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Local Government Finance & Local Tax

The Local Government Finance System

Central Government has set up three separate systems to fund the three main blocks of local authority spending in England. These blocks are:

  • spending on capital projects such as roads, school buildings or computers
  • revenue spending on council housing
  • revenue expenditure – mainly on pay and other costs of running services other than council housing. This revenue spending is supported primarily through formula grant, but also through some ring fenced grants

From 2006/07 funding for schools switched from formula grant to the ring fenced Dedicated Schools Grant (DSG). Together formula and specific grants totaled £70.2 billion in 2008/09 and £73.1 billion in 2009/10.

SIGOMA played a significant role in the review of local government finance, in particular the distribution of grant, and our work has promoted the need to take account of individual local authority circumstances, fairness in the allocation of resources and the need for a revaluation of council tax.

Three Year Settlements

From 2008/09, the Government announced settlements for three years at a time, in line with the Spending Review timetable.

The Secretary of State announces a provisional Finance Settlement to Parliament and to local authorities in late November or early December each year.

After the Secretary of State’s announcement there is a period of consultation, when local authorities can put their views on the proposals to Government, and point out any errors that may have been made. Once all points from local authorities have been considered and any amendments have been incorporated, the final Finance Settlement is approved by the House of Commons in late January early February – allowing enough time for authorities to finalise their budgets for the next financial year.

The Four Block Model

The Four Block System was introduced in 2006/07. Under the new system the distribution of formula grant is determined by Relative Needs Formulae, the Relative Resource Amount, the Central Allocation and the Floor Damping Scheme.

Relative Needs BlockDistributes grant based on need using Relative Needs Formulae (RNFs)
Resources BlockNegative Grant Allocation reflects an authorities ability to raise its own revenue via Council Tax
Central Allocation BlockDistributes the remaining grant based on population numbers
Damping BlockEnsures all Authorities receive the minimum funding above “the floor”

The Damping Block referred to above is applied to the Grant Allocation of each authority. This damps or scales back the amount of funding above a minimum guaranteed increase in grant, which is known as the “floor”. However, any funding above the floor is scaled back to be used to enable other authorities under the minimum funding benchmark to be brought up to it.

SIGOMA loses £618 million in formula grant over the 2007 Spending Review Period through damping, despite having some of the most deprived communities in England. The formula recognises this need but changes to funding are slow.

Local Taxation

SIGOMA calls on the Government to:

  • Take account of individuals ability to pay
  • Take full account of authorities ability to generate resources
  • Make sure any solution is transparent and fair
  • Support local accountability

The future of Local Government Funding has long been debated, but with no real clarity at this stage on the way forward.

Clearly the removal of schools funding to a direct grant, and the discussions on the future of local government itself, will have a significant impact on the details of a more suitable taxation system. A fundamental principle will need to underpin the outcome – equalisation.

It has been accepted that the level of deprivation is the key driver shaping the balance of funding between central and local government. More deprived local areas tend to have both less capacity to raise revenue locally and a greater need for resources to deal with that deprivation. The issue to address is how far equalisation should reach, with judgements to be made on when it could become counterproductive to local development and growth.

It is also clear that if a property tax is still to be part of the overall package then the issue of revaluation cannot be ignored.

The current Council Tax system has become implausible, based on 1991 data it no longer reflects the current patterns of wealth and ability to pay. The decision to delay revaluation indefinitely was extremely disappointing and unacceptable to SIGOMA authorities. The opportunity to help those least able to pay and avoid the perverse impacts of the current tax was lost.

Council tax cannot continue to exist in its current form and consideration needs to be given to the number and width of council tax bands. Another crucial element must be the simplification and updating of the current benefits system to include consideration of automatic entitlement to benefits for vulnerable groups like pensioners and those out of work.

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