Research and Analytics
CIPFA Finance and General Statistics
All authorities provided data for the 2006-07 General Fund Revenue Accounts return, which provides 2006/07 budget estimates for 476 authorities in England (excluding Lee Valley Regional Park Authority) and for 32 authorities in Wales.
Implications of FRS17
The full implementation of Financial Reporting Standard FRS17 was introduced to the Code of Practice on Local Authority Accounting in the United Kingdom, A Statement of Recommended Practice (SORP) and thus CIPFA's Best Value Accounting Code of Practice (BVACOP) from 1 April 2003. This resulted in a significant change in the way of accounting for retirement benefits. Under the previous arrangements the amount of retirement benefit expenditure recognised was the employer's contribution to the pension fund or in the case of an unfunded scheme payments to pensioners for whom the employer had direct responsibility. This meant that the revenue account did not reflect the true economic cost of pension benefits earned by employees in the year. The new FRS17 approach seeks to measure the true economic cost of the pension benefit earned by employees in the year and recognises this as the expenditure for the year.
430 authorities have returned figures on a FRS17 basis this year. Authorities that have reported on a pre FRS17 basis have been highlighted with a '~' in the main tables (blocks B to J).
The following table shows service expenditure on a FRS17 and a pre FRS17 basis for the 430 authorities.
Overall the difference between figures reported on a FRS17 basis and on a pre FRS17 basis is very small, differing by only 0.5%. However this difference varies between each service block and care should be taken if comparing data that has been reported on a different method.
Prior to 2004-05, capping had not taken place since 1997. This year the government made it clear that it not expect the average council tax increase to exceed 5% with a budget increase of 6%.
In an oral statement made in Parliament on 27th March 2006, the Local Government Minister announced that two authorities had set 'excessive' budget inceases over 6%. These are unitary authorities, Medway and York. On 29th June 2006 they were 'nominated' with a notional budget for 2006-07 with which their 2007-08 council tax will be compared. This means that their 2006-07 council tax will not have to be changed and new bills will not be issued.
Two district authorities, Aylesbury Vale and Wellingborough, also exceeded the 6% budget and 5% council tax increase thresholds set by the government but it was decided that no action would be taken against them.
Table 2 below shows the difference between the pre-capped budget requirement and the notional budget set by the government for the two affected authorities. This will essentially limit their scope for budget increases in 2007-08. These authorities have been highlighted with a '#' in the main tables (blocks B to J).
Returns submitted by local authorities in England and Wales reveal that in 2006-07 Net Revenue Expenditure is expected to be £56.6bn. This figure represents a cash decrease over 2005/06 budget estimates of £19.78bn (25.9%). Of this £4,203m is being financed from reserves thereby reducing authorities' aggregate budget requirement to £52.4bn, a decrease of £22.76bn or 30.3% over 2005-/06. This decrease is largely due to changes in funding of specific grants and Revenue Support Grant in England. Local authorities now receive a Dedicated Schools Grant (DSG) in specific grants replacing funding previously included in Revenue Support Grant. Table 3 shows how DSG has affected funding.
Sources of Funding
The relative contribution towards total budget requirement of each source of income is shown for each region in Figure 1. Figure 1 shows that Revenue Support Grant remains high in Wales making 45.6% of gross revenue expenditure, similar to previous years.
The proportion of Local Authorities' revenue expenditure funded locally fell dramatically, from 58% to 27%, in April 1990 when the community charge replaced the domestic rate. At the same time the responsibility for the setting of the non-domestic rate passed from local to central government. The proportion of spending locally fell even further in 1991, from 27% to 15%, when the then government increased grant aid to local authorities to enable them to cut the community charge by £140 per person. The proportion of spending funded locally has risen gradually since the early 1990s, but still represents only 21% (see table 4) of all General Fund income.
The Council Tax was introduced as the only local tax in England and Wales in April 1993. From its introduction and up until 1998-99 local authorities' control over the level of council tax was constrained by the operation of 'capping rules'.
Following this, the present government's decision to abandon the 'capping' of budgets, allowed local authorities to have more control over the level of their council taxes. In 2004-05, however, the government reintroduced capping and has proposed a maximum budget requirement for two authorities this year that it believed had increased its Council Tax excessively.
Due to the fact that the Council Tax funds a relatively small proportion of local government revenue expenditure it follows that relatively small increases in a local authority's expenditure i.e. beyond those allowed for in the grant settlement and the redistribution of national non-domestic rates, will be reflected by a greater proportionate increase in their Council Tax. This is known as the 'gearing effect' and was referred to in the DCLG Balance of Funding review.
Table 4 provides details of the funding arrangements of local government revenue expenditure since 1977-78.
