Local government finance
Background slide pack
May 2014
www.local.gov.uk
1
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.
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.uk for any additional clarification.
2
Local government finance
Index
1) Local government spending
2) Funding
3) Grants
4) Business rates
5) Council tax
6) Revenue spending power
7) Incentivisation
8) Other sources of income
9) Roles of central and local government
10) Distribution and equalisation
11) Reserves
12) Housing
13) Capital
14) Place Based Finance
15) Further information
slide 4
slide 11
slide 17
slide 25
slide 47
slide 56
slide 60
slide 64
slide 69
slide 77
slide 97
slide 102
slide 108
slide 112
slide 122
3
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)
4
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
5
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/225884/RA_Budget_2013-14_Statistical_Release_-_FINAL__2_.pdf
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
6
Summary net controllable expenditure
Service area
2013/14
Projected
2019/20
£bn
£bn
6.6
7.9
14.7
16.9
Waste Management
3.1
3.2
Street Cleansing
0.7
0.8
Concessionary fares
0.9
0.9
Capital Financing
3.7
3.7
All Other Services
21.4
10.2
51.1
43.6
Children’s Social Care
Adult Social Care
Total
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.
7
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.
8
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 noncapital 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.
9
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.
10
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.
11
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
12
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)
13
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 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 nonringfenced 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
14
The path of future funding
£60
£50
PH funding not new
money as it comes with
a new burden
Additional Social Care funding
£40
Change in reserves
Investment income
£30
£billion
Public Health allocation
Other grants
Formula Grant
£20
RSG
Retained Business Rates
£10
Council tax
The localisation of
council tax support in
April 2013 reduced the
taxbase
£0
-£10
Negative reserves figures when
councils underspend and
contribute to reserves
• 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
15
The squeeze on service expenditure
Money available for all other services
Waste Management
Adult Social Care
Children's Social Care
60
• 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)
50
30
20
10
2019/20
2018/19
2017/18
2016/17
2015/16
2014/15
2013/14
2012/13
2011/12
0
2010/11
£ billion
40
16
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.
17
Grants to local government within Aggregate External Finance (AEF) most grants are ringfenced
90
80
70
60
£ billion
Settlement Funding
50
Police Grant
Other Sp Grants
40
Ring Fenced
30
20
10
2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14
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
18
Specific grants in 2013-14
Top five incomes from specific grants budget 2013-14
£ million
Grants inside Aggregate External Finance
Dedicated Schools Grant (DSG)
Public Health Grant
GLA Transport Grant
Pupil Premium Grant
The Private Finance Initiative (PFI)
31,334
2,662
2,209
1,430
931
Grants outside Aggregate External Finance
Mandatory Rent Allowances: subsidy
Rent Rebates Granted to HRA Tenants: subsidy
Mandatory Rent Rebates outside HRA: subsidy
Sixth Form Funding from Education Funding Agency
Discretionary Housing Payments (DHPs)
14,935
3,567
1,412
988
545
19
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
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.
20
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 200607 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.
21
Split of settlement funding between local share and revenue
support grant
16
100%
90%
14
80%
12
70%
£ billion
10
60%
Local Share
8
RSG
6
RSG
50%
Local Share
40%
30%
4
20%
2
10%
0
0%
2013-14 2014-15 2015-16
2013-14 2014-15 2015-16
22
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
23
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)
24
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.
25
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)
26
Historic business rate income
25
yield shown against inflation (RPI)
Total yield, £bn
20
15
10
5
0
1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14
Actual business rate yield
Inflation-only increases
27
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
28
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
29
As time passes other grants may start
getting funded by business rates
35
30
£billion
25
20
15
10
5
0
2013-14
Local share of collected business rates
2014-15
2015-16
2016-17
2017-18
2018-19
Locally retained business rates
Revenue support grant financed by the central share
Revenue support grant financed by government top-up
Other grants financed by the central share
Other grants financed separately from the business rate system
Spare capacity in the central share
2019-20
30
How business rates retention works in
further detail
31
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
32
Business rates retention – aggregates (2)
Individual authority level
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/78786/130206_Business_rates_retention_and_the_local_g
overnment_finance_settlement_-_A_practitioner_s_guide.pdf p13
33
Business rates retention – proportionate shares and
business rates baselines
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/78786/130206_Business_rates_retention_and_the_local_gov
ernment_finance_settlement_-_A_practitioner_s_guide.pdf p14
34
Business rates retention – top-ups and
tariffs
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 p15
35
Business rate retention:
case study
36
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.
