Budgeting Version at June 2005
External Environment to Budgeting
Statutory Background to Local Government
General Rate Act 1967
Local Government Act 1972
Local Government Planning and Land Act 1980
Local Government Finance Act 1982
Rates Act 1984
Local Government Act 1986
Local Government Act and Housing Act 1989
Local Government Act 1992
Local Government Act 1999
Local Government Act 2000
Local Government Act 2003
Statements of Standard Accounting Practice (SSAPs) and Financial Reporting Standards
(FRSs)
May 2004
This section gives a brief outline of legislation that has historically impacted upon
Local Authority Budget setting
General Rate Act 1967
This established that every rating authority had the duty to legal duty to set local
taxation
(at that time rates) at a level sufficient to meet total estimated
expenditure . This is still relevant today in that council tax must be set at the
appropriate level to cover expenditure
.
Local Government Act 1972
Section 151, Local Government Act 1972 required that every local authority shall
make arrangements for the proper administration of their financial affairs and
shall secure that one of their officers has responsibility for the administration of
those affairs. The provision is a broad one but to be seen to comply with it, it is
necessary for an authority to show that all aspects of financial administration are
properly covered. The preparation of budgets is so fundamental to proper
financial management that it is invariably covered in the procedure rules of the
authority and can be argued to stem indirectly from the 1972 Act provision.
Local Government Planning and Land Act 1980
Section 2, Local Government Planning and Land Act 1980 lays down a duty on local
authorities to publish certain budget information as defined in specific Codes of
Recommended Practice issued for the purpose of this Section by the Secretary of State. This
is reflected today in the practice of publishing leaflets with Council Tax demands. In order to
provide local taxpayers with this level of analysis it is clearly necessary to estimate
expenditure and income in some considerable detail, i.e. prepare a budget.
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Local Government Finance Act 1982
This established the principal that Local Authorities cannot issue supplementary
demands for local tax
Rates Act 1984
This established the principle that Central Government could cap local tax increases
proposed by Local Authorities
Local Government Act 1986
This established the principle that councils had to set the level of local tax by March
Until this was enacted there was no time laid down by statute for when a rate
had to be made.
.
Local Government Act and Housing Act 1989
.
The 1989 Act required all local authority expenditure to be accounted for in
accordance with proper practice i.e. any generally recognised published code
which may be published. The Act also required local authorities to maintain a
separate account - the Housing Revenue Account – for all transactions related to
or associated with local authority council housing.
Local Government Act 1992
Chapter III of the Local Government Act 1992 prescribed how a local authority
should determine its budget requirement and replaced the person based
Community Charge with the property based Council Tax as the locally controlled
funding source.
Sections 32 and 43 of the Act set out respectively how a billing authority (e.g. a
shire district, London or metropolitan borough) and a major precepting authority
other than the Greater London Authority (e.g. a shire county council) are to
calculate their budget requirements for a financial year. Sections 33 and 44 of
the Act set out respectively how a billing authority and a major precepting
authority are to calculate the basic amount of their council tax. For the Greater
London Authority the budget requirement is calculated under section 85 of the
Greater London Authority Act 1999, the basic amount of council tax (for services
funded by the GLA other than the Metropolitan Police Authority is calculated
under section 88 of that Act and the additional amount of council tax in respect
of the Metropolitan Police Authority is calculated under section 89 of that Act.
Local Government Act 1999
The Secretary of State took new reserve powers in the
1999 which enabled him/her to:
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Local Government Act
regulate increases in council tax;
to adopt such criteria as he thinks fit but to focus on increases in local
authorities’ budget requirements over a number of years provided that the
period reviewed did not begin before April 1998;
to adopt different criteria to different classes of authority or indeed
different authorities.
The same Act also abolished compulsory competitive tendering and placed a new
duty on authorities to achieve best value. Best value authorities were required to
prepare Best Value Performance Plans for each financial year which set out the
arrangements which were being made to secure continuous improvement in the
way functions were exercised having regard to a combination of economy,
efficiency and effectiveness. This was to an analysis of the authority’s budget and
performance indicators which in some cases were linked to financial
performance. This legislation also provided the framework for the new
Comprehensive Performance Assessments which were to be based on corporate
and service assessments and involve an annual assessment of each authority
which identified their strengths and weaknesses. The first set of assessments
were published by the Audit Commission in December 2002. Poor performing
authorities were likely to be subject to government intervention.
Local Government Act 2000
The Local Government Act 2000 included the following provisions which have
implications for budgeting across local government and the public sector more
generally:
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Local authorities were given the power to promote the economic and social
well being of their areas and to work with other bodies to develop
community strategies. This allows them to incur expenditure, give financial
assistance to other bodies and carry out their functions. This replaces the
old section 137 power in the 1972 Act and unlike its predecessor there is
no spending limit attached to the power.
A new ethical framework for councillors and employers was introduced –
backed up by new codes of conduct, standards committees and a
Standards Board.
The existing surcharge provisions were repealed.
The executive and scrutiny role in local government was to be separated.
The
Local Government Act 2000 thus goes some way towards giving local
authorities a general power of competence by giving English and Welsh
authorities a new discretionary power to do anything they consider likely to
promote or improve the economic, social or environmental well being of the
area. They enable local authorities to incur expenditure, give financial assistance
and/or provide goods and services to others and co-operate with other bodies.
