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Local government finance . Background slide pack. May 2014. www.local.gov.uk. Local government Finance. Introduction Local government finance is frequently seen as complex. This may be because it covers councils of many sorts and a variety of different services and sources of funding.

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local government finance

Local government finance

Background slide pack

May 2014


local government finance1
Local government Finance


Local government finance is frequently seen as complex. This may be because it covers councils of many sorts and a variety of different services and sources of funding.

This background slide pack has been prepared to give members of the Commission a background briefing in the main local government finance issues. Each section contains an introduction and some key facts and figures – mostly in chart form.

It has been prepared from a local government perspective. It does not seek to describe the system from the point of view of, for example, users of services.

It is also descriptive rather than analytical. A further piece of work could be to show how particular outcomes are the result of given policy choices and to test what could be the outcome from other policy choices. An example of this is the government decision to incentivise councils keep council tax down, and the effect on council service quality.

Please contact lgfinance@local.gov.ukfor any additional clarification.

local government finance2
Local government finance


1) Local government spendingslide 4

2) Funding slide 11

3) Grantsslide 17

4) Business ratesslide 25

5) Council taxslide 47

6) Revenue spending powerslide 56

7) Incentivisation slide 60

8) Other sources of incomeslide 64

9) Roles of central and local governmentslide 69

10) Distribution and equalisationslide 77

11) Reserves slide 97

12) Housingslide 102

13) Capitalslide 108

14) Place Based Financeslide 112

15) Further informationslide 122

1 local government s pending
1) Local government spending

The first section concerns local government spending. We present the DCLG definition of spending (slide 5) and explain why it differs from the definition of “controllable expenditure” used for the LGA’s Future Funding Outlook work (slide 6). We then present the LGA’s spending outlook projections (slide 7) This is followed by slides on the main spending pressures (health and social care - slide 8, children’s social care – slide 9 and waste – slide 10)

local government spending
Local government spending

There are a variety of different definitions used for local government spending. This initial section shows how they are reconciled.

Net Current Expenditure - includes all local government services including police - £117bn budgeted to be spent in 2013-14.

Source: Local Government Revenue Expenditure and Financing; Budget 2013-14 England


from net current to controllable expenditure
From net current to ‘controllable’ expenditure
  • The LGA’s work excludes the following which are funded by ringfenced or other service specific grants
    • Schools - Education funded by the Dedicated Schools Grant (around £40bn)
    • Police – now provided through Police and Crime and Commissioners
    • Housing Benefit
  • In total net controllable expenditure is £51.1 bn in 2013-14
summary net controllable expenditure
Summary net controllable expenditure

Projected figures for 2019/20 are taken from the Local Government Association’s Future Funding Outlook model, and are based on the need and ability to cut expenditure to balance to projected funding reductions.

The following slides explain how the main spending pressures have been modelled.

spending pressures health and adult social care
Spending pressures – Health and Adult Social care
  • Demographic growth. Service usage is projected based on the change in either over 65 (for older people services) or working age (for other services) population in each local authority area.
  • Unavoidable cost rises. Health and social care unit costs remain constant in real terms to 2015 and then rise by 2% per year in real terms (but non-labour non-capital costs remain constant in real terms). This follows the approach taken by the PSSRU when modelling future social care costs for the Dilnot report.

Overall this adds up to unavoidable growth in cash terms in required spending on Adult social care over 6 year period shown on slide 7.

The calculation takes account of the funding provided by the Better Care Fund from 2015/16, but not any additional burdens arising from the Care Bill (the Dilnot reforms) as these have not yet been accurately estimated.

spending pressures children s social care
Spending pressures – children’s social care
  • Unavoidable cost rises. Health and social care unit costs remain constant in real terms to 2015 and then rise by 2% per year in real terms (but non-labour non-capital costs remain constant in real terms). This is intended to reflect key unquantifiable cost drivers such as changes to the length of time spent in care, increase in referrals, use of agency staff, complexity of care needs, etc.
  • Service usage is projected based on the change in child population in each local authority area.
  • The Children and Family Court Advisory and Support Service also report that there has been a sustained increase in the number of councils applying to the courts for Care Order since the Baby P case, but the numbers are still too volatile for a trend to be predicted and the average costs for councils leading up to a court application have not been accurately determined.

Overall this adds up to unavoidable growth in cash terms in required spending on Children social care over 6 year period shown on slide 7.

spending pressures waste
Spending pressures - Waste
  • Cost of landfill: Based on DEFRA modelling that overall waste arisings will decrease and the amount of waste landfilled will decrease. Landfill tax will remain at £80 per tonne from 2015/16 and landfill gate fees will increase with inflation only.
  • Cost of Energy From Waste: Based on DEFRA modelling that overall waste arisings will decrease, but the proportion of waste arisings sent as EFW will increase. EFW gate fees will increase with inflation only.
  • Cost of composting gate fees (organics): Based on DEFRA modelling that overall waste arisings will decrease and the proportion of waste arisings composted will remain constant. Composting gate fees will increase with inflation only.

Overall, adds up to unavoidable cost pressures to maintain / slightly increase spending on waste over 6 year period as shown on slide 7.

2 funding
2) Funding

The second section looks at the main sources of funding. Slide 12 presents an overview of the main sources of funding; these are explained more fully in later sections of the pack. Again we present the DCLG definition (slide 13) and show how controllable expenditure differs (slide 14). We then show the path of future funding (slide 15). Slide 16 shows the squeeze on service expenditure which results from these projections.

overview where does funding come from
Overview – where does funding come from?
  • Government grants
    • Ringfenced grants inside Aggregate External Finance (e.g. Dedicated Schools Grant, public health)
    • Revenue Support Grant
    • Other unringfenced grants
    • Grants for hypothecated spending outside Aggregate External Finance (e.g. Housing Benefit subsidy)
  • Business rates revenue
  • Council tax revenue
  • Fees and charges (£11.3bn in 2012/13)
  • Income from other organisations in shared service arrangements etc
  • Investment income
local government funding
Local government funding

Net Revenue Expenditure is a narrower definition. It does not include grants outside AEF (mainly housing benefit) but it does include capital financing costs and capital expenditure funded from revenue.

In 2013-14 budget:

Revenue Expenditure (£102bn) = Net Current Expenditure (£117bn) less grants outside AEF (£22bn) plus capital financing costs and capital expenditure funded from revenue (£8bn) less smaller adjustments (net £1bn)

  • Source: Local Government Revenue Expenditure and Financing; Budget 2013-14 England
  • https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/225884/RA_Budget_2013-14_Statistical_Release_-_FINAL__2_.pdf
net controllable expenditure in councils 2013 14 51 billion
Net controllable expenditure in councils 2013/14 = £51 billion
  • Net revenue expenditure of local government is £102 billion (see slide 13)
  • Subtract grants inside AEF £44 billion (most are ringfenced eg Dedicated Schools Grant, Housing Benefit subsidy)
  • Add back new homes bonus, public health and other non-ringfenced grants £6.7 billion
  • Subtract all “other” authorities: police and fire, parks, waste and transport authorities £14 billion
  • Add investment income £0.4 billion
  • Total controllable expenditure in councils 2013/14 = £51 billion
the path of future funding

Total funding £50.8 billion in 2010/11 (the last year before the austerity measures of CSR2010)

  • Total funding projected to fall to £43.4 billion by 2019/20
  • This includes £3.1 billion of Public Health funding which carries with it a new responsibility
  • All figures are in cash terms

PH funding not new money as it comes with a new burden

The path of future funding

Negative reserves figures when councils underspend and contribute to reserves

the squeeze on service expenditure
The squeeze on service expenditure
  • When we account for inflation and demographic pressures in waste management and social care, the money available for all other services (blue) shrinks from £26.6 bn to £15.1 bn (and £3.1 bn of this is for new Public Health responsibilities)
3 grants
3) Grants

This section presents an overview of the main grants to local government. Slide 18 shows that including schools funding most grant income is ringfenced – this is a result of the decision to ringfence schools funding which came into effect in 2006-07. Slide 19 presents the main specific grants in 2013-14, both those within and without ‘aggregate external finance’.

