Overview of how local government finance works
Paying for local government services
Local government expenditure accounts for around a fifth of all government 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
- business rates
- council tax
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
Local authorities receive grants from central government to finance service expenditure.
The ‘revenue support grant’ provides a general grant that can used to fund expenditure on any service. The amount of revenue support grant provided to authorities is determined by a formula and forms part of the local government finance settlement, along with locally retained business rates. The level of this grant has reduced significantly in recent years, increasing the importance of other sources of funding.
The government also provides specific grants that are ring-fenced to pay for specific services, such as running schools, public health and social care. Local authorities and schools would normally only spend this allocated grant money on the specified purposes.
Business rates
Business rates are also known as non-domestic rates. They are the tax on business premises set by central government. Business rates are collected locally by district and borough councils, with the majority of the money raised then passed to central government and redistributed back to local authorities based on a national formula.
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 is charged to most domestic properties, which are grouped into valuation bands based on domestic property values. Each local authority sets the level of Council Tax annually and can retain all of the funding raised to support its budget.
Each year the government publishes referendum thresholds for council tax. If local authorities want to increase council tax levels above these thresholds, they are required to hold a referendum. Local authorities with responsibility for social care are also entitled to charge a ‘social care precept’ at levels set by national government.
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.
Other Sources of Income
- Local authorities can apply fees and charges to certain services, such as parking and some waste services.
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 notified. 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:
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 each year publishes referendum thresholds for council tax, limiting increases in council tax by local authorities before requiring a referendum to be held.