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 government accounts for about a quarter of all public spending in the UK. Net current expenditure in 2012-13 was £112 billion. The three main sources of income for local government in England are government grants, council tax and redistributed business rates. Local government’s 2010-11 budgeted revenue expenditure (not the same as net current expenditure) of £98 billion in 2012-13was budgeted to be financed as follows:
Government grants = £57,657m in 2010-11 (55%), £56,237m in 2011-12 (57%), £46,765m in 2012-13 (50%)
Council tax = £26,254m in 2010-11 (25%), £26,451m in 2011-12 (27%), £26,715m in 2012-13 (28%)
Redistributed rates = £21,517m in 2010-11 (21%), £19,017m in 2011-12 (19%), £23,129m in 2012-13 (25%)
Councils also receive income from returns on borrowing and investments, interest and capital receipts, sales, fees and charges and council rents.
Council tax makes up the majority of the difference between a council’s planned budget and its central funding. In 2011-12, the government began making extra funding available to councils which froze their council tax with the objective of making local authorities more likely to freeze tax levels. Council tax freeze grants have been available in every year since and will continue up to and including 2015-16. The total Government funding for a freeze over the period of time covering 2011-12 to 2015-16 is up to £5.2billion. Under the Localism Act 2011, councils are required to hold a referendum on council tax increases if they are above a certain level as proposed by the Government and approved by the House of Commons. As Council tax accounts for only one quarter of local income; a 4% increase in council tax is needed to achieve a 1% increase in total local spending. It has also been argued by some in local government that council tax is not really a local tax because, for all practical purposes, the government decides it. However, the government’s position is that local authorities have had a choice of whether to (i) freeze council tax and take the Government grant; (ii) increase council tax up to the level of the referendum threshold, or (iii) increase it above the threshold and hold a referendum for local people to either approve or veto the tax increase. In practice, the referendum obligation has operated as an effective deterrent against the raise of council tax as no authorities have so far chosen to hold a council tax referendum. In times of financial and economic crisis, it is politically hardly possible to find popular support for a raise of (council) taxes. Councils can also not revalue properties in their local area (leading to discrepancies between the market price-level and the property value). There are no further tax-raising powers, such as a tourist tax or similar.
Councils collect business rates (officially called National Non-Domestic Rates) on behalf of central government and pay them into a central account controlled by the Department for Communities and Local Government. These funds are then redistributed back to councils by the department on a per head basis. This reflects the basis of distribution prior to 2006-07; after that business rates were distributed on the same basis as the Revenue Support Grant (RSG). Councils do not set business rate levels, they are centrally determined. The Government has now introduced the business rates retention scheme. Operating from 1 April 2013, this scheme sees 50% of business rates paid to central government and 50% of the business rates retained by local authorities. The scheme also allows for local authorities to keep a proportion of any business rates growth, although – according to the LGA – some authorities will be allowed to keep much less than this because of the complicated arrangements for funding the scheme as a whole.
A fundamental question in relation to Article 9 of the Charter is whether local government will have adequate (own) financial resources and whether these are commensurate with its functions.
Following the 2010 General Election the new Coalition Government urgently began to tackle the UK’s “record debts”. This has led to continuous cuts in Government spending since 2010, including cuts to the grants given to local government by central government. Overall these cuts equate to a real terms reduction of at least 32% over the last four year period of the Comprehensive Spending Review (CSR). According to all interlocutors from local authorities and publications of the LGA, “this is the toughest local government financial settlement in living memory”. Some councils face more than 16% of reduction in the amount of money they receive from the Government. The financial cuts mean that City of York Council faces cuts of about £60 million from the budget, over an 8 year period. Leeds is very much in the same financial position – it is just a matter of scale – they will need to make cuts to the tune of a staggering £50 million next year.
Even more worrying is that these changes are structural rather than temporary, as the next CSR (2015) will start from the spending control total resulting from all these changes. It appears that the cuts have also been decided unilaterally by central government, between the Ministries, without the involvement of local authorities or the LGA.
The Government “de-ring-fenced” some of these grants in order to give local government more freedom over how money is spent in individual areas. In 2013/14, ring-fenced grants amounted to nearly two thirds out of a total of £88,953 million Central government grants. This continues to push local government to find further efficiencies and deliver better value for money through structural changes and innovations.
The delegation heard that, in April 2013, central government delegated three services to local authorities: Council Tax benefit Localisation, Social Fund and Children-on-Remand. In each case, local authorities were asked to take over additional responsibility and control costs, leading to the transfer of a significant financial risk as these services are demand dependant. This looks contrary even to the New Burdens Doctrine guidance published in 2011, according to which “all new burdens on local authorities must be properly assessed and fully funded by the relevant (government) department.”
