Tenure product to offer a staircase from social
           rent to ownership in order to assist those who cannot buy now (because of
           mortgage availability) to occupy a new house on a regeneration site and
           gradually buy into the house as economic conditions improve;
        c) to establish the Tees Valley sub-regional eligibility criteria for the Government’s
           new Mortgage Rescue Scheme; and,
        d) to prepare a draft report to Homes and Communities Agency setting out the
           Tees Valley response to the economic downturn.

        Tees Valley Growth Point

21. The Tees Valley has been chosen by the Government as a potential second round
    Growth Point and has now submitted a programme of development detailing the city
    region's plans and ambitions for growth, including a trajectory for housing delivery
    and the infrastructure needed to achieve it. The Growth Point may provide some
    significant policy challenges to meet demanding Government targets on new house
    building. Pressure is likely to arise to support sites in more prosperous locations
    which will be attractive to the development industry. This process needs to be
    carefully managed so that it does not have a negative impact on regeneration sites,
    such as Middlehaven and Acklam Green.

        Social Housing Sector/affordable housing provision

22. The economic downturn may result in increased demand for social renting as it
    becomes increasingly difficult to access home ownership. The Housing Corporation
    believes that the sector is well placed to weather the current downturn. However,
    housing associations in Middlesbrough are finding it increasingly challenging where
    schemes are cross-subsidised by income from sales, or form part of larger private
    sector development which in better times would be more easily financed through

23. On the other hand, the current situation also presents an opportunity to meet the
    town’s need for additional affordable housing, whilst at the same time assisting the
    private sector and supporting the housing market. In addition to a one-year stamp
    duty holiday5 the Government has recently announced a £1 billion package to:

        a) help first time buyers get onto the housing ladder;
        b) help homeowners in difficulty; and,
        c) support the house-building industry.

24. Opportunities on sites in Middlesbrough are currently being considered with private
    sector and housing association partners and form part of the response being
    prepared by the Tees Valley Economic Downturn Task Force. A new national

5   From 3 September 2008 properties sold for under £175,000 will be exempt.

     clearing house has also been set up where house builders can approach the
     Housing Corporation with robust proposals to sell their unsold stock for affordable

25. However, there is a balance to strike in respect of not being drawn into a situation
    whereby the fundamental characteristics of new developments change from being
    predominantly owner occupation. The town’s housing stock is already significantly
    skewed to high levels of social housing and low value private dwellings. It will,
    therefore, be important that any increase in social housing is not to the detriment of
    the overall ambition for a site. This will need to be monitored and addressed on a
    site by site basis.

     Private Rented Sector

26. The current economic climate may result in increased demand for private renting,
    as it becomes increasingly difficult to access home ownership. Well-established
    landlords may see rents increase, but credit restrictions will make it more difficult for
    new landlords to enter the market. Smaller investors may be more exposed if rents
    fail to keep up with the rising costs.

27. As individual households and private landlords are forced to make difficult
    budgetary decisions it is possible that one outcome will be reduced investment in
    private sector residential property, which may result in increased enforcement
    activity by the Environment Service. As individuals become less able to spend
    money on precautionary and preventative measures themselves there may also be
    an increased demand for assistance through Decent Homes Grants, for example.

     Housing Market Renewal

28. HMR is long-term activity and it is important that projects are not derailed by short-
    term challenging market conditions. It may well be that the market stabilises
    sufficiently in the short-term and land values begin to increase enabling investment
    required to deliver projects. There might also be opportunities as Government seeks
    to support the market and to bolster new build targets.

     Quality of development

29. Even in times of growth and prosperity in the property market, there is a constant
    need for the Council’s planning service to work hard to ensure that the quality and
    standards of development are suitable and meet aspirations. In the current climate
    developers are clearly going to seek to increase revenue wherever possible, usually
    by increasing density on sites, or by sacrificing quality to drive down costs. Clearly
    the Council needs to balance pragmatism with the need not to be drawn into
    accepting poor quality schemes.

