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									Local Government Finance System in England

                  Nick Cooper
 Department of Communities and Local Government
                                  The importance of local Government

    •    Local choice is important - what is right for one area may
         not be right for another
    •    Local Government allows those choices to be made locally.

“The founding principle of local government is that citizens have the right to influence the
    decisions that affect their lives and their communities. Sometimes they may exercise this
    right through personalised services and sometimes by influencing local services - for
    example, by having a direct say over how their neighbourhood is policed. And sometimes it
    will be through lobbying their council. But a key way in which local citizens are able to
    exercise that right is their ability to elect a strong local council which can lead and shape
    their area.”

Communities Secretary, John Denham MP, October 2009
                     The importance of local government (2)

“Woe betide the local authority which cuts frontline services when it hasn't
made every possible efficiency savings. Local taxpayers should be vigilant if
they are asked to accept reduced services because their Council won't take
tough decisions to introduce shared services, sharing senior staff with other
local authorities, PCTs or other bidders, or through making the best use of
public buildings.

"The new Task Force I am creating today will identify where local authorities
can reduce their pay bill as a result of the radical changes Government has
announced to reduce Whitehall's red tape on councils, which will free them up
to put their local residents first and maintain high quality services where they
are most needed.“

Communities Secretary, John Denham, December 2009
                              Local Government Expenditure as a % of
                                               public sector 2007-08

                                                Public corporations,

                          Local government,

                                                                       Central government,

Note: Taken from LGF Statistics England No 19 2009, Chart K,1a
                            Net current expenditure by service 2007-08

                                              Fire & rescue      Other services
                                                   2%                 4%
               Highways and transport

                 Cultural, environmental
                      and planning                                                      Education
                            9%                                                            37%


                            Housing (excluding
                             Housing Revenue
                                Account)                              Social services
                                   15%                                     17%

Note: Taken from LGF Statistics England No 19 2009, Chart K,1b
                         Central and Local Government

• Central government and local government have
  shared responsibility in local outcomes
• this balance between and local and central reflected
  in local government finance system:
  • mix of local tax and central government grant,
  • mix of dedicated and specific grants and
      unfenced grants,
  • capital receipts which maybe retained and
      receipts which must be pooled.
                                      Local Authority Gross Income 2007-08

                                         Other Income
                 HRA (Rents & other                                            Specific government
                      income)                                                  grants outside AEF
                        5%                                                              9%

               Sales, fees and
                                                                                            Specific government
                                                                                             grants inside AEF
                Council tax

        Council tax benefit
              grant                                                                   Formula Grant -
               2%                                                                  Revenue Support Grant
                     Capital (Grants &                                                      2%
                                                                            Formula Grant -
                            8%      Formula Grant - Police
                                                                          Resdistributed NNDR

Note: Taken from LGF Statistics England No 19 2009, Chart K,1b
Other Income includes external trading service revenue accounts & financing
movements from K,1b chart
                                 The balance of funding

• Councils have control over council tax but not
  business rates or grant,
• Excluding specific and ring fenced revenue (such as
  charges for services), council tax accounts for about
  25% of revenue,
• Means that gearing ration is 4:1 but will vary from
  council to council
• Small Changes in spending can lead to large
  changes in council tax
• But, local councils are still able to make choices, and
• any system requires some equalisation
                                The Colour of Money

• Money in local government is either classed as
  revenue or capital:

    • Revenue – mainly on wages and cost of
      running services other than council
      housing (e.g. children and adult’s social
      care, or environment management)

    • Capital – acquisition of fixed assets (e.g.
      new school, or roads)

                                      The Golden Rule

“Over the economic cycle, the Government should
  only borrow to invest and not to fund current
  expenditure” so:

  • Revenue can be used for revenue or capital

  • Capital can only be used for capital expenditure

  • Local authorities can only borrow for capital

                     Local Authority Revenue Funding

Types of funding

• General Grants (Formula Grant and Area Based
  Grant) including Business Rates

• Specific Revenue Grants

• Council Tax

• Sales, fees, charges and other income

                        Categories of Revenue Grant Funding

Government revenue grant funding falls into three basic categories:

    •   Formula Grant (unfenced)
    •   Area Based Grant (unfenced)
    •   Specific Grants (partly ring-fenced)

When a Government Department is considering how to allocate a funding
  stream to councils it must:

•   first consider if it can be included in Formula Grant and then Area
    Based Grant

•   only if Formula Grant and Area Based Grant are not suitable can it be
    distributed as a specific grant,

•   Presumption is for unfenced grant

                                                             Unfenced Grant

•   Formula and Area Based Grant provides non-ringfenced general grant
    funding to councils for their core services. As a non-ringfenced grant it can
    be spent on any service area

•   £31.5bn in 2009-10 made up of 4 key elements:

    •   Revenue Support Grant (£4.5 bn) – general unringfenced revenue
    •   National Non Domestic Rates (£19.5 bn) – also known as Business Rates
    •   Police Grant (£4.3bn) – for police authorities only
    •   Area based grant (£3.2bn)

•   Distribution of most is based on the socio-economic and demographic
    characteristics of the authority, together with their ability to raise income via
    Council Tax. The same formulas are applied to all authorities that provide the
    same services.