Most non-hypothecated grant is bound up with both the business rates and council tax systems. Up to 2012-13 redistributed business rates and revenue support grant were known as formula grant. Slide 20 shows the composition of formula grant up to 2012-13; following schools ringfencing, the majority of this income came from redistributed business rates.

Slide 21 explains the different definitions of Revenue Support Grant.

Following the introduction of business rates retention, formula grant, along with a number of other income streams, was incorporated into a new settlement funding assessment (known as start-up funding assessment in 2013-14). Slide 22 shows the split in how this is financed between locally retained business rates and revenue support grant and reflects the fall in revenue support grant shown in slide 15. Finally slides 23 and 24 contain more material on hypothecated and specific grants.

The business rates system is covered in section 4 below.

grants to local government within aggregate external finance aef most grants are ringfenced
Grants to local government within Aggregate External Finance (AEF) - most grants are ringfenced

Settlement funding in 2013-14 includes retained business rates and revenue support grant. Before then it consists of formula grant and revenue support grant. The 2013-14 figures are not comparable with previous years – they include transfers including council tax support and public health

specific grants in 2013 14
Specific grants in 2013-14
  • Source: Local Government Revenue Expenditure and Financing; Budget 2013-14 England
  • https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/225884/RA_Budget_2013-14_Statistical_Release_-_FINAL__2_.pdf
composition of formula grant up to 2012 13 bn
Composition of formula grant up to 2012-13, £bn

In 2006, schools funding was taken out of the general grant to councils to form the ringfenced Dedicated Schools Grant – hence the significant reduction in total formula grant.

grants revenue support grant
Grants – revenue support grant
  • Before April 2013, revenue support grant (RSG) was a grant paid in addition to the redistributed amount of business rates. Following the introduction of the ringfenced Dedicated Schools Grant in 2006-07 RSG was reduced (see slide 20)
  • Since April 2013, it represents that element of settlement funding which is not funded through retained business rates. It is funded through the central share of business rates and through grant funding. (See slide 22)
  • In 2013/14 it was worth £14.5bn, but it is reducing sharply, down to £8.7bn in 2015/16. If the current trend continues, our modelling estimates it will be worth £2.2bn by 2019/20.
grants hypothecated
Grants – hypothecated
  • Local government acts as an ‘agent’ for implementation of several national policies and transfer of related funding
  • As a result, it receives grant funding that gets passed on to the intended recipients
  • The main examples include:
    • Dedicated Schools Grant (DSG) (£31.3bn). It is a ringfenced source of funding for schools. Councils act as agents for the government in transferring the funding, however there are some powers retained locally over how the funding is distributed among individual schools.
    • Housing benefit (£19.9bn). Councils administer this benefit on behalf of government and receive a hypothecated grant to fund the welfare payments, alongside a separate grant for administration costs (which can be influenced)
  • Treatment of these grants accounts for most of the polemic difference over the size of council spending
grants other specific grants
Grants – other specific grants
  • Specific grants are provided by the government with the intention of them being spent for their particular purpose, or being awarded on a particular criterion
  • Many of these grants have been rolled into the business rate retention system to form part of the new RSG, but a few remain outside the framework
  • Some are unringfenced:
    • Efficiency support grant (awarded to councils with largest reductions in spending power)
    • Housing benefit administration grant
    • Council tax freeze grant
    • New homes bonus
    • Local welfare provision grant
    • Education services grant
  • Some are ringfenced:
    • Public health grant
    • NHS funding to support social care (Better Care Fund from 2015/16)
4 business rates
4) Business rates

Section 4 concerns business rates. Slide 26 introduces how the business rates system works. Slide 27 shows the historic yield of business rates.

Slide 28 provides further detail on how the business rates bill is set . Slide 29 introduces the business rates retention system which was implemented in April 2013. Slide 30 shows how this is compatible with the reduction in resources shown in slide 15.

Business rates retention is then considered in further detail. Slides 32-35, taken from the DCLG Practitioners Guide explain the basics of the system.

Slides 37-42 explain various aspects of business rates retention with case studies taken from different councils. Slides 37-38 concern how the top-ups and tariffs system equalises the starting point, slides 39-40 concern growth and slides 41-42 concern risk.

Slide 43 concerns pooling and slide 44 other aspects of the business rates system. Slides 45-46 concern the impact on business and current discussions around the Treasury / DCLG Business Rates Administration Review.

business rates
Business rates
  • Business rates are a tax on non-domestic property.
  • The business rate bill for a business is worked out by taking the rateable value and multiplying by a fixed multiplier (2014/15 - 48.2p in the pound, with smaller premises paying a reduced rate of 47.1p). The national multiplier was introduced in 1990
  • The multiplier is normally uprated by RPI annually (exceptionally the increase has been capped in 2014/15 at 2 per cent)
  • Rateable value – broadly – reflects the annual rent for which the property could be let on the open market – currently (2014/15) this reflects 2008 rents.
  • Councils do not have any control over the system (except for the ability to provide discretionary relief) and act as issuers and collectors of bills. However, from April 2013 they retain up to 50% of real terms growth in their business rate revenue
  • Total yield in 2014/15 is worth £22.4bn (after allowances for mandatory, discretionary and transitional relief, allowances for losses in collection and the cost of collection and amounts retained outside the rates retention scheme e.g. revenue from enterprise zones)
business rates setting the bill
Business rates – setting the bill
  • The value of premises is subject to regular reassessment:
    • If there is an appeal about the valuation raised by the council or ratepayer, the result of the appeal may change the value
    • There are overall revaluations taking place every five years (with the exception of this cycle where there will be 7 years between revaluations)
  • At every planned revaluation, the total amount raised from business rates is fixed – the revaluation is intended to deliver a constant yield, so when the total rateable value changes, the multiplier is changed accordingly
    • This still creates winners and losers among businesses and councils. A business can see its bill change even if rateable value hasn’t
    • However, businesses with major changes to bills receive transitional relief. This sets limits to how fast bills can increase and decrease.

