Local government finance

What is revenue spending?

The money councils spend on day-to-day running costs – 86% of total spending

• wages (for teachers, social workers, librarians etc),

• repair and maintenance of land and buildings (heating and lighting, parks and roads, vehicles)

• stationery, materials, fuel, interest payments etc

What is capital spending?

14% of council expenditure for large-scale building and refurbishment projects like new schools, roads, and community facilities which cost millions and will have to be funded over a period of years.

What is revenue income?

• Around half of all revenue funding comes to councils directly from central Government in the form of government grants and retained business rates

• council tax is the main income element councils can set themselves, along with rents, fees and charges, and any balances and reservesthe council has set aside for emergencies)

  • Rents, Fees & Charges – LAs charge for some services (e.g. rents, planning permission, parking, parking penalties, adult care, burials)

  • Balances and Reserves – Savings and reserves set aside for emergencies – may be used to reduce council tax

What are central government grants?

Government uses formulae to see how much councils should get – in general block grants which councils can spend how they want and in specific grants for particular services.

Specific grants

• Ring-fenced – can only be used for specific service

• Eg Dedicated schools grant, public health grant, police grant

General block grants

• Formula grants which local authorities can use as they wish

• Eg business rates, revenue support grant

What is council tax?

• Funds around half of total revenue spending

• Hybrid tax: domestic property tax paid by the householder based on market value of property and number of adults living in it

• Hits those on low incomes hardest and has risen at three times rate of inflation since 1993 – to an average of £2280 in England in 2025-26.

• Collected by billing authorities (districts, metropolitan districts, unitaries, London boroughs) on behalf of precepting authorities (eg county, police, parish, fire authority)

How do you calculate council tax?

• Eight bands depending on market value based on 1991 national valuation by listings officers

• Each council sets its own tax but ratios between bands must remain the same.

• Band D is the base band – those in Band H pay twice as much and Band A pays two-thirds.

• Council calculates how many Band D properties are in its area to set the tax

Who pays council tax?

• Most residents whether renting or owners

• Owners liable for bedsits, nursing homes, religious communities

• EXEMPT – full-time students, student nurses, apprentices, patients in long-term care, severely mentally impaired, monks, nuns

• Some properties exempt – occupied solely by students, unfurnished for six months because inhabitant is imprisoned, in hospital or in care

• Discretion for holiday homes – can pay 50% or 90%

• Relief up to 100% available for low income etc – means tested

• Based on two adults living in a house – single-person households get 25% discount

What are the advantages and disadvantages of council tax?

ADVANTAGES

• Property tax = difficult to evade + cheap to collect

• Predictable yield – makes budgeting simple

DISADVANTAGES

• Regressive tax – fails to take into account ability to pay – e.g. old people

• Average charge up by 150% since introduction

• Low tax yield – Does not raise that much

• Favours occupiers of expensive properties

What are business rates?

• Property tax on local businesses set by central government, collected by councils

• Paid by occupiers of commercial, industrial premises – shops and factories

• Total income traditionally has been redistributed so business-heavy areas don’t benefit disproportionately

• Properties given rateable value by HMRC valuation officer based on theoretical rent, based on factors like size, location and how it’s used

• rates revalued every 5 years

• Gov then sets ratings multiplier for whole of England which is used to calculate the rates bill

What is the revenue support grant?

RSG is a complex formula- government compares relative needs of different authorities, taking into account population size, deprivation etc and subtracts how much income they will generate from council tax

What is capping?

A reserve power central government can use to prevent councils levying higher council taxes.

What is capital spending?

LAs fund most of large building schemes with borrowing although need to show they can afford repayments and that plans are affordable, prudent and sustainable

Where can LAs get funding from?

• Borrowing from banks or central gov (via Public Works Loan Board)

  • A major means of funding projects but must be “prudential borrowing”

    • cons: debt charges – loans need to be paid off over a number of years, impacting revenue spending

• Government capital grants

  • Direct funding, possibly for specific projects, though sometimes not ringfenced – and overtook loans as the main source of capital funding in 2021

    • Cons: if ring-fenced, no choice over how to spend it – and might involve match funding

• Capital receipts

  • Money raised from selling off assets

    • Cons: family silver sold – once spent, asset is lost

• Revenue Sources

  • No central government control, but unlikely to be easy in current financial climate and may impact council tax or cuts to other services

• Private-Public Partnerships

  • Joint ventures with private sector enabling private sector finance to fund projects more quickly

    • Cons: May cost more than originally expected; developers may use it to secure planning application

• National Lottery

  • External funding for specific projects – very newsworthy

    • Cons: relatively small source of income

• EU

  • External funding for specific projects. UK no longer eligible after Brexit.

What are topical issues concerning government finance?

• Some areas (deprived – often Labour) get 75% of funding from grants; wealthier ones only 20%, so cuts for more deprived areas are devastating. Gov claimed it has addressed this problem by changing formula and giving transitional grants to those worst affected

• Business Increase bonus – councils who get significant increase in NNDR revenue by encouraging more non-domestic development may keep additional revenue for six years

• Figures in April 2019 revealed the amount of council tax unpaid had risen to over £3bn with more than two million households in arrears.