     Commercial property market

30. Falls in consumer spending will hit the retail and leisure sectors. It is anticipated
    that the service sector, in particular business and finance sectors, will be hit hard by
    the current slow down. 6 This appears to be having a negative impact on a number

        of retail-based regeneration initiatives across the UK with lead developers pulling
        out of deals as a result of the combined effect of difficulties in raising capital finance,
        lower than projected rental values and waning interest from retail operators. The
        general view of the commercial property industry appears to be that the existing
        pipeline of projects under construction are generally unaffected but for the next 2 to
        3 years only projects in good locations with a pre-let and phased over a longer
        period will take place.

31. As mentioned, the retail sector is particularly vulnerable to the effects of an
    economic downturn. This situation is being reflected in Middlesbrough and can be
    summarised as follows:

        a) higher value retailers are bearing up as higher income groups continue to
           spend; and,
        b) value retailers are benefiting from the current market conditions, but at the
           expense of the middle market as mortgage, energy and food bills combine to
           restrict disposable income.

32. The Town Centre is, however, benefiting from the recent opening of Middlesbrough
    College, which appears to be softening the blow for some retailers, as the
    disposable income of young people remains largely unaffected by higher household
    running costs. Nonetheless, the crucial Christmas trading period is extremely
    challenging for retailers.

33. The current economic climate has implications for flagship regeneration schemes,
    such as Middlehaven and Cannon Park. Middlehaven has already been the subject
    of a development review which considered current economic and property market
    conditions affecting the delivery of key elements of the masterplan. Tees Valley
    Regeneration and lead developer, Bio-Regional Quintain (BRQ), have expressed
    confidence in Middlehaven. BRQ has confirmed strong and ongoing support and a
    continued determination to deliver a successful and high profile scheme. The first
    buildings will not be complete until 18 months from now, by which time the
    economic landscape might be different. BRQ already has significant public sector
    financial support in place for the development, with English Partnerships providing
    support for the residential elements through the First Time Buyers Initiative which
    will help maintain momentum and tenure mix. BRQ has also had discussions with
    the Fabrick Group about the possibility of it purchasing units for low cost home
    ownership and rent. However, as already mentioned, it will be important to ensure
    that short-term fixes do not result in a damaging longer-term divergence from the
    Council’s desired tenure mix.

        Business Development

35.      Feedback from internal services and external partners is indicating that the
         majority of companies within Middlesbrough are reporting business as usual and
         are not yet seeing any major signs of a slowdown in the economy, although
         increasing numbers of redundancies are beginnng to emerge. The Small Business
         Federation is reporting a similar position from its membership. Business Link has

6   GVA Lamb & Edge Middlehaven Development Review 2008

        confirmed that it is not seeing any significant increase in companies experiencing
        difficulties as a result of the current economic climate. Those least affected seem
        to be the larger companies and those related to the offshore sector, which is
        experiencing strong growth.

36.     Whilst global trading conditions are not yet having a significant effect on the
        viability of local companies, there does seem to have been an impact on potential
        growth and recruitment plans. Whilst Tees Valley Regeneration is still reporting
        strong demand for expansion related funding such as SFIE 7, this is primarily from
        companies operating in the offshore sector. Anecdotal evidence from other
        companies indicates a greater aversion to risk and a reluctance to commit to
        additional capital investment at the present time.


37.     As already noted, although the sustainability of local companies is largely
        unaffected, there has been a marked impact upon levels of employment within
        Middlesbrough. Over the past three months the unemployment rate has risen from
        4.8% in June to 5.4% in October. Crucially, the number of vacancies has fallen
        from 1,135 in June to 926 in October (325 less than October 2007). This trend will
        have a serious impact upon the ability of the Council and other partners to address
        employability issues.


38.     It may become increasingly difficult for the Council and other
        organisations/companies to recruit, particularly at more senior levels, as people
        find it more difficult to sell their homes and generally become more risk-averse.

39.     Conversely, perceived job security in the public sector might entice people from
        less secure sectors.


      Care services purchased from the independent sector

40.     Social Care purchases over £20 million worth of social care services from the
        independent sector. It generally pays an annual inflationary uplift (of around 3%).
        Independent sector providers are already experiencing increased costs. The
        biggest concern is, therefore, in relation to inflation rates, which in September
        reached 5.2%. If inflation continues to rise, and providers’ additional costs are not
        absorbed by Social Care, there is a very real possibility that some providers will
        simply go out of business. The consequence will be an extremely fragile social
        care market and, potentially, a situation where the market cannot meet levels of
        demand. On a more positive note, economic analysts forecast inflation to fall
        significantly over the next year or so, and indeed the rate had dropped to 4.2% in

7 Selective Finance for Investment in England (SFIE) is the Department for Business, Enterprise and Regulatory

Reform's capital investment grant scheme aimed at encouraging businesses to invest in land and buildings, plant and
machinery to support expansion and modernisation in England’s more deprived areas.

