Overview of how local government finance works
Paying for local government services
Local government spending amounts to about 27% of all public spending. Local authorities spend the majority of this on providing schools, social services and maintaining roads, but they also provide many other services. In addition, local government spending pays for police and fire services.
Local government spending is paid for by three main sources:
- Central Government − 61%
- Business rates − 17%
- Council tax − 22%
Central government
The biggest single amount that local government receives is from central government. This is made up from ‘specific’ grants (54%), and a general grant (7%).
Specific grants are provided by central government to pay directly for individual services, such as running schools and helping vulnerable people with their housing and accommodation needs. Local authorities and schools would normally only spend this allocated grant money on the specified purposes.
A general grant is also paid by central government to local authorities. This is known as the Revenue Support Grant or Formula Grant. Formula Grant is largely funded by local business rates income (which is ultimately collected for central government). General grant and business rates are added together to make up the Formula Grant, which is then distributed to local authorities using a complex formula.
Business rates
Business rates (17%) are also known as non-domestic rates. They are the tax on business premises set by central government. Although they are collected locally by district and borough councils, the money raised is then passed to central government. The Government then distributes the money back to local authorities as Formula Grant. Further details about how business rates are individually assessed can be found on the website of the Valuation Office.
In terms of the national picture there are relatively few large business premises in East Sussex county.
Council tax
Council tax (22%) pays for nearly a quarter of all local services. There can be pressure for large council tax increases if central government funding does not keep up with the local government spending increases needed to maintain and improve local services. This has caused the significant rises in council tax (nationally) in recent years. Details of how we set our council tax can be found in Our budget for 2008/09.
Annual budget and financial planning
A local council cannot finalise its budget plans until it knows:
- how much it needs to spend on maintaining its services to an acceptable level
- the additional spending pressures it has for service developments, price increases and pay awards
- the level of savings it can achieve
- how much it will receive from central government.
When a local council knows these sums, it can calculate the amount it needs to collect from council tax.
We have developed a process to ensure that our budget plans match our policy intentions throughout the budgeting period. This process is called ‘Reconciling Policy and Resources’.
Councils are required to plan for more than one year ahead in line with the Government’s own three yearly spending plans. Because much information is unknown at the time, these figures provide only an indication of how much future funding will become available.
In line with the process of Reconciling Policy and Resources, we have long-term budget plans to reduce council tax rises. As a result, the percentage rise in our share of council tax each year is reducing over four years from 4.7% in 2006/07 to 3.5% by 2009/10. We can achieve this as long as there are no major changes to the funding that central government gives us.
To find out when the budget is set, read our budget timetable page.
Limits on council spending
The Government exerts pressures on local councils to invest in and improve their public services, and also to limit their spending so that budgets do not increase in an unreasonable manner.
- The Government requires local councils to provide services to national standards. If it considers that standards are not being achieved then the local council needs to invest in that service, paid for by reducing other services or by additional council tax.
- The Government has wide ranging powers to limit or ‘cap’ increases in council tax. To exercise these powers, government ministers can look back over a number of years to identify local councils whose budgets have increased unreasonably.
For more information see our pages on how our performance is measured.