In order to support local service transformation, the Government has introduced a number of measures which include the £3.8 billion Better Care Fund for the integration of the provision of health and social care, a £300 million transformation fund for councils to fund up-front costs of service re-engineering, and the establishment of the Public Service Transformation Network. With regard to article 9.3 (financial resources deriving from the local level), it can be observed that councils have responded to the localisation of resources, in particular to the recent financial incentives, including the localisation of business rates, City Deal incentives (agreements between the government and cities to increase the latter’s powers) and the discretion to determine council and business tax discount, in a positive way. However, as most of these financial reforms are quite recent, it is not yet possible to assess their full impact in practice.
The distribution of central government funding to local authorities is determined using complex distribution formulae, taking into account population and other demographic factors as well as the ability to raise revenues locally from the property tax base. The Standard Spending Assessment (SSA) was designed to provide a notional spending allocation for each local authority taking into account their needs and population. The aim was to ensure that, for the same level of services, each authority should be able to set the same average council tax, having regard to their respective property tax base (i.e. relative values). This was the original aim; by the mid-1990's Government made it clear that SSAs were simply a measure used to distribute grants. This was consolidated in 2003-04 when SSAs were replaced with Formula Spending Shares. It was replaced from 2006-07 onwards by the ‘four block’ model which contained separate components linked to population (central share), needs including deprivation and relative costs pressures (relative need amount), respective residential property tax bases (relative resource amount) and a fourth block (damping) to guarantee a minimum level of change year on year.
In recent years, as a result of the reduction in expenditure to meet the Government’s spending targets, damping to reduce the year-on-year volatility of allocations between authorities has become more pronounced. This places authorities in “bands” based on their relative reliance on grant funding. As a result, one London Borough, which was entitled to a 9% grant increase under the needs formula in 2013-14, received the same percentage reduction in grant as another Borough which, on the basis of the formula, should have had a 31% grant reduction. From 2014-15 onwards there will be an even greater focus on limiting variability and giving all authorities undertaking the same services similar percentage cuts – and the link with needs/population/demographic changes will be further reduced. According to interlocutors, local grant allocations will not be recalculated on the basis of updated needs assessments until 2020/21.
There are few budgetary restrictions. Indebtedness and deficits are mitigated by the Prudential Code which received statutory force by the Local Government Act 2003 and subsequent amendments. Local authorities can only borrow long-term to fund capital investment. Operating costs are funded from day-to-day resources through an active treasury management regime. Local authorities are allowed to borrow under the Prudential Code, meaning the amount of debt and other liabilities do not have an upper limit but must be affordable and prudential. The Prudential Code sets out indicators relating to affordability, sustainability and prudence to be respected. It does not apply, however, in all areas. For example, the amount of borrowing councils can undertake for the purpose of increasing local social housing supply is capped by the Government, as part of the Government’s deficit reduction policies. The LGA, London Councils and the GLA are, however, lobbying for this system to be changed to allow more investment in housing.
In Scotland, local government is allocated around one third of the devolved budget of around £33 billion, giving them significant procurement power. Moreover, despite substantial staff reductions over the recent years, local authorities remain one of Scotland’s biggest employers. With over 248 200 staff, they employ around 45% of the public workforce in Scotland and provide 1 in 10 jobs in Scotland overall.
In terms of resources, however, councils are very dependent on the Scottish Government. Budgets are not statutorily protected and councils have little statutory ability to influence the budgets they receive. But, most importantly, councils raise only a small amount of their resources locally: 80â€‘85% of budgets come from the government, with only 15-20% raised through local taxation (council tax). Although there are negotiations with COSLA for the local government budget, ultimately the power rests with the Scottish Government.
The 2012-13 local government settlement was £11,5 billion (£10,9 billion in revenue funding and £0,6 billion in capital grant funding). Income generated from council tax was £1,9 billion. These figures do not include revenue from sources such as housing rents and local charges. Councils are able to borrow (under certain constraints) under the Local Government (Scotland) Act 1973. Interlocutors have underlined the importance of European funding, in particular for the infrastructure.
In terms of expenditure, education accounts for nearly 40% of total expenditure. A further 25% is spent on social work (but this is expected to increase rapidly due to the ageing of the population). The remainder is spent on other services including roads and transport, planning and development and culture related areas.
According to interlocutors, formal ring-fencing has been reduced, leaving definitively more choice in spending, but councils still have significantly less ability to raise and control resources locally. The Rapporteurs would suggest that, in future, the focus should shift to the joint improvement of outcomes. This would allow for an assessment of the services delivered, and leave more room for discretion to councils on how to perform them.