See https://www.gov.uk/apply-for-business-rate-relief/transitional-rate-relief

business rates retention system
Business rates – retention system
  • Before April 2013, business rates were collected by billing authorities and transferred to the exchequer.The government redistributed the majority of rates in the form of Formula grant (see slide 20)
  • Since April 2013, councils keep 50% of locally collected business rates (the local share), with the other half transferred to central government to be used to finance grants (the central share)
  • Legally business rates have to be used by the government to fund local government activity.
  • The only grant financed through the central share is currently (2014-15) RSG, but this is likely to change as RSG reduces to less than what is collected through the central share. At this point, other grants should be financed with the remainder. It is predicted that in 2015-16 there will be a gap of £3.2bn between RSG and the central share
  • The following slides describe the mechanics of the system in more detail
as time passes other grants may start getting funded by business rates
As time passes other grants may start getting funded by business rates

Central share of collected business rates

Local share of collected business rates

business rates retention aggregates 1 from spending review control total to the local share and rsg
Business rates retention – aggregates (1) from spending review control total to the local share and RSG

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/78786/130206_Business_rates_retention_and_the_local_government_finance_settlement_-_A_practitioner_s_guide.pdf p9

business rates retention aggregates 2 individual authority level
Business rates retention – aggregates (2)Individual authority level


business rates retention proportionate shares and business rates baselines
Business rates retention – proportionate shares and business rates baselines


business rates retention top ups and tariffs
Business rates retention – top-ups and tariffs


business rates retention equalisation
Business rates retention: equalisation
  • At the outset of business rate retention, the government calculated two measures for each council:
    • The local business rates baseline (the local share of business rates collected in an area, after taking into account how they would be split between various tiers of local government in that area) and
    • The funding baseline (how much a council would receive if the total English local share would be distributed according to need)
  • Authorities where need was greater than yield received a top-up to match the difference, paid for by the tariffs from those councils that ‘collected more than needed’.
  • These top-ups and tariffs are annually updated by RPI, alongside the rateable value of businesses to keep the system in balance. Top-ups and tariffs are a self-financing system
  • RSG is – broadly – distributed on the same basis as the funding baseline
  • However, the system is not sensitive to changes in relative need as formulae are not updated annually as before.
business rate retention case study 1 3 calculating top ups and tariffs
Business rate retention – case study (1/3)Calculating top-ups and tariffs
  • The top-up and tariff mechanism is intended to provide a ‘level playing field’ in year 1 of the system.
  • As Hillingdon is estimated to collect more than it needs, at the start of the system it is assigned a ‘tariff’ it has to give up every year. It is fixed but uprated by inflation annually.
  • As Wigan is estimated to collect less than it needs, at the start of the system it is assigned a ‘top-up’ it will receive every year. It is fixed but uprated by inflation annually.
  • The end result is that, at the start of the system, both councils see their local business rates adjusted to match need. From this point on, the changes to business rate income in comparison to the baseline affect the level of locally retained income.
business rates retention growth
Business rates retention: growth
  • From April 2013, local authorities keep 50% of business rates collected in their areas (there are splits between different tiers and standalone fire authorities also get a share)
  • However, revenue support grant is reduced to take into account that there is annual RPI growth, effectively ensuring that councils only benefit from taxbase growth
  • ‘Tariff’ authorities are also liable to pay a levy on this retained growth, this is the government’s way to take into account that areas with more proactive economies (i.e. with BR receipts higher than needs) would otherwise benefit more from equivalent levels of growth than top-up authorities.
  • The rule of thumb is that post-levy growth in rateable value of 1% in above inflation results in 1% more income retained after tariff.
business rate retention case study 2 3 business rate growth
Business rate retention – case study (2/3)Business rate growth
  • In this scenario, both councils collect more in business rates than their respective baseline. This amounts to £5m in both cases, 4.9% of Hillingdon’s and 13.3% of Wigan’s initially estimated business rate income.
  • Hillingdon is a tariff authority and as such has to pay a levy on growth. The levy rate is individually determined – the bigger the relative size of the tariff, the bigger the levy, but this is capped at 50%, benefitting authorities with very high tariffs.
  • Levy income is used to fund the safety net mechanism – see part 3
  • Wigan is a top-up authority, which means that no levy is applicable
  • Revenue support grant is reduced by the level of total inflationary growth in the local share, so if the funding in the local share grows by less than inflation, a council may see its total funding reduce – even if business rate income has grown
business rates retention risk
Business rates retention: risk
  • With business rate retention, councils have a more direct stake in income collected in their area. Some of these risks are difficult to manage as the levers are retained centrally:
    • Business rate appeals.
    • Business rate avoidance and evasion.
    • Economic contraction.
  • The safety net mechanism is intended to protect councils from their post-top-up or post-tariff income falling by more than 7.5%
  • It is intended to be funded by the levy on growth described earlier, but the impact of appeals in 2013/14 made this impossible
  • As a result, settlement funding is being topsliced to pay for the remainder of likely safety net payments. This topslice was £25m in 2013-14 and will be £120m in 2014-15. The topslice is taken from RSG
business rate retention case study 3 3 business rate decline
Business rate retention – case study (3/3)Business rate decline
  • In this scenario, both councils collect less in business rates than their baseline, a £0.7m loss.
  • The loss could have arisen from businesses shrinking or closing down, successful appeals or avoidance.
  • As a result, after paying over the tariff Dartford loses retained income worth 30% of the funding baseline. The safety net mechanism limits losses to 7.5%, so it receives protection funded by levy payments of other councils in the system or a topslice from overall council funding.
  • Southampton also loses the same amount but it’s only 1.5% of its funding baseline so the safety net mechanism is not triggered.
business rates pooling
Business rates – pooling
  • Local authorities are allowed to enter into business rate pooling agreements
  • For the purposes of calculating the growth levy and the amount of business rates retained the authorities in a pool are treated as a single entity
  • There are two main benefits
    • The risk of reduction in income is shared among participants
    • For tariff authorities, the levy on growth can reduce if paired with top-up authorities
  • The pool makes its own agreement for how locally retained business rate income is shared
  • There are 18 pools in operation in 2014/15, an increase from 13 last year
  • Some pools have not been continued after the first year.
business rates other
Business rates – other
  • There are a number of smaller schemes which allow councils to retain 100% of business rate revenue:
    • Enterprise zones
    • Renewable energy
    • (Not yet confirmed) Fracking
  • There are two ways for local authorities to implement an additional business rate charge, fully retained locally
    • Business Improvement Districts (BIDs). Businesses in local areas such as town centres etc. can enter into a voluntary agreement with the council, ratified by referendum, to pay a top-up on the business rate bill, to be used to improve the area’s prospects for growth.
    • Business Rate Supplements (BRSs). Local authorities can levy BRSs on larger businesses in the entirety of their area in order to finance projects which improve growth prospects for the LA area as a whole. The only BRS in operation is levied by the GLA for Crossrail.
business rates impact on businesses
Business rates – impact on businesses
  • Councils do not have rate-setting powers – they were taken away in 1989 in favour of a uniform, national rate
  • Business rates bills are based on the rateable (imputed rental) value of commercial property at a particular point in time, so there is no direct connection with actual profitability or sales
  • As a result, businesses of comparable size and performance can have very different business rate bills depending on where in the country they are based, provided that rental market conditions are different
  • Properties are revalued all at once every 5 years (with the exception of the 2010-2017 cycle), however this is done in a way that does not change the total amount raised nationally
    • In practice, this means that the tax rate is increased if, overall, property values drop, or decreased if, overall, property values rise
    • So if a business does not see any significant change in its rateable value, it can still see its bill rise or fall, depending on what the national trend is
  • Councils have powers to grant discretionary relief to businesses, but this must be done from their own resources
business rates current discussions
Business rates – current discussions
  • Various groups, some representing businesses (such as the British Retail Consortium) have called for the business rate system to be reviewed
  • Suggestions include:
    • Tying business rates to corporation tax to reflect profitability
    • Using a different taxbase(emissions)
    • Discounts for employment growth
    • Replacement with a land value tax
  • The government is undertaking two simultaneous reviews of aspects of the system:
    • Business rate appeals. The government has consulted on ways to change the appeal system and to make billing information clearer in order to reduce the burden on the Valuation Office Agency and increase certainty to councils and businesses, reducing the number of appeals.
    • Wider business rate administration concerns. The government has consulted on various other aspects of the system, such as revaluations, introducing value bands as opposed to current (2014/15) individual valuations, business rate enforcement and others.
  • The government has also recently introduced a number of measures aimed at reducing the rate burden on businesses:
    • A cap on the annual increase in rateable value (and hence the bill) of 2%, as opposed to inflation of 3.2%
    • extension of the small business relief scheme originally established in 2010
    • A series of further reliefs aimed at smaller retail businesses to reduce their business rate bill
5 council tax
5) Council tax

