Local Government Finance

Cuts, cuts, cuts – the issues

• Spending squeeze on public sector means councils will see grants cut by 28% over four years

• Councils angry over ‘frontloading’ of cuts • Public angry over cuts to services and closures of

facilities • Is Big Society being used as way of concealing cuts?• “Democracy dodgers” - council tax freeze• Demand for many council services increasing putting

extra pressure on budgets • Significant job losses among councils (+shared services

concept)

Revenue expenditure

Essentially, a council’s day-to-day running costs necessary to provide services

It covers:

• Employees pay

• Repair and maintenance of land and buildings

• Payments to contractors or suppliers

• Grants to organisations

Capital expenditure

Spending on building things like:• Building new schools• Bypasses, roads• Facilities like sports centres/libraries• Major items of equipment (eg IT)

• Large capital projects usually cover three to five year periods – spread the costs

The Council Tax (funds revenue expenditure)

• A hybrid tax based on property element and personal element

• How much you pay is based on:i) Property bands: Band D (£68,000-£88,000) is the average (middle band) – Band H (more than £320,000 is the highest)ii) Two adults occupying property

Decisions on bands are based on property valuations as assessed by Inland Revenue Valuation Office Agency – based on property prices in 1991

The council tax

• Council tax levels are set by each local authority

• Resident (over age of 18) with strongest legal interest is liable to pay

• In two-tier areas, districts/boroughs are responsible for sending out bills and collecting payments

• Council tax levels must be set by full council

Council tax bands

• Band A - <under £40,000• Band B - £40,001 to £52,000• Band C - £52,001 to £68,000• Band D - £68,001 to £88,000 (the average)• Band E - £88,001 to £120,000• Band F - £120,001 to £160,000• Band G - £160,001 to £320,000• Band H – more than £320,000

Discount and exemptions

• Single person households discounted by 25%

• Those on low incomes or benefits receive rebates up to 100%

• Full-time students in student accommodation; those in care homes and homeless in hostels do not pay

• Bills for second home owners may be discounted (10 to 50 per cent - at council’s discretion)

Exemptions

• Properties are exempt where:

• They are empty and unfurnished for more than 6 months

• Empty and where person is in hospital or long-term care

• Empty and where person is in prison

Council tax bills

Bills are made up of different “precepts” - another word for the council tax sum being levied - of the different charging authorities:

In two-tier areas:• County council precept (the highest amount)• District/borough council precept

In unitary areas: The unitary precept

Council tax bills

• All council tax bills also include:

• Police authority precept

• Fire authority precept

And if there is one:

• Parish or town council precept

How council tax has risen

• Average bill 1995: £609

• Average bill 2012: £1,201

• Kent County Council bill 2012: £1,047

• Medway Council average bill: £1,113

Three Kent councils are increasing bills in 2013 – Tunbridge Wells, Gravesham, Canterbury

Is it fair?

• Regressive: unrelated to ability to pay; those in lower bands pay proportionately more

• Tougher on those on fixed incomes (pensioners)• Valuations out of date – wide regional variations• Bills have increased above rate of inflation• Does not give councils financial autonomy or

enhance accountability

Capping

• Govt. has reserve powers to “cap” a council’s budget if deemed excessive

• Powers to either nominate or designate

• Used to halt excessive council tax increases

• Can mean councils having to issue new bills

New – local council tax benefit schemes

• Govt. says councils must now arrange council tax benefit schemes

• But councils say Govt. has not given enough money to do so – grant has been cut by 10%

• Pensioners continue to be protected• But others no welfare benefits being asked

to pay council tax for first time• Typically, about 8.5% of average bill

Referendums…

• Govt. says any increase in council tax of 2% or more should be subject to public vote

• Most councils evading this by increasing by less than 2%

• Leading to “democracy dodgers” complaint by Mr Pickles

Where the money comes from

• Central government provides the lion’s share of council money (approx 75 per cent) – controls of purse strings

• Money from Government comes in the form of different grants (called ‘specific’ and ‘general’ grants)

• Spending framework for all public services set over three year period

• More specific figures come via the yearly Local Government Finance Settlement (usually November)

Government grants

Grants in all forms are known as Aggregate External Finance.