However, also in Scotland, local government budgets have been reduced in the wake of the economic and financial crisis. The crisis and long term trends such as population ageing mean that resources are diminishing while demand for public services is growing rapidly. In the 2007, COSLA and the Scottish Government signed the Concordat, freezing council tax and agreeing upon additional funding to compensate for it. This has been criticised as a voluntary renouncement of own-decision-making powers in financial issues. Today there is ongoing discussion on the replacement of the current council tax system with a fairer local tax, based on ability to pay. Proposals for the introduction of a Local Income Tax have been dropped in 2008.
Local authorities in Wales receive the majority of their funding in the form of a revenue grant from the Welsh Government (RSG). The RSG is the main component of the local government revenue settlement, which comprises RSG and non-domestic rate income, which together are known as Aggregate External Finance (around 80% of local government finance). The remaining 20% comes from non-domestic rates (a national tax locally set and collected), council tax and income raised from fees and charges. The amount of council tax people pay depends on the value of their home.
Local authorities decide how the money from RSG as well as some additional capital funding should be spent according to their needs and priorities. They also receive a number of ring-fenced grants, both revenue and capital, which must be spent on specific activities (e.g. grants for social care, for bus shelters or for school uniforms). The RSG funding is shared out between authorities on the basis of a population-based distribution formula. The formula is kept under review by the Distribution Sub Group, a working group under the Partnership Council’s Consultative Forum on Finance.
In contrast to other parts of the public sector, local government has been financially sound over the 17 year period of unitary structures. Since 1996 no authority has failed to set a budget or has gone into deficit. Council tax collection rates in Wales are at a level of 96.7% of council tax billed.
The Welsh Government is heavily reliant on providing grants for specific purposes and (around 12% of council spend) regularises council’s abilities to charge for certain services. There is a growing expectation on local authorities to deliver more with less resources and, increasingly, local government needs a more flexible financial framework. The WLGA warns that this approach is unsustainable and will most probably worsen in the coming years, given the bleak financial outlook for local government in Wales (£ 175 million reduction for 2014/15, a £ 460 million reduction by the end of 2015/16).
A key issue is how to provide the necessary services for an ageing population in the context of drastic budgetary reductions alongside rising cost and demand pressures for local public services. Wales has a higher proportion of older people in its population compared with England, Scotland and Northern Ireland: currently over 700.000 people in Wales are over 65 years old (of a total 3 million population), and this number is expected to rise to over a million people in the next twenty years.
Another important question is whether central and devolved governments will succeed in moving beyond annual incremental budgeting and implement financial and budget strategies that cover their whole term in office. Local Government has been improving its system of medium-term financial plans since 2003/04.
Local government funding in Northern Ireland comes from several sources including rates, grants and fees from services:
a) District Rate Revenue – from both domestic and non-domestic properties;
b) The “de-rating” Grant, which compensates councils for the loss of income from de-rated properties (de-rating element), and the Rates Support Grant, which is paid to councils whose needs exceed their wealth (resources element);
c) Specific Grants – paid from government departments, EU agencies to assist the financing of certain revenue and capital expenditure;
d) Fees and charges – e.g. entrance fees for leisure centres.
The majority of district council funding, just over two thirds, is coming from the district rate (67.6%, see below). De-rating Grants and Rates Support Grant are not ring-fenced and make up 7.8% of a council’s income, while Specific Grants and fees and charges, are ring-fenced for special purposes, e.g. emergency planning (Department of Environment), Construction Products Grant for a council’s enforcement role and the Dereliction Grant. Together with fees and charges, these ring-fenced grants make up 23% of the total income.
Each council raises the majority of its income through the rating system. There are two different rates:
(a) a domestic rate for household and occupied residential properties. It is based on the capital value of a home as at 1 January 2005 and calculated by multiplying the rateable capital valuation by the domestic rate for the council area. The domestic rate is made up by the regional rate set by the Northern Ireland Executive and the district rate set by the individual council.
(b) a business rate for all non-domestic properties, such as offices, factories and shops. It is based on the rental value of the property as at 1 April 2001 and made up of a number of parts including the regional rate and the district rate set by the individual council.
Subject to the approval of the Ministry of the Environment, loans may be raised by councils to assist the financing or funding of capital projects.
Public services in Northern Ireland are not (yet) the subject of the severe cuts. Belfast City Council, for instance, is 75% self-funded from domestic and business rates whilst other great metropolitan areas in England are on average only 17.6% funded from the council tax base, or 12% in inner-London Boroughs. While the impact of the crisis has not been so severe, the budgets are relatively lower. With the prospect of new functions being transferred, the contemporary transfer of resources is necessary. As rate payers in Northern Ireland do not have the money for paying higher rates, the power to raise rates will not be sufficient for councils to guarantee a commensurate funding.