37
Business rate retention – case study (1/3)
Calculating top-ups and tariffs
Hillingdon, £m
Wigan, £m
Local share of the business rate baseline (50% of the
total, less anything that goes to precepting authorities)
101.2
37.6
Funding baseline (i.e. if the total England local share
was distributed along the lines of relative need, this is
how much income the council would be entitled to) –
NB. This has been assumed.
42.1
62..9
-59.2
25.3
Give up (subtract)
£59.2m
Receive (add)
£25.3m
Top-up/(tariff) [Funding baseline less local share
baseline]
When calculating its local business rate income, a
council has to..
•
•
•
•
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.
38
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.
39
Business rate retention – case study (2/3)
Business rate growth
•
•
•
•
•
a)
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 Hillingdon,
local share, so
if the funding
in the£m
£m
Wigan,
local share grows by less than inflation, a council may see its total funding reduce – even if business rate income has
Local
share of business rates collected (less anything that goes to
106.3
42.6
grown
precepting authorities)
b)
Local share of business rate baseline
101.2
37.6
c)
Growth in local share (a-b)
5.0
5.0
d)
Growth levy payment (for Hillingdon, levy is set at 50%. Wigan –
no levy)
-2.5
0
e)
Add/less top-up/tariff
-59.2
25.3
Total locally retained business rate income (a + d + e)
44.6
67.9
Baseline funding level
42.1
62.9
2.5 (5.9%)
5 (7.9%)
Growth in retained income (£m, %)
40
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 201415. The topslice is taken from RSG
41
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.
Dartford, £m
Southampton, £m
a)
Local share of business rates collected (less anything that goes to precepting
authorities)
31.4
47.0
b)
Local share of business rate baseline
32.1
47.7
c)
Growth in local share (a-b)
-0.7
-0.7
d)
Add/less top-up/tariff
-29.7
1.6
Total locally retained business rate income (a + e)
1.8
48.6
Funding baseline
2.4
49.3
-0.7 (30%)
-0.7 (1.5%)
e)
Reduction in retained income (£m, %)
f)
Maximum loss limited by safety net (£m, 7.5% of funding baseline)
0.2
3.7
Safety net payment due (e-f if applicable)
0.5
42
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.
43
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.
44
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 20102017 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
45
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
46
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.
47
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
48
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
49
Band D council tax from 1993 (£) – flat since 2010-11 despite
decreasing grant
yield shown against inflation (RPI)
1,600
1,400
1,200
1,000
800
600
400
200
Actual average Band D council tax
Inflation-only increases
50
2014-15:
2013-14:
2012-13:
2011-12:
2010-11:
2009-10:
2008-09:
2007-08:
2006-07:
2005-06:
2004-05:
2003-04:
2002-03:
2001-02:
2000-01:
1999-00:
1998-99:
1997-98:
1996-97:
1995-96:
1994-95:
1993-94:
0
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 – property values in 1991
and relationship to Band D
Band A
under
£40,000
6/9
Band B
£40,001
to
£52,000
7/9
Band C
£52,001
to
£68,000
8/9
Band D
£68,001
to
£88,000
1
Band E
£88,001
to
£120,000
11/9
Band F
£120,001
to
£160,000
13/9
Band G
£160,001
to
£320,000
15/9
Band H
over
£320,000
2
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
Source: ONS data, March 2011
http://maptube.org/map.aspx?m=gm&s=DHxSogRIXLGlJgA8EYHAplwcCnNsChWd
53
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
54
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-b7011b98591c548f
55
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.
56
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
57
Revenue spending power
Revenue spending power reductions, 2010/11 - 2015/16 (2010/11 = 100%)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2010/11
2011/12
2012/13
2013/14
2014/15
2015/16
Council tax
Council tax benefit
Local share of business rates
Formula grant / revenue support grant
New homes bonus
Ringfenced NHS funding (2015/16: Better Care Fund)
Public health grant
Other funding
58
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)
59
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.
60
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)
61
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 highgrowth 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
62
£ million
New homes bonus funding
1,000
900
800
700
600
500
400
300
200
100
-
Grant
Top-slice
Adjustment grant
2011-12
2012-13
2013-14
2014-15
2015-16
63
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.
64
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
65
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
66
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
67
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
68
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.
69
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.
70
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
DEFRA
DCMS
Dept of Health
•
•
•
•
•
Home Office
Cabinet Office
BIS
DECC
DWP
71
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.