This section concerns council tax, which is the main source of local revenue. Slide 48 presents the basics of council tax. Slide 49 outlines how the tax is set including the council tax referendum provisions. Slide 50 shows how the average level of Band D council tax has changed through the years. Slide 51 contains more detail on the taxbase. Slide 52 shows the values which are used for the different bands based on 1991 property values. Slide 53 shows the modal average in various areas.

Slide 54 concerns council tax support which replaced council tax benefit in April 2013. Finally slide 55 shows how as funding for council tax support is reduced one result is that the system becomes more regressive.

council tax basics
Council tax - basics
  • Introduced in 1993, it is a banded tax related to the estimated value of a domestic property. It is the only tax fully retained by local authorities.
  • Councils set the council tax for Band D, with tax for other bands calculated according to fixed proportions (e.g. Band A tax will be worth 6/9 of Band D tax). Average Band D tax in 2014/15 is £1468
  • Council power to increase tax is limited by the requirement to hold a referendum on rises above a certain threshold, set annually by the government
  • There is a set of discounts, prescribed nationally but administered locally. Over 90% of discounts (by value) are for single adults in a household – a discount of 25% (known as the Single Person Discount)
  • The poorest taxpayers are supported through locally determined and administered council tax support schemes
  • The next 4 slides describe the system in more detail
council tax setting the tax
Council tax – setting the tax
  • Council tax is set annually based on the ‘council tax requirement’ which is expressed as the difference between revenue expenditure and other income such as grant income
  • Band D council tax is defined as the council tax requirement divided by the taxbase (see slide 30)
  • However, councils are in practice limited in terms of the changes they can make to household bills, especially when it comes to increases.
  • Since 2011-12 the government have paid a ‘council tax freeze grant’ to councils which freeze their council tax. In 2014-15 this is worth the equivalent of a 1% increase in council tax requirement
  • The government has established a requirement for councils to hold a local referendum should they wish to increase council tax by more than a nationally set, annually reviewed threshold (‘principle’). This is 2% for 2013-14 and 2014-15
  • To date, no referenda have been triggered
Band D council tax from 1993 (£) – flat since 2010-11 despite decreasing grant yield shown against inflation (RPI)
council tax the taxbase
Council tax – the taxbase
  • The tax is based on the estimated value of domestic properties, grouped into 8 separate bands (A to H)
  • The valuation date is 1 April 1991. Properties built afterwards are valued at an imputed value as at that date as well
  • A household in Band H pays twice as much as Band D, and three times as much as Band A – the ratios are fixed
  • When council tax was initially set up, it was intended that properties would be revalued regularly as with business rates
  • However, no revaluation has happened to date in England
  • As a result, council tax is based on property values considered to be out of date, but a revaluation would expose large shifts in property values, destabilising the system
  • In Wales, council tax was revalued once, with the valuation date now 1 April 2003
council tax bands modal average

The most common band in England is Band A but there are marked differences regionally

  • Darker colours represent higher bands
  • Higher bands are more prevalent in wealthier areas
  • Metropolitan Districts have predominantly lower band properties

Council Tax bands – modal average

Source: ONS data, March 2011


council tax council tax support
Council tax – council tax support
  • Local council tax support schemes replaced council tax benefit from April 2013, with a corresponding initial 10% cut in funding to local authorities - £430m off a total bill of £4.3bn
  • The government gave some freedom for councils to set their own levels of support, however pensioners and ‘vulnerable residents’ remained fully protected from paying council tax
  • Councils have to consult the public when considering changes to the scheme
  • As a result of the reduction in funding, many councils set schemes that were less generous than the old council tax benefit. Most often this included a minimum amount of council tax payable by unprotected groups
  • From 2014/15, council tax support funding is no longer separately identifiable in the local government finance settlement. The LGA has said that if councils reduce funding for council tax support schemes at the same rate as the cut in settlement funding there will be a cut of £1bn in support for council tax by 2015/16
council tax support as funding is reduced the council tax becomes more regressive
Council tax support – as funding is reduced the council tax becomes more regressive

See http://www.local.gov.uk/documents/10180/11531/The+story+so+far+-+council+tax+support.pdf/a953d38d-2b39-48a9-b701-1b98591c548f

6 revenue spending p ower
6) Revenue spending power

The next section concerns revenue spending power – which the government has used since 2011-12 to present changes in council funding.

  • Slide 57 shows what revenue spending power does and does not include.
  • Slide 58 shows the reductions in revenue spending power since the baseline year of 2010-11 – using an index in order to make like for like comparisons.
  • Slide 59 explains efficiency support grant which is distributed based on revenue spending power.
revenue spending power
Revenue spending power
  • Revenue spending power (RSP) is a measure used by the government to assess the impact of changes to grants on council budgets. It was introduced in 2011-12
  • It includes:
    • Council tax
    • Revenue Support Grant
    • Assumed funding from the local share of business rates
    • New homes bonus grant funding
    • NHS funding (from 2015/16, Better Care Fund) and public health grant
    • Efficiency support grant
  • It excludes:
    • Income from fees and charges, including parking
    • Investment income
    • Hypothecated grants e.g. DSG and Housing Benefit
    • Education services grant
    • Minor, bid-based funding streams
efficiency support grant
Efficiency Support Grant
  • Paid to councils so that no council sees a larger reduction in revenue spending power than a threshold set by the government
  • Paid from 2013-14 onwards
  • Threshold in 2013-14 was -8.8%; in 2014-15 and 2015-16 it is -6.9%
  • 7 shire districts eligible in 2013-14 (£8.7m in total), 9 shire districts eligible in 2014-15 (£9.4m in total)
7 incentivisation in council funding
7) Incentivisation in council funding

There is a variety of incentivisation systems built into local government finance, outlined in Slide 61. The main ones are business rates retention and the new homes bonus.

