External Environment to Budgeting: Local Government

External Environment to Budgeting: Local Government

April 2008March 2012

This section identifies the external factors and developments which influence budgeting in local government, summarising the main developments which have taken place in recent years.

Involving Key Stakeholders in Budget Setting – The Conflict Between National and Local Priorities

A local authority’s expenditure plans will be influenced by local pressures and demographic factors which may affect either the overall level of expenditure taken into account in assessing the acceptable level of growth or reduction in services, or the individual apportionment of resources to particular services.

It is important to recognise that a change in the volume of current expenditure is not necessarily the same as change in the level or standard of services provided; the maintenance of existing standards of service to an increasing population, for example, involves a real increase in the volume of expenditure.

Conversely, if an area’s school population is falling and there is a desire to maintain constant staff/pupil ratios, the provision for fewer school teachers will involve a reduction in expenditure but not in standards of service.

Local pressures, particularly in regard to individual services or projects, make inevitable demands upon resources and if the authority has determined an overall limit to its level of expenditure i.e. its budget then improvements in one area resulting from such pressures can be achieved only at the expense of other items within the predetermined total.

National indicators are normally expressed in terms of groups of services used for national statistical purposes. This means that it is inevitable that each individual authority will require flexibility within overall totals, to allocate additional resources or apportion reductions at its own discretion to those services it deems most appropriate. The move to a national indicator set has rationalized some of the volume of indicators but they still play a significant part in demonstrating accountability of the public sector to national government.

Although government advice and guidance indicates the implications for individual groups of services, the need for individual local authority judgementsjudgments to be made has generally been accepted by central government, and remains integral to local autonomy.

However, it is often difficult to explain to local taxpayers and pressure groups the validity of local variations and this difficulty is compounded by the prescription of published expenditure figures, (e.g. the formula spending share allocation particularly in relation to schools funding). This can lead to conflict where national and local aspirations do not coincide. The move to less ring fencing of grants (for example, following the introduction of the Area Based Grants) is a means of allowing greater flexibility for local authorities to match resource allocations to individual targets and respond to local circumstances, with less micro management from the national government. This gives greater flexibility to local authorities, but also means they are more accountable for their resource allocations and performance.

There has been a growing tendency in recent years for other bodies to become involved in the budget process. The acceptance over the last decade of the importance of partnership working has led to greater involvement of other statutory or voluntary bodies in the setting of the Local Authorities budget. The development of Local Strategic Partnerships (LSP’s) and more recently Community Budgets has also meant a need to reflect a wider range of stakeholders views in the budget in addition to the traditional; political structures. The developing community leadership role of the local authority means that local priorities will take on greater importance. This, however, can conflict with those services where there is a high amount of national government direction, such as schools and health. Politics are a firm feature of local government and political group meetings are held regularly in many authorities. Their prime reason for existence is to promote and control local policies and it is difficult for them to do so without having regard to the authority’s budget. Even if the officers do not attend such meetings, and there is growing pressure for them to do so occasionally, budget reports are discussed and decisions taken which will later be reflected in formal decisions by the organisation.

Scotland

In Scotland the impact of devolution has created a new relationship between local authorities and the Scottish Government, whereby national priorities in areas such as social care and education are reflected in budget settlements, either through the grant settlement or via specific funding outside of the aggregate of external finance (AEF).

However, following the 2008/09 funding settlement, the number of ring-fenced grants has been significantly reduced (to eight ring-fenced revenue grants) as part of the 'Concordat' between the Scottish Government and local authorities. The police grants of £581 million makes up the greatest element out of a total of £764 million in ring fenced funding. This amounts to only 7.5% of total Scottish Government funding for local authorities.

Legislation Before 1992

Until the Local Government Finance Act 1992, there was no direct statutory provision requiring a local authority to prepare a budget. However, there is a long history of provisions in other Acts which amount to an indirect requirement and impacted upon the way in which budgets were prepared.

General Rate Act 1967

The General Rate Act 1967 established that every rating authority had the legal duty to set taxation 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 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 the preparation of budgets is so fundamental to proper financial administration that it is arguable that the need to prepare budgets stems 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.

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.

Local Government Finance Act 1982

The Local Government Finance Act 1982 established the principle that local authorities cannot issue supplementary demands for local tax.

Rates Act 1984

The Rates Act 1984 established the principle that central government could cap local tax increases proposed by local authorities.( note however that the Localism Act 2011 transferred this power the Local Communities –see later).