Responsibilities
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
72
European Charter of Local SelfGovernment (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.
73
European Charter of Local SelfGovernment (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.
http://conventions.coe.int/Treaty/en/Treaties/Html/122.htm
74
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
75
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
76
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)
77
Equalisation in theory
78
Distribution: the big debate
Needs and equalisation
Incentivisation
Supporters say:
Fair allocation of resources based on costs,
demands and tax capacity
Empowers local authorities to grow their own
budgets and incentivises economic goods
Critics say:
Breeds a begging bowl mentality and
incentivises deprivation
Unfair and arguably the incentive is unevenin some places easier to achieve than others
‘Fairness by formula’ is an illusion
As presently expressed, priorities fairly
narrow – more buildings and keeping down
council tax
79
Equalisation
•
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)
80
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.
81
Resource equalisation
Top-up
grant
800
Redistributed
amount 500
2,000
1,000
Spending per head
Local
income
1,500
Resources per head
Authority A
Redistributed
amount 500
Local
income
700
Spending per head
Resources per head
Authority B
82
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.
83
Resource & needs equalisation
Top-up
grant
850
Redistributed
amount 400
1,000
Spending per head
Local
income
1,500
1,100
Needs formula
2,000
Resources per head Spending per head
Authority A
1,950
Redistributed
amount 400
Local
income
700
Needs formula
Resources per head
Authority B
84
Resource & needs equalisation
(with Government control of grant total)
Needs formula
scaled back to
achieve required
control total
Top-up
grant
700
Redistributed
amount 450
1,000
1,050
Spending per head
Needs formula
Local
income
1,500
Redistributed
2,000
Resources per head Spending per head
Authority A
Government
fixes control
total at
required level
1,850
amount 450
Local
income
700
Needs formula
Resources per head
Authority B
85
Equalisation and the general grant system
in England
86
Equalisation
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’.
87
Equalisation
• 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
88
Equalisation
•
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 decisionmaking. 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.
89
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
90
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.
91
Formula Spending Shares (FSS) 2003/04 – 2006/07
£ / head
1400
1200
1000
800
Formula Grant
600
400
200
Assumed income from council tax
0
Before damping
formula grant = formula spending shares - assumed income from council tax
92
The four block model (2007/08) – a restatement of the FSS
system without explicit supported spending or assumed
council tax figures
£ / head
1400
1200
1000
Relative needs
800
600
Central allocation
400
200
Relative resources
0
Before damping
formula grant = relative needs + central allocation - relative resources
93
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
94
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
95
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 7 slides 60-63)
96
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.
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Estimated usable reserves
Estimates as at 31 March 2013, using 2012/13 RO
data
£bn
% Annual net
Expenditure
Councils Earmarked Reserves
11.1
22%
3.6
7%
14.7
29%
Councils General (unallocated) Reserves
Total “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
98
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.
99
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 and localisation of council tax benefit). This represents a cocktail
of significantly greater uncertainty and risk than would normally be the case.
100
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
101
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.
102
Housing
• 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
103
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
104
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
105
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
106
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
107
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.
108
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
109
2007-8 to 2012-13 local authority PWLB
Advances and Repayments
2012-13
2011-12
2010-11
2009-10
2008-09
2007-08
Advances:
English principal authorities (inc GLA)
Welsh principal authorities
Scottish principal authorities
Others
Total advances
2,406
93
560
70
3,129
14,838
46
775
452
16,111
3,779
60
943
473
5,255
2,837
44
1,124
1,075
5,080
3,862
191
920
1,387
6,360
7,204
624
1,072
1,100
10,000
Repayments
English principal authorities (inc GLA)
Welsh principal authorities
Scottish principal authorities
Others
Total repayments
1,074
44
265
161
1,544
6,399
45
309
577
7,330
2,808
170
206
153
3,337
3,411
168
898
236
4,713
4,610
453
980
209
6,252
5,382
572
998
212
7,164
1,585
8,781
1,918
367
108
2,836
1,676
8,906
1,598 -
472 -
1,070
1,948
Total net new borrowing (repayments)
Of which:
Net New Borrowing by Local Authorities
110
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
111
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.
112
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%
113
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
114
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
115
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.
116
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
117
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
118
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
119
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
120
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)
121
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/attachmen
t_data/file/316772/LGFS24_web_edition.pdf
Editions back to 2010 can be accessed from
https://www.gov.uk/government/collections/local-governmentfinance-statistics-england
122