  • Slides 29-44 above concern business rates retention.
  • The council tax freeze grant is considered in slide 49.
  • Slides 62-63 concern the new homes bonus.
incentivisation in council funding
Incentivisation in council funding
  • The current (2014/15) local government finance model attempts to reward councils for certain behaviour and accomplishment of goals
    • Business rate retention: incentive to boost economic growth
    • Council tax freeze grant: incentive to keep council tax levels fixed
    • New homes bonus: incentive to encourage or expedite house building (discussed in the next slide)
incentivisation new homes bonus
Incentivisation – new homes bonus
  • An unringfenced grant, funded mainly by a topslice of RSG. It is worth £950m in 2014/15, going up to £1.25bn in 2015/16 (see slide 63)
  • Paid each year for 6 years; based on the amount of extra council tax revenue raised for new-build homes, conversions and long-term empty homes brought back into use. There is also an extra payment for providing affordable homes
  • From April 2015, London boroughs will have to share their new homes bonus receipts with the GLA
  • The scheme does not have uniform support in local government – seen by some as a way to cut funding to areas in more need of grant and provide it to high-growth areas
  • Some commentators have expressed an opinion that new homes bonus flows to areas which already had a momentum in house building when the scheme was introduced
  • The government is planning a review on whether new homes bonus has been successful at providing an incentive
8 other sources of income fees and charges and investment income
8) Other sources of income -Fees and charges and investment income

Income from fees and charges accounted for £11.3bn 2012-13. The following slides consider the main statutory (slide 65) and discretionary (slide 66) fees and charges. Slide 67 concerns parking income.

Slide 68 outlines the situation on council trading and investment.

fees and charges statutory
Fees and charges - statutory
  • Councils are allowed to charge for some statutory services, however this has to be enshrined in legislation
  • Examples include
    • Social care for those who do not fully meet criteria for free care
    • Land searches
    • Planning applications
  • In some cases (adult social care) the level of charge is flexible, but fixed in others
fees and charges discretionary
Fees and charges - discretionary
  • Local authorities can levy fees and charges for services they provide, as long as those services are not statutory (i.e. the council is not required by law to provide them)
  • Examples include
    • Leisure centres
    • Parking
  • Councils are free to set their level of charge, provided they do not generate a surplus
  • Parking is an exception
fees and charges parking
Fees and charges - parking
  • Parking is by definition a discretionary service, but the level of demand is fairly unpredictable and charges may need to change to influence certain behaviours
  • This may lead to surpluses and deficits in council parking accounts. In 2013/14 budgets, the overall forecast is a surplus of £635m
  • The law allows councils to run an incidental (unplanned) surplus parking account, provided that the extra funds are ringfenced for improvement of parking services or transport infrastructure
  • Councils are not allowed to increase parking charges for the purposes of investment
  • Parking charges, enforcement and surplus parking accounts are a constant source of controversy and attract media attention
local authority trading investment
Local authority trading/investment
  • Councils have a ‘general power of competence’ which means they can do anything that an individual could, provided that they are not prevented from doing so by law
  • Local authorities use this flexibility to generate income with various forms of trading and investment
    • Lending to other local authorities
    • Owning a portfolio of commercial premises that can generate a rental yield
    • Setting up local authority trading companies to provide services to clients outside the council (for example, Croydon Care Solutions)
    • Acting as a social landlord (although this is a ringfenced operation so any surplus can’t be used to fund services)
  • Our surveys suggest about 40% of councils are looking to use some of their reserves to finance invest-to-save or invest-to-earn projects
9 roles of central and local government
9) Roles of central and local government

The role of central government is outlined in slide 70. Slide 71 outlines how council services are influenced by the framework set centrally. Slide 72 looks at the role of the Department for Communities and Local Government. Slides 73-74 present the European Charter of Local Self-Government.

Slides 75-76 concern the main legislative and administrative controls.

the role of central government
The role of central government

In the absence of a UK/English constitution, the role of central government is hard to pin down. In terms of the local government finance system, Government arguably has three roles:

  • In the nation’s economic interests Government has a legitimate concern to ensure public spending and taxation is appropriate to meeting the nation’s economic goals, affordable and sustainable
  • There is an expectation that the strategic allocation of resources to national priorities and between parts of the country will be led by the Government
  • The Government has a technical role as the funder of last resort which helps dissipate risk and reduce the cost of risk management.

Each of these is present in the current (2014/15) system but critics say that Government controls go beyond what is necessary to achieve these goals.


Local services

Local authority services are a mixture of statutory provision where the service level is specified or regulated (eg minimum levels of social care), statutory provision where the local authority must make arrangements for a service to be provided to a relatively unspecified level (eg “a comprehensive library service”), or where the local authority holds a statutory power to enable it to provide a service at its local discretion (eg wellbeing powers). Local government spending is in some way regulated by or influenced by the following Ministerial departments, plus numerous non-ministerial departments and central government agencies. This influence can include service regulation but from a funding point of view it particularly includes grants for specific purposes to further central government initiatives and policy, or administration on behalf of central government (eg Housing benefit spending is approximately £20bn and is funded by a specific grant).

  • DCLG
  • DfE
  • DCMS
  • Dept of Health
  • Home Office
  • Cabinet Office
  • BIS
  • DECC
  • DWP
dclg s role extract source dclg website
DCLG’s role (extract) Source: DCLG website

What we do

  • The Department for Communities and Local Government's job is to create great places to live and work, and to give more power to local people to shape what happens in their area.


We are responsible for:

  • supporting local government by giving them the power to act for their community - without interference from central government
  • helping communities and neighbourhoods to solve their own problems so neighbourhoods are strong, attractive and thriving
  • working with local enterprise partnerships and enterprise zones to help the private sector grow
european charter of local self government uk is a signatory
European Charter of Local Self-Government (UK is a signatory)

Article 9 – Financial resources of local authorities

  • Local authorities shall be entitled, within national economic policy, to adequate financial resources of their own, of which they may dispose freely within the framework of their powers.
  • Local authorities' financial resources shall be commensurate with the responsibilities provided for by the constitution and the law.
  • At least part of the financial resources of local authorities shall derive from local taxes and charges of which, within the limits of statute, they have the power to determine the rate.
  • The financial systems on which resources available to local authorities are based shall be of a sufficiently diversified and buoyant nature to enable them to keep pace as far as practically possible with the real evolution of the cost of carrying out their tasks.
european charter of local self government continued
European Charter of Local Self-Government (continued)
  • The protection of financially weaker local authorities calls for the institution of financial equalisation procedures or equivalent measures which are designed to correct the effects of the unequal distribution of potential sources of finance and of the financial burden they must support. Such procedures or measures shall not diminish the discretion local authorities may exercise within their own sphere of responsibility.
  • Local authorities shall be consulted, in an appropriate manner, on the way in which redistributed resources are to be allocated to them.
  • As far as possible, grants to local authorities shall not be earmarked for the financing of specific projects. The provision of grants shall not remove the basic freedom of local authorities to exercise policy discretion within their own jurisdiction.
  • For the purpose of borrowing for capital investment, local authorities shall have access to the national capital market within the limits of the law.


council finances main legislative controls
Council finances- main legislative controls
  • Duty to set a balanced budget
  • Balanced HRA over a 30-year business plan
  • Duty to set prudential borrowing limits
  • Requirement to hold a referendum if proposing to increase council tax above level decided by SofS
  • Statutory audit of accounts
  • Duty to achieve ‘best value’
  • Restrictions on charging for services – for some services charging prohibited, for others only cost recovery allowed
council finances main administrative controls
Council finances- main administrative controls
  • Grant controls
    • Allocation mechanisms
    • Annual/ short-term setting of grant allocations
    • Ringfencing
  • SofS setting of ‘excessive’ council tax increases
  • Government setting of business rates multiplier
  • ‘Soft controls’ – pressure to allocate grant in line with government preferences even though the grant is not ringfenced
10 distribution and equalisation
10) Distribution and equalisation

Different areas have different needs and differing capacities to raise resources. Section 10 considers the issue of distribution and equalisation within the finance system, both in theory and in practice.