      Community cohesion

41.    Historically, severe and prolonged recession in the UK has coincided with a rise in
       support for extreme political organisations, particularly those on the far right. The
       concern is that some far right political organisations have gained support in what
       have been relatively benign economic conditions over the last decade. In more
       challenging economic times the danger is that they will exploit people’s fears and
       concerns thus damaging community cohesion. The Council, therefore will
       continue to promote harmony within communities to mitigate any potential
       heightened tensions during the downturn.

      Child poverty

42.    Middlesbrough already has high levels of child poverty, the second highest
       nationally. The Children and Young People’s Trust is conducting a review in this
       area and estimates there are 13,000 children and young people living in poverty in
       the town. The economic downturn is likely to exacerbate the position and increase
       the pressure on social care services. More generally, the link between poverty
       and social problems is well documented. The Council and the voluntary sector
       may see a rise in demand for social care services if the economy undergoes a
       period of prolonged recession.

       Free school meals

43.    If unemployment increases, or households earnings are reduced, it is likely that
       demand for this service will increase at a time when food prices are rising and
       putting greater pressure on budgets.


44. There is already clear evidence, nationally, that falling house prices, negative equity
    and increases in the cost of living are impacting on homeowners’ ability to maintain
    mortgage payments. Repossessions and the numbers of owners in negative equity
    are increasing. Homelessness as a result of rent arrears and illegal evictions in the
    private rented sector may also increase. This may result in an increased demand on
    homelessness and advice services in Middlesbrough. It will be important, therefore,
    for the Council to work with housing association partners to monitor and seek
    mitigation of any rise in homelessness applications.

45. The Government has recently launched a package including measures to ensure
    financial advice and support is available. It will also introduce a new Mortgage
    Rescue Scheme to support vulnerable homeowners facing repossession by helping
    them to remain in their home by converting the tenure of the existing home via a
    registered social landlord. The national Support for Mortgage Interest scheme has
    also been reformed to increase help for some of the most vulnerable homeowners.

      Fuel poverty

46. The fact that September’s annual inflation rate is mainly a result of increases in gas
    and electricity charges highlights the importance of effective implementation of the
    town’s Affordable Warmth Strategy and maximising opportunities resulting from the
    Government’s increased expenditure on energy efficiency measures for older and
    vulnerable people.

     Building Schools for the Future (BSF)/Primary Strategy for Change

47. There are major investment programmes for schools, which may benefit the local
    economy. This includes BSF for secondary schools with investment to begin in
    2009. A Government decision is awaited on investment for primary schools.

     Effects on individual households

48. As household budgets are under increasing pressure there is likely to be an
    increase in clients seeking assistance from Environment’s Money Advice service
    and similar agencies across the town. There may be continued and increasing
    interest in the role the Council could play in the provision of alternative means of
    saving/obtaining affordable credit through Credit Unions, as access is increasingly
    denied to those on low incomes who may otherwise be lured by disreputable,
    unregulated and expensive alternatives. There could be less discretionary spend,
    for example in the Council’s leisure centres, but then people might pay and play
    more, and forego private club membership. The town’s libraries and museums may
    also provide an outlet for people affected by the credit squeeze looking for more
    economic leisure-time pursuits.

     Staff welfare

49. From a staffing perspective, Council employees are not immune to the current
    challenges to household finances. It is probable that there will be some increase in
    the numbers of staff suffering stress or undergoing money problems because of the
    economic downturn. (See also paragraphs 38 and 39 on recruitment issues). In
    the wider employment market Job Centre Plus has expressed concern that the
    reduction in vacancies will have a knock-on impact on Incapacity Benefit claim
    levels as existing staff are put under increasing pressure to the detriment of their


50. As people increasingly make decisions on economic grounds, reduced use of
    vehicles will result in reduced emission of greenhouse gases, but there would also
    be negative impact in terms of income from car parking. There may also be more
    attempts at parking evasion, and more illegal parking on highways to avoid parking
    fees. From a more direct service perspective increased fuel costs for the
    Environment Service have resulted in significant budgetary pressures.


