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, 1% Local government, 27% Central government, 72% Note: Taken from LGF Statistics England No 19 2009, Chart K,1a 4 Net current expenditure by service 2007-08 Fire & rescue Other services 2% 4% Highways and transport 5% Cultural, environmental and planning Education 9% 37% Police 11% Housing (excluding Housing Revenue Account) Social services 15% 17% Note: Taken from LGF Statistics England No 19 2009, Chart K,1b 5 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 10% income) grants outside AEF 5% 9% Sales, fees and charges 7% Specific government grants inside AEF 29% Council tax 13% Council tax benefit grant Formula Grant - 2% Revenue Support Grant Capital (Grants & 2% Receipts) Formula Grant - 8% Formula Grant - Police Resdistributed NNDR Grant 12% 3% Note: Taken from LGF Statistics England No 19 2009, Chart K,1b Other Income includes external trading service revenue accounts & financing 7 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) 9 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 expenditure • Capital can only be used for capital expenditure • Local authorities can only borrow for capital expenditure 10 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 11 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 12 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 function). • Different method for Area Based grant. 13 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 14 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 delivered. • Recently (2006/07) funding for school was removed from general grant following concerns that some were not spending all their school budget on schools. 15 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 16 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 district 17 Council Tax capping • Government expects councils to manage their finances efficiently to avoid the need for excessive increases in council tax. • Capping was reintroduced in 2004 as average yearly increases in council tax had hit 12.9% ( compared to 3% average in 2009-10) • 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 UK • 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 grant • 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 20 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 21 Summary • 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.