The reforms to council structures has lead to the abolition of the old committee
system. . This change in political structures has had a significant impact on
budget development. The former Committee system has been replaced by
various executive models e.g. elected mayors or a leader and cabinet approach.
While the authority to set Council Tax remains with the general assembly of the
Council the power to scrutinise performance and the budget strategy has
generally passed to Overview and Scrutiny Committees.
Local Government Act 2003
The
Local Government Act 2003
enacted a number of changes to the
legislation regarding local authority capital finance, housing finance, fees and
charges and the ability of councils to engage in trade. The most significant
change is the introduction of a new prudential borrowing system which will
replace the former capital controls arrangements linked to credit approvals. Each
authority will have the power to determine its own prudent borrowing limit
although it will still be possible for the Treasury to restrict this if aggregate
targets are exceeded nationally.
Sections 25 to 29 of the Act impose new duties on local authorities about how
they set and monitor their budgets.
The new duties are designed to help ensure that authorities make prudent
allowance for risk and uncertainties in their budgets, and regularly monitor their
finances during the year. Largely they leave discretion with the authorities about
the allowances to be made and action to be taken. But Section 26 is a reserve
power for the Government to lay down the minimum reserves that local
authorities must allow for when they set their budgets. Section 30 facilitates
remedial action when an authority's expenditure is forecast to exceed its
resources and its chief finance officer has made a formal report to that effect.
Section 26 requires local authorities to make allowances for the risks associated
with budget setting e.g.
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ensuring that there are adequate reserves to draw on if the service
estimates turn out to be insufficient;
making prudent allowance in the estimates for each service.
Section 44 requires an authority's chief finance officer to make a report to the
authority when it is considering its budget and council tax. The report must deal
with the robustness of the estimates and the adequacy of the reserves allowed
for in the budget proposals, so members will have authoritative advice available
to them when they make their decisions. The Section requires members to have
regard to the report in making their decisions.
Section 26 gives the Secretary of State power to determine minimum reserves
for local authorities in England by regulation. The National Assembly for Wales is
given a corresponding power in relation to local authorities in Wales. The
minimum applies to the budget process: authorities would have to ensure that
their budget made allowance for reserves at least equal to the minimum. Nothing
in the Section would prevent these reserves being used during the year, even if
as a result they fell below the minimum. However, if it was forecast that this was
likely to happen, Section 27 requires the chief finance officer to report to the
authority, at the time the following year's budget and council tax is being
considered, to explain the reasons and any action considered necessary to
prevent a repetition.
Sections 28 and 29 make budget monitoring a statutory duty. If monitoring
establishes that the budgetary situation has deteriorated authorities are required
to take such action as they consider necessary. This might include, for instance,
action to reduce spending in the rest of the year, or to increase income, or the
authority might decide to take no action but to finance the shortfall from
reserves.
Distinct budget procedures apply to the Greater London Authority and its
functional bodies, and so separate provision for these organisations is made in
Section 29. The monitoring duty is placed on the functional bodies (i.e. the
Metropolitan Police Authority, the London Fire and Emergency Planning Authority,
the London Development Agency and Transport for London) and (for its own
budget only) on the GLA. But, because the GLA is responsible for setting the
budgets of the functional bodies, when one of these bodies identifies a budget
deterioration the Section requires it to report the fact and the action it proposes
to take in response to the Mayor and the Chair of the Assembly.
Question. Has there been anything of significance in 2004/5
Statements of Standard Accounting Practice (SSAPs) Statements of
Recommended Practice (SORPS’s) and Financial Reporting Standards (FRSs)
Classification of expenditure and Income in Budgets will reflect underlying financial
accounting standards.
Historically standards in the UK have been set by the Accounting Standard s Board.
While these standards are developed primarily with the private sector in mind,
relevant parts of the SSAP’s and FRS,s have been adopted by public services.
Full details of the current Financial Reporting Standards and Statements of
Standard Accounting Practice are from the Accounting Standards Board.
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The European Uniion (EU) requirement that companies listed on EU echanges
should use International Financial Reporting Standards (IFRS) has lead to
IFRS requirements being gradually imported into UK GAAP as part of the
UK Accounting Standards Board’s (ASB) convergence strategy.
Convergence will be achieved with gradual replacement of the existing
UK standards with those based on IFRS.
However the UK approach to specialised sectors by the use of Statements of
Recommended Practice (SORPS,s) have no international equivalent.
(SORPS’s) are particularly relevant to UK public sector organisations.
These will need to be changed to reflect changes in UK GAAP made as a
result of the convergence process.
In respect of Local Government the SORP is the Code of Practice on Local
Authority Accounting in the United Kingdom , which is developed and maintained
by CIPFA/LASAAC Joint Committee under the auspices of the ASB. Like other
SORP’S it is reviewed on a regular basis (link?)
The following have been listed in the SORP as being particularily applicable to
Local Authorities:
SSAP
SSAP
SSAP
SSAP
SSAP
SSAP
SSAP
FRS
FRS
FRS
FRS
4 Accounting For Government Grants
5 Accounting For VAT
9 Stocks and Long Term Contracts
17 Accounting For Post Balance Sheet Events
19 Accounting For Investment Properties
21 Accounting for Leases and Hire Purchase Contracts
24 Accounting For Pension Costs
1 Cash Flow Statements
5 Reporting The Substance of Transactions
17 Retirement Benefits
18 Accounting Policies