     Council Investment Strategy

51. Following Government guidelines, investment of Council and Teesside Pension
    Fund balances to date has been in a number of four-star banks with amounts, and
    risk, spread between them, with tactical movement of funds based upon market
    intelligence. The Council has invested wisely, and has not been affected by bank
    collapses, such as the recent damaging Icelandic episode, which affected a number
    of institutional and personal investors. It is, however, essential that the Council
    does everything in its powers to ensure the continuing credit-worthiness of the
    banking institutions in which it invests public funds as any losses would ultimately
    be borne by Council Tax payers.

52. Obviously, lower risk investment usually delivers a lower return with consequences
    for the revenue budget. The potential income losses mean that it is simply not
    feasible always to invest at the lowest rates of return. The most secure investment,
    with the Government, brings the lowest return. Whilst recent intervention by the
    Government to stabilise the banking system should allay concerns, the most
    appropriate policy remains the packaging and spreading of risks. Whilst interest
    losses from the larger pensions fund would be greater, as this is a longer term
    investment there is more time to recover as markets correct themselves. The
    Council would feel losses on shorter term investments more acutely.

     Service costs and income

53. The Council’s medium term financial plan has a built-in inflation factor of 4.0%. The
    fact that annual inflation is now 4.2% (October 2008), coupled with potential
    increases in running costs and demand for services across the Council, as identified
    in this report, has significant financial implications. Having said that, economic
    analysts seem to be in general agreement that inflation will continue to fall and,
    perhaps, dip below the Government’s target before the end of 2009, and may even
    reach very low single figures. The Government has also raised the possibility that
    deflation may occur. In terms of income from Council Tax, whilst the implications
    are not great, because numbers are likely to be relatively small, there is,
    nevertheless, a concern that Council Tax may be the first bill not paid when
    individuals get into financial difficulty.

     Access to funding

54. As already mentioned, there may be an increased pressure on public spending,
    particularly given the massive intervention to stabilise the financial system.
    Although Government is looking to stave off the worst effects of recession through
    an increase in public spending, as already stated, some analysts predict that the
    Government’s 2009 spending review will herald a squeeze on public expenditure,
    referring to the challenges some sectors will face in defending their funding streams
    as the consequences of the banking crash hit public spending. There is already
    evidence that the Government’s recent initiatives are, in part, being financed by
    budget cuts elsewhere. For example, the £300 million Homebuy Direct scheme,
    which forms part of the £1 billion housing rescue package, will be made up of cuts
    from Regional Development Agency economic regeneration budgets (£34 million in
    the case of One Northeast). Whatever the outcome, there will remain a significant
    emphasis on private sector investment, particularly in relation to regeneration
    initiatives. Whilst high return, low risk schemes will always be funded, and the

     opposite is never the case, those schemes on the middle ground will be where the
     impact will be most acute. This new economic landscape will require the Council to
     revisit assumptions around scheme packaging and delivery phasing/timescales.

     Capital receipts

55. The economic downturn has already led to a review of forecast capital receipts from
    the sale of assets. The Council has agreed that it would be inappropriate to add to
    the planned list of potential capital realising assets, and lower returns have been
    budgeted for. It will be important, however, to ensure that the present list can
    support the Council’s capital programme.

56. Regeneration activity is predicated on, amongst other things, certain assumptions
    about the likely receipts from disposals of Council assets. The Council will need to
    take a view on whether to progress or delay disposal on a number of key sites and
    the knock-on effect on regeneration activity.

     Strategic site acquisition

57. Falling land prices may also create opportunities to purchase strategically important
    sites and it will be important for the Council to consider strategic site assembly
    opportunities in the current economic climate.