Local Government Act 1986

The Local Government Act 1986 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 and Housing Act 1989

The Local Government and Housing Act 1989 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 (HRA) – for all transactions related to or associated with local authority council housing.

Local Government Finance Act 1992

The Local Government Finance Act 1992 identifies the steps that both billing and precepting authorities must take in the calculation of the budget requirement, starting with:

“the expenditure which the authority estimates it will incur in the year in performing its functions and will charge to a revenue account for the year”.

Chapter 3 of the Local Government Act 1992 prescribes 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.

To illustrate this application of the Act a local authority’s budget requirement in England and Wales is calculated under sections 32 to 36 of the 1992 Act using the formula as follows:

A being the Council tax base for the Council is calculated in accordance with regulation 3 of the Local Authorities (Calculation of Council tax base) regulations 1992 as amended
B being the council’s gross general fund expenditure as prescribed under sections 32(2) (a) to (e) of the Act
Minus
C being the council’s income from fees, charges and specific grants as prescribed under Section 32(3) (a) to (c) of the Act
Equals
D being the council’s budget requirement i.e. the amount by which A exceeds B in accordance with section 32 (4) of the Act
Minus
E being the aggregate sum which the Council estimates will payable into its general fund in respect of redistributed non domestic rates and revenue support (formula) grant, increased (or decreased) by the estimated surplus (or deficit) on the Collection Fund which the council estimates will be transferred into the general fund in accordance with section 22 of Part III of the Act
Equals
F being the aggregate sum to be met from local council tax payers
Divided By
G being the Council tax base for the authority which gives the basic amount of its Council tax for the year for a typical property in Band D in accordance with Section 33 (1) of the Act.

The amount of council tax in G reflects only the charge for the authority concerned and will need to be adjusted to take into account the expenditure plans of precepting bodies (e.g. shire county councils and the Greater London Authority in England) as well as the effect of parish and community council precepts (under Section 41 of the Act) which relate to only part of an authority’s area in order to generate the total level of local taxation to be charged.

Legislation Since 1997

Local government legislation directly impacting on budgeting after the 1992 Act was relatively limited until the 1997 election.

The 1997 Labour Party manifesto identified a number of issues in the sphere of central and local relations which it considered needed reforming, e.g.

·  the balance of funding between central and local government with the intention that a greater proportion of resources be raised locally;

·  the mechanism for redistributing grant to local authorities including the need to introduce a degree of stability into the system;

·  the system of capital and debt financing for local authorities;

·  the replacement of compulsory competitive tendering by a system of best value;

·  greater freedoms and flexibilities for authorities linked to a more effective system of performance measurement.

These commitments were consulted on and implemented through a series of green papers (Modernising Local Government, March 1998; Modernising Local Government Finance, September 2000) and white papers (Modern Local Government – In Touch with the People, July 1998; Strong Local Leadership - Quality Public Services, December 2001).

These culminated in the Local Government Acts of 1999, 2000 and 2003. The key implications of each of these for local authority budgeting are summarised below.

Local Government Act 1999

Universal capping of local authorities, which had become a feature of local government finance in the late 1980s, was abandoned after 1997. This, not withstanding the Local Government Act 1999, gave the secretary of state new reserve powers to:

·  regulate increases in council tax;

·  adopt such criteria as he/she thinks fit to focus on increases in local authorities’ budget requirements – with powers to look at changes in budgets over a number of years;

·  apply different criteria to different local authorities.

These powers were first used by the Office of the Deputy Prime Minister (ODPM)ODPM in the 2004/05 budget setting round when capping notices were served on a number of English local authorities.

The Local Government Act 1999 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 (BVPPs) for each financial year setting 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 provide an analysis of the authority’s budget and performance indicators which in some cases were linked to financial performance.

The 1999 Act also provided the framework for the new comprehensive performance assessments (CPAs) which were to be based on corporate and service assessments and involve an annual assessment of each authority which identified their strengths and weaknesses.

Local Government Act 2000

The Local Government Act 2000 goes someway 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.

This power enables local authorities to incur expenditure, give financial assistance and/or provide goods and services to others and co-operate with other bodies.

The 2000 Act also proposed reforms to council structures and abolished the old committee system. Approval of the council’s budget remains the responsibility of the full council but each authority is required to set up an overview and scrutiny committee which has the role of making policy and budget proposals to the council.