Pa1 - Power Point 3. Local Govt Finance

Public Affairs Part I Local Government Finance

Types of Local Govt Finance There are two main types of finance: • Revenue – Money needed to fund day-today spending (e.g. running costs of offices, schools, roads, etc) • Capital – Investment in infrastructure (e.g. the building of new roads, schools, etc)

Breakdown of local authority revenue income for 2008-9

Breakdown of local authority revenue spending 2008-9

The Revenue Spending Process To meet its revenue spending requirements, a local authority relies on three forms of funding: • Grants (53%) – including RSG (3%), area-based (3%), police (4%), and specific grants (43%) • Council Tax (25%) • Uniform Business Rates (21%) • Reserves (1%) Until recently, the main form of grant used to cover the cost of routine council spending has been the revenue support grant (RSG), also known as the general block grant

RSG and other Formula Grants The RSG is actually one of three types of grant grouped together as formula grants: • RSG • Redistributed UBR – or national non-domestic rate (NNDR) • Principal formula police grant (PFPG)

How the RSG is Calculated The RSG was initially calculated on the basis of so-called formula spending shares (FSS) - i.e. calculations of how much central government feels given authorities needs to be able to provide a “national level of service” in all the areas for which they are responsible. This was based on a variety of complex demographic factors, including nature (as well as size) of local population. The FSS was introduced by Labour to replace its precursor, known as standard spending assessment (SSA), which was a much more ‘top-down’ means of allocating money which tended to concentrate purely on population size and failed to take into account specific local circumstances.

How the RSG is Calculated The formula was changed recently, to introduce the concept of the relative needs formula (RNF), and the relative resource amount (RRA). Essentially, the former is a calculation by central government of how much money a given local authority needed to provide that “national level of service” in key areas, and the latter is a negative sum based on the assumption that the council can raise much of this money itself through council tax and other means. Subtracting the RRA from the RNF gives the amount of money the council needed to receive in government grants. To ensure all councils – no matter how well they do relative to others from the allocation, receive at least a minimum year-on-year rise, the government uses a process called floor-damping.

Other Forms of Revenue Grant There are also two types of non-formula grant: • Specific grants - for specific areas of service need • Area-based grants – to be shared between councils and other local agencies working in partnership in an area Specific grants are then further split into: • Ring-fenced grants – e.g. Dedicated Schools Grant • Unfenced grants – like the RSG, these are for councils to spend as they see fit, within a specific broad service area (e.g. the Housing Planning Delivery Grant). Unlike unlike RSG, they are not calculated using a formula.

The Gearing Effect With all the funding formulae, there has been a tendency for governments not to significantly increase the size of formula grants from one year to the next. If the real terms costs of providing local services go up but the RSG fails to keep pace with this, councils’ only means of making up the difference is to raise the levels of local taxation by a disproportionately large degree. The net knock-on effect of this is known as the gearing effect (e.g. 1% drop in level of RSG could lead to a 4% rise in council tax).

Central government control of council’s spending The fashion for governments to target grants, in a ‘ring-fenced’ way, at specific areas of need/geographical areas is known as passporting. Examples of passported grants include the Mental Illness Specific Grant introduced under the Tories’ controversial “Care in the Community” legislation in the early 1990s, and the recent additional payments made to local authorities to help them implement the new healthy school meals guidelines introduced by the School Food Trust. Despite the restrictions imposed on councils by passporting, they have limited discretion to move money between some areas within a given financial year. This process is known as virement. Ultimately, though – as with local taxation – the government has the power to cap spending.

Evolution of Local Taxation Local taxation has evolved through three key stages over the past 30 years: •

Rates – a property-based tax which related to the “rateable value” (i.e. rent levels chargeable) for given properties

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Community Charge/ Poll Tax – deeply unpopular “head tax” introduced by Margaret Thatcher in the late 1980s. The aim was to make each individual pay their way, rather than levying taxes on properties, to avoid lone person households paying as much as neighbouring properties in the same bands occupied by several people. In the event, the Poll Tax was seen as even more unfair, though – only the unemployed were exempt, and some individuals on low incomes were charged exactly the same as multimillionaires because there was no banding. Even students had to pay!

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Council Tax – Introduced by John Major as a compromise replacement for Poll Tax, this is largely property-based, but this time related to “capital value” (market price). Retains elements of a “head tax” – e.g. single person discounts introduced to reduce the impact of new tax on people living alone.

How Council Tax is Calculated Despite being seen by many as an improvement on the Poll Tax, the Council Tax is still controversial – not least because the property values it is based on have not been updated since its introduction in 1993. Its main principles are as follows: •

Domestic properties split into eight broad bands, according to values at the time of the original valuation. The average is Band D

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Rationale for the tax is based on the assumption that two or more people occupy the same property, but adjustments made for other situations (e.g. students exempt, and single person discounts available)

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Calculation of average council tax bill is based on following formula:

the amount the authority intends to spend-non-council tax revenue Council tax base (no. of taxable households)

Uniform Business Rates (UBR) Uniform business rates (or the national nondomestic rate) are a form of local taxation paid by companies, based on the physical size of the premises they occupy. Unlike council tax, the money is collected locally, but then passed to central government to be redistributed across the country to areas in greater financial need. Govt also sets the annual rate at which UBR is charged, by dictating a national multiplier for each financial year (e.g. 3p in the £)

Uniform Business Rates (UBR) The UBR is controversial for several reasons: • As with the council tax, it is calculated on the basis of property values at the time of original valuation (1993) • Companies occupying larger premises (e.g. factories) pay significantly more than those operating from smaller ones, even though office-based financial services/online media companies, for example, will tend to be more profitable than those involved in manufacturing sector • Firms paying large amounts of UBR do not necessarily see that money coming back into their areas, and being spent on local services from which they benefit • Property tax bands are the same across the country

Other Useful Revenue Terms • Precept – Term for the “bill” levied on council taxpayers by individual local authorities (i.e. unitary authority and police authority in some areas, and county council, district/borough and police authority in two-tier areas) • Supplementary Precept – When council departments find themselves facing unexpected expenses after initially agreeing their precepts for the next financial year, they may apply to councillors for permission to increase their precepts • Minimum revenue provision – Amount councils must set aside by law to pay back any outstanding debt in any given year • Debt Charge – The value of any interest paid on debt in any given year • Capping – Government prevents council tax/spending rising above certain levels in specific geographical/service/local authority areas

Capital Expenditure The so-called capital programme is financed in a variety of ways: • Borrowing via Basic credit approvals and supplementary credit approvals. These are agreed by the Government • Public-private partnerships (PPPs) – previously known as Private Finance Initiative (PFI). Commercial companies put up part of the cost (often 50% or more) in the short-term of building a new school, library, care home or other capital project. The company is repaid over the period of a ‘lease’, which tends to be between 20 and 30 years, profiting from the interest accrued

Capital Expenditure • Government grants (often project-specific, e.g. central govt grants to enable buildings to be brought up to new health and safety/disabled access standards) • European Union grants (e.g. development grants) • Capital receipts (income from sale of land or property – this does not include the sale of council homes) • Local lotteries • Local Strategic Partnerships – e.g. different local authorities club together to tackle issues which present general infrastructural problems across their neighbouring areas