     Contractors’ pricing

58. There appears to be a view emerging that one of the major consequences of
    projects being put on hold because of the economic downturn has been the
    construction industry being put on the back foot. Up until very recently there has
    been very strong inflationary pressures on building contracts. However, the industry
    is now beginning to chase contracts and becoming much keener on pricing. The
    result should be a significant cooling in the contractor market which could further
    help the funding position across a number or regeneration schemes moving forward
    with, for example, more competitive bids for both public realm and buildings at

59. The current economic climate gives the Council some leverage in negotiations with
    contractors where contractors’ confidence in the Council’s ability to guarantee timely
    payment will be a very real incentive.


     National Performance Indicators, Multi and Local Area Agreements

60. There are a number of National Indicators, and, more specifically, some Multi and
    Local Area Agreement (MAA and LAA) targets where performance may be affected
    as a result of the issues raised in this report. However, whilst the LAA is currently
    being reviewed/refreshed, from the Government’s guidance perspective this

     process is about unfinished business rather than reopening negotiations. Targets
     can only be changed if approved by the Secretary of State.

61. Appendix 4 set out those indicators where the impact is most likely to be felt.
    Service areas will track the impact on performance (where base line evidence is
    available) and report this via the quarterly Performance Clinics.

     Risk management

62. The economic downturn was discussed in detail at the quarter one performance
    clinics, along with the need for a new strategic risk to be added to the Corporate
    Strategic Risk Register. Each service area was subsequently asked to consider the
    impact of the economic downturn on its activities and what actions can be taken in


63. The economic climate is obviously subject to rapid change at the moment, and it will
    be essential to keep a close watch on its on-going evolution. In particular, the
    implications for the major regeneration schemes need to be closely monitored.
    However, whilst an initial review reveals the range of problems and concerns
    outlined above, there is at present no reason to change the Council’s basic
    approach and strategy for the regeneration of the town. The underlying problems
    which the Regeneration Strategy addresses remain in place, and the strategy itself
    is fundamentally sound. The impact of current economic circumstances will
    certainly lengthen or postpone some (but by no means all) elements of the strategy.
    However, this is not a reason to fundamentally change the strategy itself. The
    Council will need to be ready to change details of implementation of schemes where
    this can be demonstrated to assist in maintaining the momentum of development
    without compromising fundamental Council objectives. This will be dealt with on a
    case by case basis, and referred to Executive where appropriate. Until and unless
    either government policy or economic fundamentals change dramatically, the
    present course should be maintained.


64. The following paragraphs set out actions the Council can take in response to the
    current economic climate. Obviously the Council cannot effect change in the wider
    economy, but it is far from being a casual observer and can seek to mitigate the
    impact on the town and prepare the ground so that Middlesbrough is poised to
    respond when the situation begins to improve. A number of specific actions are,
    therefore, proposed, these being:

     a) continue to work with strategic partners to identify what can be done to mitigate
        the impacts of the economic downturn;
     b) use existing service area mechanisms to look at the issues around the
        economic downturn and associated implications in terms of service delivery and
        project implementation, and take this into account accordingly, including

         monitoring arrangements, undertaking risk assessments and reporting through
         budget and performance clinics as appropriate;
    c) review and consider re-negotiation of MAA/LAA targets affected by the
       economic downturn, the effects of which could not be predicted when they were
    d) continue to contribute to The Tees Valley Economic downturn Task Force;
    e) work with Tees Valley Living to develop the Growth Point Initiative and seek to
       obtain resources to help pump prime development sites;
    f)   continue to work on master planning and major projects for key sites, so as to
         ensure the town is well placed to be able to remain competitive in the
         development market, particularly as the economic position improves, although
         each scheme needs to be subject to a economic risk assessment;
    g) be pragmatic in negotiations with developers and housing associations in
       respect of development schemes and proposals for changes in design, or the
       extension of affordable housing, but on the basis that there is no dilution of the
       overall ambition for a site / scheme;
    h) monitor planning fee income and take actions accordingly to ensure the
       planning and building control services work within set budgets;
    i)   defer proposals for the development of a standard approach to section 106 –
         Planning Obligations until the development market shows signs of recovery;
    j)   continue to work with housing association partners to monitor and seek
         mitigation of any rise in homelessness applications, including appropriate
         application of recent Government initiatives; and,
    k) continue regular promotion of support services for Council employees.

Author: Michael Quinn


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