The first set of slides considers equalisation in theory. Slide 79 presents some points for both sides of the argument. Slide 80 introduces equalisation of both needs and resources. Slide 81 specifically concerns resource equalisation. Slide 82 gives a hypothetical example showing how resource equalisation can involve both grant and redistribution. Slide 83 looks at arguments for needs equalisation and slides 84-85 build on the example in slide 82; showing how needs equalisation is introduced and how the formulae are constrained to a government control total.

The second set of slides moves on to look at how the theory has been applied in successive grant systems in England. Slides 87-89 concern how the system developed from the 1940s onward. Slide 90 presents the main developments in the needs formulae from 1970 onwards. Slide 91 summarises the main features of needs formulae and how they were used in successive funding systems. Slides 92-93 illustrate how the four block model – introduced in 2007/08 – can be shown to be identical to the previous formula spending shares system. Slide 94 shows the effect of damping in the system.

Finally slides 95-96 consider how equalisation is dealt with in the post-April 2013 business rates retention system (see slides 31-42 for further details on this)

  • The term is used widely but there is no definition of exactly what it means.
  • ‘Full equalisation’ implies an equalisation of resources and spending needs between authorities in the interests of fairness both to taxpayers and consumers of local services.
  • Several key aspects of this are clearly questions for debate;
    • Which resources should be equalised?
      • The current (2014/15) system equalises assumed income from council tax and baseline business rates in different ways, but does not seek to equalise, for example, parking fees or income from social care charges
    • The definition of ‘needs’
      • The current (2014/15) manifestation is a complex Relative Needs Formula within each authority’s settlement funding allocation
    • What exactly is fairness?
      • The 1991 definition explicitly mentioned a standard level of service provision at a standard level of community charge (later council tax)
resource equalisation
Resource Equalisation
  • The fundamental problem is that different places make different calls on public services.
  • If the local tax system is left to pick this up, it leads to widely different levels of taxation in different places, which may lead to wealthier people and businesses migrating from high needs areas to ones where taxes are lower. This leaves vulnerable areas even more vulnerable.
  • Thus while the rhetoric around equalisation is often about fairness, in its early manifestations it sought to deal with a problem of sustainability of local economies and containing costs to the Exchequer. Accordingly it was initially largely about resource (rates) equalisation.
  • Initially rates equalisation was based upon prevailing levels of local authority spending. There was no attempt at ‘needs’ equalisation.
  • It follows, however, that if spending is greater than local tax income, then a top-up is required. This can either be in the form of a Government grant or of a payment from an authority with higher resources.
resource equalisation1
Resource equalisation

Top-up grant



Local income 1,500

Redistributed amount 500

Redistributed amount 500


Local income


Spending per head

Spending per head

Resources per head

Resources per head

Authority A

Authority B

needs equalisation formulas
Needs Equalisation & formulas
  • The idea of needs equalisation (the notion that consumers of local services as well as ratepayers needed to be treated more equally) emerged later. Past spending is only a very crude indicator, so it is necessary to identify the cost of standardised levels of service that a locality needs.
  • Needs equalisation formulae started simple and have gradually become more and more complex, up until the most recent manifestation (the ‘Four Block Model’) introduced in 2007. This was motivated by a drive for fairness, influenced by lobbying and facilitated by the advent of cheap, powerful computing capacity. The spurious precision and increased complexity however made it easier for Ministers to influence distribution without necessarily being transparent about it.
  • A funding formula also allows the Government to exercise greater control over the cost of the system. If needs are assessed by a government derived formula rather than by local spending decisions, then the government can determine the amount of grant it wishes to distribute and ensure the system distributes exactly that amount. Equalisation has therefore become a matter of ‘relative’ needs and ‘relative’ resources.
resource needs equalisation
Resource & needs equalisation



Top-up grant


Local income 1,500

Redistributed amount 400


Redistributed amount 400


Local income


Spending per head

Spending per head

Resources per head

Needs formula

Resources per head

Needs formula

Authority A

Authority B

resource needs equalisation with government control of grant total
Resource & needs equalisation (with Government control of grant total)

Government fixes control total at required level

Needs formula scaled back to achieve required control total



Top-up grant


Local income 1,500

Redistributed amount 450


Redistributed amount 450


Local income


Spending per head

Spending per head

Resources per head

Needs formula

Resources per head

Needs formula

Authority A

Authority B


For a while, the equalisation system that developed suited all parties. It provided adequate funding to local authorities (if coupled with a generally rising trend of increasing grants), it suited government by enabling control of spending and it fitted with the prevailing political consensus on ‘fairness’.

  • Initially it also initially left local authorities with local discretion over tax rates. However from the 1940’s onwards the Government sought to take more control through;
    • 1950, nationalisation of rating valuations
    • 1985, rate capping and holdback of grant
    • 1992, nationally set Non-Domestic Rates multipliers and council tax capping
    • 2012, council tax referendum limits
  • From the advent of capping in particular, the change in a local authority’s spending each year came to depend more and more on the change in its level of grant.
  • Over time this was said to have created a begging bowl mentality in which influencing Government decisions on grant distribution was more important than local decision-making. This could arguably be blamed ultimately on equalisation, but exacerbated by the Government’s need and desire for control of local spending and local taxes.
  • Among the reasons for reform of the system and introducing funding increments based on incentives rather than grant distribution was a desire to tackle this problem.
equalisation since 1970
Equalisation since 1970
  • 1970s – separate needs and resources elements
  • 1981 – Grant Related Expenditure Assessment – many service blocks
  • 1991 – Standard Spending Assessment – a simplified needs assessment
  • 2003/04 – Formula Spending Shares
  • 2007/08 – Four Block model – did away with a needs assessment expressed in £ - but can be shown to be identical
  • 2013/14 – Top-ups and tariffs – not updated until a reset
about needs formulae
About needs formulae
  • Derived by variety of methods; both statistical and judgmental. The statistical include multiple regression of past spending against dependent variables and dependent variables against each other. (Arguably past spending is too much of an influence).
  • At root based on population size, weighted by size of ‘needier’ age groups- children and the elderly.
  • Past spending is most strongly correlated to measures of relative deprivation so these have tended to dominate the resulting formulae. Benefit claimant rates, ethnicity indicators, educational qualifications and social housing tenure are prominent amongst these.
  • Some criticism therefore that there is a perverse disincentive within the system to tackle deprivation although no such thing has ever been proven.
formula spending shares fss 2003 04 2006 07
Formula Spending Shares (FSS) 2003/04 – 2006/07

£ / head

Formula Spending Shares

Formula Grant

Assumed income from council tax

Before damping

formula grant = formula spending shares - assumed income from council tax


£ / head




Relative needs


Central allocation


Relative resources




The four block model (2007/08) – a restatement of the FSS system without explicit supported spending or assumed council tax figures

Before damping

formula grant = relative needs + central allocation - relative resources

the effect of damping an example from 2011 12 for single tier and county councils
The effect of damping – an example from 2011-12 for single tier and county councils