This money supports:

• Revenue expenditure

• Capital expenditure

• Housing expenditure

Government grants for revenue expenditureFormula Grants

• Block grants that can be spent by council as it sees fit on revenue expenditure (around 40% of govt. grant money)

• Based on formulae that take into account council tax base (ie how much can be raised) and how many people rely on services

Specific grants

• Grants paid for particular services (60% of government aid for revenue spending)

• Includes bulk of money for schools (Dedicated Schools Grant - DSG)

• Some specific grants are ring-fenced (money comes with conditions)

• Some are unfenced/targeted (no restrictions)

Specific grants - DSG

The Dedicated Schools Grant:

• Provides funding for schools

• 100% from the DfE

• Councils have no say in how it is spent – just pass it on to schools – “passporting”

Revenue Support Grant - RSG

• Post 2006: accounts for much smaller slice of grant aid to councils – about five per cent. How much a council gets is based on:

• Relative Needs Formula (RNF) – formula based on various factors: deprivation; high wage costs; tourism; commuters

• Relative Resource Amount (RRA) – how much councils can raise from council tax. In effect, a Govt. judgement about an authority’s ‘wealth’

• Central Allocation (CA) – additional money based on population

Area based grants (ABG)

• Designed to encourage partnership working – councils with other organisations, eg charities; businesses; neighbouring authorities

• Aimed at improving efficiency; cutting costs and avoiding duplication of services

• £45billion of ABGs has gone to councils in 2009

Govt. approach to revenue grants

• Vulnerable communities a priority – deprived areas with social challenges

• Protection for social care

• Council tax freeze – funded by extra 2.5 per cent in grants for councils

• Power for residents to veto council tax increases in future years through referendums

Uniform business rates

• Paid by occupiers of commercial and industrial properties (shops, factories, businesses)

• Based on rateable value of property x national multiplier (set by Government)

• Collected by district councils but passed to Government for redistribution (based on ‘need’)

• Also know as National Non-Domestic Rate

Relief/discounts on UBR

• Small business rate relief (<£50,000 = 50% discount)

• Lower multiplier for those with rateable values between £10,000 - £14,999

• Empty properties

• Charities and charity shops

• Non-profit organisations

• Agricultural land

Uniform business rates

• How formula is calculated:

• Rateable value of property x National Multiplier

• For eg, where premises have rateable value of £50,000 and multiplier is 50 pence, the UBR is £25,000

Fees and charges

• Parking • Planning application fees• Allotments• Libraries• Leisure centres• Social care • + others specific to councils, (eg Kent

Freedom Pass fee rising to £100 in 2011)

Capital funding – how it works

• Borrowing to pay for capital schemes operates under what is known as “prudential borrowing regime” (Local Govt. Act 2003)

• Under PBR, councils decide how much they can afford to pay, taking into account how much they need to repay (impact on council taxpayers)

• Borrowing agreements must accord with Cipfa (Chartered Institute of Public Finance and Accountancy) code

• Money may be borrowed from various sources

Prudential funding

• Govt. has reserve power to impose “ceilings” limiting how much can be spent

• System encourages responsibility – how much can we (& taxpayers) afford?

• Allows councils greater freedom to decide priorities

• Viable alternative to PFI• Could be self-financing (eg adding facility

to leisure centre that pays for itself)

The Private Finance Initiative - PFI

• Private consortium pays upfront for project in a contract with council

• Building/facility is leased back to council

• Costs paid off by council over period of between 20-30 years (plus interest) after which council retains ownership

PFI ii

• Delays or bad management usually penalised

• Interest payments can mean costs rise above actual costs

• PFI contracts often include arrangements for company to maintain and manage asset over relevant period

PFI – advantages/disadvantages

Good:• Risks taken by private contractor• Enables council to get scheme built more quickly

Less good:• Risk of contractors underbidding for contracts

and then folding• Interest costs hike up eventual overall bill• Council ends up after agreement period with

relatively old asset

Public Works Loan Board

• Executive arm of the Treasury• Enables councils to borrow money more cheaply than if

they went to the City or banking institutions• Board approves loans only if satisfied loans can be

repaid• Collects the repayments, which include interest (usually

lower than elsewhere)• Money drawn from National Loans Fund• Overseen by 12 commissioners

Capital receipts

• Sale of assets, eg land, buildings, housing

• One-off money: once spent, it’s gone!

• Some money from any sale must be “pooled” – given to the government, which redistributes it

• How much is pooled varies according to how much is raised – can be 50 per cent

Capital receipts ii

• Since 2004, Govt has set limits on how much can be used for projects – “usable” sum

• Some of the money from sale must be “pooled” – given to Government and then redistributed

• Can prove controversial (eg playing fields, allotments to developers)

Other capital sources

• Money from income raised by rents, fees and charges (eg leisure centres; library charges; fees for planning applications; parking; school meals)

• Councils raised £10.8billion from charges in 2006-07 – equal to £210 per person

• Income from fees/charges usually relatively small when compared with other sources

Other capital grants

• Central govt - through national schemes, such as Single Regeneration Budget, Sure Start

• European Union – via structural funds (usually to deprived/disadvantaged regions) – Objective One and Objective Two status

• National Lottery