Formula Grant Distribution
The formula grant distribution system in England has been changed from 2006/07, moving away from the former Standard Spending Assessments (SSAs) and the recent Formula Spending Shares (FSS). The new system, known as the ‘four-block model’, was characterised by Local Government Minister Phil Woolas in a statement accompanying the provisional settlement: The formula is simply a means of distributing government grant ... What I am proposing is a system that deals in an honest currency - cash grant - not fanciful assumptions about spending (Woolas Dec. 2005)
The system is also moving towards three-year settlements in line with Comprehensive Spending Reviews. Alongside the final 2006/07 settlement, provisional figures for 2007/08 were also announced. The system will be fully aligned from 2008/09.
In Wales the SSA system remains in place.
The Four-Block Model
The new model is based upon four blocks of cash:
- Relative needs amount;Relative resources amount;Central allocations;Floor damping.
Components of Formula Grant
The formula grant comprises of Revenue Support Grant, Redistributed Business Rates and Police Grant. Figure 2 illustrates the distribution of grant by each of these elements.
In 2005/06 Revenue Support Grant constituted 55.8% of formula grant, now it only represents 22.0%. Redistributed Business Rates is now the largest component making 63.5% of formula grant.
Another big change affecting formula grant as previously mentioned is the funding of schools, which is no longer included as part of Revenue Support Grant. Consequently formula grant has witnessed a significant drop by 45% over 2005/06. Figure two exemplifies how formula grant has changed.
Specific grant and Educational Funding
The introduction of Dedicated Schools Grant has caused specific grants to increase by 90.3% to nearly £60 billion. The DSG is just over £26.6 billion and represents nearly 45% of all grants. For a comprehensive breakdown of grants please refer to page 12.
It is the government policy to try and minimise ring fenced grants, a significant proportion of specific grants are now unfenced grants. In addition, there is generally no ring fencing for authorities rated as 'excellent' in the Comprehensive Performance Assessments, (except for grants that have to be passed to Schools).
Total Service Expenditure is budgeted to be £93.6bn in 2006-07, an increase of 5.2% over 2005-06. This increase compares with the forecast rise of 2.4% in prices as measured by the GDP deflator, last estimated in March 2006 (source HM Treasury). The retail price index for all items in May 2006 measured annual inflation at 3.0% (source ONS).
The General Fund Revenue Account Summary at the end of this commentary provides a more detailed analysis of the adjusted figures.
Excluding gross expenditure on mandatory student awards, authorities are budgeting in 2006/07 an increase in spending of £2,125m (5.7%) over last year's budget. Of local authorities' Total Service Expenditure, 41.8% will be directed towards providing an Education Service, 0.2% higher than in 2005/06.
Including Supported Employment, authorities are budgeting in 2006/07 an increase in spending of £979m (5.4%) over last year's budget. Of local authorities' Total Service Expenditure 20.3% will be spent on Social Services, 0.1% greater than in 2005/06.
Spending on Police Services is set to rise by £506m (4.6%) over last year's budget. Of local authorities' Total Service Expenditure 12.2% will be spent on Police Services, 0.1% lower than last year.
In total, Education, Police and Social Services are expected to make up nearly three quarters (74.3%) of local authorities' Total Service Expenditure in 2006/07.
Map 1 overleaf shows Service Expenditure per head of population in 2006/07 by region. Map 1 shows that service expenditure per head follows a pattern, it is lowest in the South of England (apart from London), and highest in the North of England and Wales. Greater London has the largest service expenditure per head with £2,430, by comparison the South West has the lowest at £1,492 per head.
CIPFA's Best Value Accounting Code of Practice states that the true cost of service provision must include capital charges (depreciation, notional interest, loss on impairment of assets and amortisation of deferred charges).
This was the seventh year in which the survey requested details of capital charges, and significant improvements are evident. The majority of authorities are able to provide figures for capital charges, however, authorities are not yet completing each service line with sufficient consistency and for this reason details are excluded from the main body of the publication.
Table 6 provides a summary by main service area of authority of the information that has been received. Figure 3 shows Total Service Expenditure and Capital Charges by each service area as a percentage of the Total. Highways expenditure in particular is subject to high capital charges as opposed to Social Services and Police where charges are comparatively low when set against net current expenditure. This is possibly due to the comparably high amount of physical assets involved with Highways Services. Column 120 of the main statistical tables provides details of individual authorities' capital charges.
The overall average Council Tax demand on band 'D' dwellings in England and Wales (before relief and benefits) in 2006/07 is £1,249.81 a 4.5% increase over 2006/07. All regions show an overall increase, however, there are variations between authorities. This increase ranges from Wansbeck and Blyth Valley (both Northumberland) at 1.8% to 13.3% in Greater London Authority (pre capping). The rise in council tax for London was largely due to extra requirement placed in preparation for the Olympic Games in 2012. The degree of variation in percentage rises is comparable with last year, when they ranged between 0.7% and 6.8% after capping. In poundage terms Wandsworth (Greater London) has the lowest average band 'D' Council Tax bill at £648 and Sedgefield (County Durham) the highest at £1,490.
The overall average dwelling payment in 2006/07 is £1,042.99, an increase of £46.60 (4.7%). It will be observed that this amount is significantly lower than the benchmark tax (band 'D') and arises because two thirds of dwellings lie in the lower valuation bands A, B and C.
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