•   The Floor – every authority is guaranteed to receive at least a minimum %
    increase year on year on a like for like basis (after adjusting for changes in

•   Different method for Area Based grant.

                                                             Specific Grants

•   Specific Grants are individual grant streams designed to deliver specific
    outcomes or outputs (e.g. Dedicated Schools Grant)

•   Partly ring-fenced and partly unfenced

•   They can be revenue (£41.6bn in 2009-10) or capital (£7.1bn in 2009-10)

•   Government recognises need for local flexibility. Ring-fenced specific grants
    are only provided only in exceptional circumstances such as:

    -   Existing policy commitments
    -   Where Ministers collectively consider that there is a recognised need to
        designate specified resources to specific purposes

-   The biggest ring-fenced specific grant is Dedicated Schools Grant - £29.8bn in
    2009-10 (compared to Formula Grant of £28.3bn). Beyond schools, have
    reduced ring-fenced grant

                                   Ring-fenced or general grants

•   General grants allow local council to make local decisions:
    • respond to specific needs in locality,
    • match services to local priorities

•   But, Government also recognises need designate specific resources
    to specific purposes. Balance between:

    -   providing freedoms and flexibility to local government, and
    -   concern ensure national policies and minimum standards are

•   Recently (2006/07) funding for school was removed from general
    grant following concerns that some were not spending all their school
    budget on schools.

                                             How are grants derived?

•   The Local Government Finance Settlement is the mechanism by
    which revenue grant funding to local authorities is distributed

•   Currently in the middle of the first ever three year settlement for local
    government covering 2008-09 to 2010-11

•   Three year settlements provide local authorities with certainty and
    stability in their funding, thus allowing them to plan for the delivery of
    better services at an affordable cost

•   Provisional settlement figures are announced in November/ December
    – and are subject to a six week consultation. Settlement finalised at
    the start of February via a debate in the House

•   Once the settlement is announced councils can then finalise their
    council tax bills

                                               Council Tax

• Property tax based on bands of capital value
• Important source of income for councils –
  particularly to fund local priorities not fully supported
  by central Government
• It is non-ringfenced revenue funding
• Whereas Business Rates are mandatory, councils
  can choose whether or not they charge Council Tax
  and (until capping was re-introduced) at what level
• All local authorities with the ability to charge council
  tax are precepting authorities, but there will be only
  one billing authority – in two tier area, usually the
                                            Council Tax capping

•   Government expects councils to manage their finances
    efficiently to avoid the need for excessive increases in council

•   Capping was reintroduced in 2004 as average yearly increases
    in council tax had hit 12.9% ( compared to 3% average in

•   Capping enables the Secretary of State to take action to limit
    the level of increase allowed per year on council tax – for 2009-
    10 it was set at a 5% increase in council tax.

•   The New Burdens Doctrine works alongside capping to keep
    pressures on Council Tax to a minimum.
                                                      Business Rates

•   Property tax on non-domestic premises (some exemptions)
•   Tax on occupier + occupation determines unit of taxation. Owners
    liable on empty properties
•   Based on annual rental value – currency of business property in
•   Supplemented by various relief schemes – small businesses, rural
    settlements, transitional relief – to maintain fairness and credibility
•   Regular revaluations by law – every 5 years
•   Tax rate controlled nationally + linked to inflation. Collected by
    local government but given to central Government to fund general
•   Some steps to give local government more access to business
    rate revenue:
         • Business Improvement Districts
         • Business Rate Supplements (e.g. to part fund
            infrastructure), and
         • Tax Increment Finance (under considering)
                          Sales, Fees, Charges and other income

Councils have the power to charge for the delivery of services

•   Where services are statutory the legislation relating to that service sets out
    their powers in relation to fees and charges – planning fees

•   May charge for discretionary services – must be limited to cost of delivery.
    E.g. leisure, catering, museums.

•   Income will be non-ringfenced revenue – but fees and charges should not be
    used as a revenue raising tool – cost recovery

•   Councils are investors in financial markets – they use the funding that passes
    through their accounts to earn additional income through interest. In 2008/09
    councils earned interest of around £1.8bn – around 2% of total income

•   Interest earned is non-ringfenced revenue

•   Reducing interest levels from the economic downturn are reported to be putting
    additional pressures on local authorities budgets

                                     Local Authority Capital Funding

•   Capital grants from central Government and/or other bodies

    e.g. Housing Market Renewal Fund

•   Capital receipts (selling an asset)

    •   housing (still includes some pooling to CLG)
    •   non housing (can be used for capital expenditure or to repay debt)

•   Revenue funding can be converted into capital
    •  Revenue generated from a scheme
    •  Council tax

•   Borrowing
    •   Supported borrowing – government pays revenue cost
    •   Prudential borrowing – councils can borrow provided that they can afford to
        service the debt from their own resources
    •   Councils can only borrow for capital expenditure, not revenue


•   Much depends on the balance between local and central government of:

        •   Responsibility, and
        •   Accountability.

•   England has a system of shared responsibility for delivering local outcomes –
    shared between central and local government. This balance is reflected in
    local government finance system.

•   Whether you have more or less controls – more or less autonomy for local
    government – depends on

    •   strength of local democracy,
    •   Strength of local accountability.
    •   Therefore degree to which central government can relinquish control.

•   And on how many public servants you have available to run the system.

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