The Local Government Finance Act (Northern Ireland) 2011 modernised the legislative framework for local government finance. It introduced a new capital finance system and set out the legislative framework within which a district council may manage its finances and central government may regulate that activity. Control by central government is to be exercised, where necessary, through subordinate legislation and guidance. The Act also contains requirements for each council to approve estimates, authorise expenditure and fix the amount to be raised by its rates for the following year as well as report duties of the council’s Chief Financial Officer. It retains the power for a council to borrow for purposes relevant to its functions (adding purposes for the prudent management of its financial affairs) and removes the requirement for approval by the DCLG. While councils are now able to decide to take a loan to refinance existing debt, they will have to comply with regulations made by the DCLG when determining an affordable borrow limit.
Accounts and audit
Councils are legally required to provide annual accounts to show their financial transactions. These accounts are audited by local government auditors designated by the Ministry of the Environment. They have the power to reject expenditure which is considered not to be lawfully incurred
Conclusions as regards compliance with Article 9
Central government is able to exercise control over local government in England through the allocation of grant funding; Council tax funds only a relatively small proportion of expenditure and any attempt of raising its level above a specified threshold is subject to the referendum obligation. Moreover, business rate levels are also centrally determined, although from 1 April 2013, the business rates retention scheme sees 50% of business rates paid to central government and 50% of the business rates retained by local authorities. The scheme also allows for local authorities to keep a proportion of any business rates growth. The high share of central Government grants (a concern expressed in the 1997 CoE Report, 9) has been reduced, but remains still over 50%. While the proportion of ring-fenced grants has also fallen compared to 1998, it is still at a remarkably high 64%. All this reflects the centralised nature of local funding in England, although the recent business rates retention scheme might mark the beginning of a change.
The dramatic reduction in central government grants since 2010, is a strong indicator of funding being hardly commensurate with the functions and responsibilities of local government in England. This will lead to difficult decisions with regard to where savings can be made, including frontline services in future. The financial burden seems to have become even heavier as new functions have been given or delegated, without providing for adequate financial compensation.
The complex formulae for the distribution of central government funding to local authorities in England has been changed continuously over the last decade producing considerable uncertainty and, it seems, effects of unequal treatment in some specific cases.
Local authorities have freedom to prudentially borrow in practice. However, in 2012 the Treasury capped the amount councils in England could borrow against their ring-fenced housing budgets. In November 2013, in an opinion poll, three-quarters of councillors said that their authorities would borrow to build more homes if the government’s existing cap on Housing Revenue Account borrowing was lifted.
In Scotland, all local authorities have accepted the terms of the Concordat on the council tax “freeze” in return for increased spending flexibility. Although the freeze is based upon an agreement, it makes them virtually totally dependent on the Scottish Government, which transfers government grants, fixes levels of non-domestic rates and has frozen the council tax, leaving almost no room for autonomous fiscal capacity.
Considering the severe budget cuts that local government in the UK is generally facing means that in the current economic climate financial resources will increasingly be no longer commensurate with local authorities’ responsibilities. This will have huge implications on public service delivery, and possible implications for the workforce employed by local government.
The capacity to deliver essential public services, quality health and social care and effective and adequate community services and facilities, especially to the growing number of older people will be severely restricted by the austerity measures placed upon local government. This makes the question of commensurate finances for local government even more urgent. The Government seems committed to the introduction of a number of measures to support local service transformation.
The rapporteurs conclude that, given the above, the system cannot be said to be in compliance with Article 9 paragraphs 1, 2, 3 and 4 of the Charter. Local authorities do not have adequate financial resources and the prospects for the coming years appear even worse. Since the first report of 1998, which recommended to “seriously increase local government’s financial capacities”, the financial situation of local authorities has worsened. While local government finances are part of a national economic policy, it seems that local government is faring worse than other public sectors and national government. A diversified base of local revenue appears an urgent necessity, as Council tax is the only tax under some level of local control. However it is limited by central or devolved governments, due to the referendum obligation (England) and the freeze of council tax (Scotland). In addition, all rates are decided by governments and funding is still dominated by central government grants. In England, the new business rates retention scheme appears as a move in the right direction (diversification). Despite significant cuts, in Wales and Scotland local authorities are (still) better off financially than their English counterparts, but lacking diversity of local finances is a concern also there.
On the positive side, ring-fencing has been reduced and access to borrowing is guaranteed; thus, there is compliance regarding these two issues.