Damping was based on banded groups – with the most grant dependent councils having the smallest reductions

changes to formula grant
Changes to formula grant
  • 2011/12 - Grants using tailored distributions included in formula grant (supporting people and other smaller grants) – around £2bn in total
  • 2013/14 – Formula grant plus funding for council tax support, early intervention, learning development = start-up funding assessment (SUFA). SUFA funded through the local share and RSG
  • 2014/15 – SUFA renamed settlement funding assessment (SFA). Separate block for council tax support merged into other blocks
equalisation in the new system
Equalisation in the new system
  • The new post 2013 system (see Slides 31-42) retains some equalisation through;
    • The role of the Four Block model in determining the baseline funding level
    • The role of tariffs and top-ups in re-distributing the local share of rates income.
  • The effect of damping (see slide 94) means that equalisation in 2013 was crude compared with previous versions.
  • This is equalisation frozen at 2013 levels. Equalisation within the system will not now be touched at least until the system is reset (expected in 2020).
  • The only way that authorities can increase their share of mainstream funding is therefore through the pursuit of incentive-led funding. (See section 7slides 60-63)
11 reserves
11) Reserves

This section concerns council reserves. Slide 98 presents the figures on estimated usable reserves as at 31 March 2013. Slide 99 presents some arguments as to why councils hold reserves. Slide 100 presents the most recent CIPFA statement on council reserves. Slide 101 shows how reserves vary by region.

estimated usable reserves
Estimated usable reserves

In addition : GLA Reserves of £2.6bn, other ie Police, Fire, National Parks, etc £2.1bn

= Total figure sometimes quoted £19.4bn for “local government”

Upper tier councils also hold £2.4bn of schools balances

7% represents the equivalent of about 26 days net expenditure

why do local authorities hold reserves
Why do local authorities hold reserves?

Earmarked reserves are held for specific future spending (eg planned services changes and developments, provision for investment, capital spending), for specific risks (eg funding self insurance arrangements; potential or threatened litigation) or possible future events. Some are very specific, others can be more general (eg “financial equalisation reserve”).

If not required, the council can “unearmark” some of its earmarked reserves

General reserves are held to cover unpredicted events, to mitigate the underlying risks associated with the operation of the council and the management of service expenditure, income and the council’s funding.

Part II of the Local Government Act 2003 introduced a requirement for the S151 Officer (the Chief Finance Officer) when calculating the budget to report upon

“the robustness of the estimates made for the purposes of the calculation of the budget and the adequacy of the [council’s] proposed financial reserves”

But there is no “right” amount of reserves to hold – it has to be a local decision.

cipfa statement on council reserves
CIPFA statement on council reserves
  • Reserves are an important component of councils' financial planning but they are not a silver bullet solution to financial problems;
  • Judgements about reserves - to what extent they should be used or set aside to meet either specific or unforeseen future liabilities - can only be made locally within individual organisations;
  • Local decisions should be taken by councillors having regard to clear and full information and advice provided by Chief Finance Officers;
  • Recent increases in aggregate levels of reserves reflect councils' good performance to date in coping with austerity. They have universally reduced budgets in real terms, and in many cases they have also managed their affairs to deliver underspending which bolsters reserves;
  • Uncertainty and risk is increasing. (2013/14) budgets present the dual challenge of further funding reductions and significant financial system reforms (business rates retention andlocalisation of council tax benefit). This represents a cocktail of significantly greater uncertainty and risk than would normally be the case.
reserves held regional variations and movements to march 2012
Reserves held – regional variations and movements to March 2012

The Blue Column shows the estimated average level of reserves as a % of net revenue expenditure as at 31 March 2012; the red column shows the estimated movement in reserves over the previous 4 years

12 housing
12) Housing

Local authority housing is outlined in this section. Slide 103 outlines the main form of public sector investment in housing. Slide 104 shows the effect of the Right to Buy. Slide 105 considers recent developments in the Housing Revenue Account. Slide 106 looks at regulatory roles in housing and slide 107 sets out the main housing finance issues.

  • Public sector investment in housing principally takes the form of:
    • subsidising rents through Housing Benefit administered by local authorities - £20 billion in 2013/14 (Local Housing Allowance places limits on rents that will be supported)
    • income and expenditure on council housing stock through the ringfenced Housing Revenue Account – £7.8 billion in 2011-12
    • local government borrowing on housing – this shows on the Public Sector Borrowing Requirement (PSBR)
    • Affordable Homes Programme administered by the Homes and Communities Agency to develop the affordable housing stock - £4.5 billion from 2011 to 2015 (£1.7 billion 2015-18)
    • Decent Homes Programme to improve the stock of 45 local authorities and ALMOs (Arms Length Management Organisations) - £1.6 billion 2011 to 2015
right to b uy
Right to Buy
  • since 1980s 2 million council properties have been sold under the Right to Buy scheme
  • in 2012-13 5,942 sales generated £368 million in capital receipts for local authorities, 11,000 homes in 2013-14
  • the £75,000 maximum discount is set nationally (£100,000 in London)
  • discount for houses is 35% after tenant has lived in house for 5 years. For every extra year it goes up 1% to 60% limit
  • discount for flats is 50% after tenant has lived in flat for 5 years. For every extra year it goes up 2% up to a maximum of 75%
  • the eligibility is reducing to 3 years
  • the cost floor establishes a principle that no council home should be sold for less than it cost to build. However this principle is limited by the cost floor period of 15 years. Following this time period there is no further protection on the sale price to guard against public sector losses
housing revenue account
Housing Revenue Account
  • councils with housing stock are required to record all income and expenditure in relation to these dwellings in a separate, ringfenced Housing Revenue Account
  • the current arrangements – “the self-financing regime” - began in April 2012
  • prior to that HRA councils in surplus, subsidised those in deficit
  • there is a cap of around £3 billion in total on the amount councils can borrow to build homes for their HRAs
  • each council has its own individual cap
  • the cap was partially lifted by £300 million over 2 years in Budget 2014 – this is a bid-based process
  • councils provide around 1.7 million homes [Dwelling Stock Estimates, England, 2013] of which 400,000 are sheltered or extra care properties
regulatory roles
Regulatory roles
  • Housing Act 2004 introduced a housing health and safety rating system used to see if council needs to intervene in privately rented properties and a mandatory licensing system for private sector houses in multiple occupation
  • Council action to bring 300,000 empty homes (for over 6 months) back into use
  • Planning – councils approve 9 out of 10 planning applications
  • in 2013 there were planning approvals for over half a million units (of which half were not started)
  • The Homes and Communities Agency took responsibility for the regulation of social housing providers in England on 1 April 2012
what are the issues
What are the issues?
  • Councils would like to build more homes – but are constrained by the Housing Revenue Account cap from doing so
  • National rules on Right to Buy – the discounts themselves and other rules, for example, Homes and Communities Agency grants cannot be used with Right to Buy receipts to build stock
  • Any future limits on rents under Universal Credit – and the impact of direct payments
  • Planning – the extent to which it is an obstacle nationally and locally
  • Housing Benefit – could it be used more effectively, implications of the welfare cap
13 capital
13) Capital

Councils’ capital spending is briefly outlined in this section. Slide 109 concerns the different way councils use capital spending. Slide 110 summarises the main transactions through the Public Works Lending Board. Slide 111 considers the main issues around capital.

