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. Local government spending pays for many different types of local authority. These include county councils, district councils, London and Metropolitan authorities, and police and fire services.

Overall, local government spending is paid for by three main sources:

  • Central Government − 61%
  • Business rates − 17%
  • Council tax − 22%

However, the local funding received by individual authorities varies significantly depending on the local tax base for council tax, the demography of local service need and the services provided by different types of local authority.

Funding from 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%) for local authorities and the police:

  • 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.

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.

At East Sussex County Council, our process for setting our budget typically starts 14 months beforehand, and budgets are considered over a 4-year planning cycle. Because much information is unknown at the time, these figures provide only an indication of how much future funding will become available.

Senior staff consider spending pressures in the previous Spring. Cabinet then sets out initial guidelines over the Summer, and discussions continue as our Government grant figures are received before Christmas. Plans are refined in the new year, and the full budget is finally approved in February, for formal publication in April.

All the major budget decisions are discussed and approved by our Cabinet. The final budget is then agreed at full County Council meetings. The reports and minutes for these meetings are all published on our website:

How we match our budget and policies

We make sure our budget plans meet our policy needs by using a process called ‘Reconciling Policy, Performance and Resources’. We use this process throughout the year. In line with this process, we have long-term budget plans to reduce council tax rises:

The emergency budget of the coalition Government in June 2010, and the national Spending Review in October, will impact our normal budget process for a number of years to come. This is in line with the Government’s national need for “deficit reduction”.

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 previously held wide-ranging powers to limit or ‘cap’ increases in council tax. It is now planning legislation to hand over these powers and to instead require local authorities to hold a local referendum if they seek to set, in its view, an excessive council tax increase.