  • Council capital expenditure is around £20 billion per annum, with capital receipts of around £15 billion per annum
  • Councils use their revenue, capital receipts, borrowing and central government grants to finance capital spending [and the Major Repairs Reserve for housing]
  • Borrowing is regulated by the Prudential Code [which councils must “have regard to” under the Local Government Act 2003]
  • Councils cannot borrow for revenue expenditure and must set a balanced revenue budget
  • Typically councils borrowing from the Public Works Loans Board – at the end of 2012-13 total borrowing was £84.5 billion of which £63.4 billion is accounted for by the PWLB
  • Local authorities have £37 billion of investments
  • The LGA is setting up a municipal bonds agency to provide a sector-owned source of finance that diversifies the sources of finance (and mitigates the risk of predominantly single source borrowing) and provides competition with the PWLB
  • Councils can also require developer contributions for the site specific (section 106) and broader (Community Infrastructure Levy) impacts of their developments on infrastructure
what are the issues1
What are the issues?
  • A disconnect with capital investment by government departments and its agencies creates tensions with councils role in promoting local growth
  • Contrast between rules on Prudential borrowing and controls attached to government capital grants
  • A maintenance backlog – for example, on road repairs. The Annual Local Authority Road Maintenance Survey estimates the backlog in England and Wales at £12 billion
14 place based finance
14) Place Based Finance

Section 14 looks at place based finance. Slide 113 sets out the main stakeholders in a place and slide 114 gives examples of how services to the public overlap between providers. Slide 115 gives examples of cases where place-based finance arrangements may be particularly effective. Slides 116-118 give a case study of the developments in the Better Care Fund with the NHS which will come into being in April 2015. Slide 119 looks at place based finance and welfare. Slide 120 gives a case study of place based finance and troubled families. Finally slide 121 looks at the scope for the expansion of place-based finance arrangements.

public spending in a place
Public spending in a place
  • Councils are not the only service providers in their local area
  • Other public stakeholders include, but are not limited to
    • The local Clinical Commissioning Groups (CCGs)
    • Police, fire and rescue authorities
    • JobCentre plus
    • Further education: colleges and universities
    • Adult education providers
    • Government departments and executive agencies
  • Local government funding, once main ‘non-controllable’ spending (schools, housing benefit) is removed, constitutes about 12% of spending in a place
  • CCG spending amounts to about 17% and welfare spending (excluding pensions) to about 22%
public spending in a place1
Public spending in a place
  • Services provided by councils in a place very often overlap with the work and objectives of other organisations
    • Community safety: police and court services
    • Children’s social care: schools, third sector providers
    • Adult social care: NHS
    • Highways provision: the Highways Agency
    • Local welfare and housing benefit: Jobcentre Plus
    • Adult learning: third party providers and various government agencies
    • Youth skills and employment: further education colleges, universities, Skills Funding Agency
  • Some joint governance groups, such as Local Economic Partnerships and Health & Wellbeing Boards, have been set up to recognise and consider these synergies in a co-ordinated approach
  • Place based finance mechanisms are a tool for achieving improved outcomes and financial savings where this is underpinned by shared objectives
place based financial arrangements are a potential tool for
Place based financial arrangements are a potential tool for..
  • Low volume, high complexity/cost issues
  • Areas with high spatial concentrations
  • Services where multiple agencies are involved
  • Dealing with entrenched economic inactivity
  • Dealing with local differences and variable pace
  • Services where outcomes or current performance levels are sub-optimal
case study nhs and the better care fund
Case study: NHS and the Better Care Fund
  • Health spending protected in real terms over the Spending Review period
  • However, the growth in funding is significantly slower than increasing demand of NHS services
  • Financial planning of NHS England is currently (2014/15) based on an assumption of inflation-only increases to the budget over the next Parliament
  • The King’s Fund predicts that the size of the NHS budget as a % of GDP will shrink from 7.5% to 6% by 2021
  • This leads to an increasing need to improve productivity.
case study nhs and the better care fund1
Case study: NHS and the Better Care Fund
  • Some of the main drivers behind demand for NHS services are:
    • An ageing population
    • Substance abuse
    • Disability
    • Other health factors, such as obesity or chronic conditions
  • These factors also drive costs in council services such as public health and adult social care provision, giving rise to shared objectives
  • Reducing demand of services can take off some of the pressure on the NHS to improve productivity, at least in the short term
  • The Better Care Fund is seen as a model through which closer integration between council and NHS services can address shared objectives, reduce demand and unlock financial savings
case study nhs and the better care fund2
Case study: NHS and the Better Care Fund
  • The Better Care Fund (BCF) is the most ambitious nationally implemented place-based finance arrangement to date
  • Announced in the 2013 Spending Round, the BCF is a pooled budget arrangement, mostly financed by the NHS
  • Due to start in April 2015
  • The scheme was initially worth £3.8bn but a review of locally agreed integration plans showed that in excess of £5bn of council and NHS funding has been pooled together for 2015/16
  • High expectations of performance in the health sector in order to alleviate the productivity problem by sharply reducing demand of hospital beds
  • Our modelling estimates that the Better Care Fund is worth about 1.4% of spending in a place (2.5% if welfare is excluded), leaving scope for closer integration in the health and social care sector
place based finance and welfare
Place based finance and welfare
  • Welfare spending has proven difficult for the government to control, even with the impact of its welfare reform measures
    • Benefit cap
    • Social sector size criteria (‘bedroom tax’)
    • Localisation of council tax support
    • Introduction of Universal Credit
  • The latest announcement by the Chancellor is an introduction of a welfare spending cap, with ministers accountable to Parliament if it is breached
  • This puts an added incentive on the government to control welfare spending by reducing demand
  • While councils only directly control discretionary welfare schemes and have local influence over council tax support, their regeneration, education and social services have an impact on economic growth and economic activity of the local population
  • Hence, there is scope for a place based financial agreement involving savings to welfare – with the right incentives
case study troubled families
Case study: Troubled Families
  • The Troubled Families programme involves a multitude of local stakeholders (councils, police, health, JobCentre Plus and others) developing a coordinated mix of services for families with complex dependencies
  • The focus is on the cases which are the most costly to the public sector with the aim of preventing these costs from arising in the future
  • So far, results have been encouraging. In more than 40,000 families of those targeted so far:
    • children who were truanting or excluded have now been back in school for 3 consecutive terms; and
    • youth crime and anti-social behavior across the household has been significantly reduced, or
    • an adult in the household has been employed for at least 3 consecutive months
  • The total funding for the scheme, some coming from council grants, is set to be worth £200m in 2015/16 as the scheme expands to target 400,000 families
place based finance scope for more
Place based finance – scope for more?
  • Several areas have so far not been fully explored on a national scale
    • Youth skills and education
    • Adult skills and education
    • Community safety
    • The ‘childhood cycle’, from early years support to further education, including children’s social care
    • Housing provision
  • However, some areas and spending might not be a good fit for fully localised place based finance arrangements
    • State pensions
    • Court services
    • National highways (although there is scope for approaches coordinated between central government and areas that are affected)
    • National railways (although there is scope for approaches coordinated between central government and areas that are affected)
15 further information
15) Further information

DCLG’s annual Local Government Finance Statistics publication contains a wide range of information about local government finance.

The 2014 edition can be found at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/316772/LGFS24_web_edition.pdf

Editions back to 2010 can be accessed from https://www.gov.uk/government/collections/local-government-finance-statistics-england