Unit 10 - Local Government Finance

Question 1

Explain the difference between revenue and capital expenditure.

Answer 1

Revenue or current expenditure is the running costs – heating, lighting, wages – it is anything that lasts for a year or less. Capital expenditure is expenditure on long-term durable assets – anything that lasts for more than a year. The ratio is about 80% revenue expenditure; 20% capital expenditure – with the cuts, capital expenditure is likely to fall.

Question 2

Roughly what proportion of local authority revenue (current) expenditure is locally determined and locally raised?

Answer 2

The average in England is 35% local government funded; 65% central government. This varies from area to area and in deprived areas central government may provide 75% of the money, whilst in more affluent areas central government funds only 20%.

Question 3

In one sentence define the council tax.

Answer 3

The council tax is a local domestic property tax with a personal element.

Question 4

Assuming that you are not a student but sharing your property with three others, all of whom are full-time students, who pays the council tax bill and who is exempt? What reductions are there?

Answer 4

You as the occupier (it’s your property) would be liable to pay. However, the three full- time students do not count as they are exempt and so you qualify for the single person’s discount of 25%, as the personal element of the tax assumes two adults living in the property. Depending on your financial position, you might also be eligible for means tested council tax support, which is now localised, so the amount of help that you might get will depend on your local authority.

Question 5

Who sets and collects the council tax? Are they free to charge what they like? For which band is it set?

Answer 5

All local authorities, joint boards, joint authorities set the council tax. The districts and unitary authorities (billing authorities) collect the tax for themselves and on behalf of the precepting authorities (county councils, police authorities, fire authorities). None of the authorities are totally free to set the level of charge because central government has the power to require a local referendum if it feels that the local authority is proposing an excessive increase in council tax (currently 2% or over). The tax is set for band D, from which the charges for the other bands are determined according to a ratio laid down in law.

Question 6

How and by whom are domestic properties valued?

Answer 6

Domestic properties are valued by listing officers of the Valuation Office Agency of HM Revenue and Customs. In England, the valuation is based on capital valuations at 1991 prices and properties are placed in one of eight bands A-H, with A being the cheapest and H the most expensive. Appeals may be made to the Valuation Tribunal.

Question 7

Identify three disadvantages and two advantages of the council tax.

Answer 7

Main disadvantages are – fails to take into account ability to pay, low tax yield, crude valuations that favour expensive property. Main advantages – difficult to evade payment and administratively cheap to collect.

Question 8

Why are rents, fees and charges important in local government finance terms?

Answer 8

Rents, fees and charges are mainly locally determined, locally set and locally retained. As such they are becoming a more important source of funding.

Question 9

Why are balances and reserves important in local government finance terms?

Answer 9

With cuts in funding from central government, council balances can, in the short term, be used to plug the gap.

Question 10

What are the two main types of revenue grant from the central government? Why is the distinction important? Roughly, what proportion of money comes with each type of grant?

Answer 10

General (block) grants and grants for particular (specific) services. With general grants local authorities are free to spend the money how they wish. With grants for specific services the money must be spent on the services for which they are designated. Roughly 34% of the money comes in general grants and 66% in grants for particular services.

Question 11

What major change did the Coalition Government make to the types of revenue grants and for what reason?

Answer 11

The Coalition Government massively reduced the number of specific ring-fenced grants which had to be spent on particular services and had detailed instructions on how the money was to be spent. These changes, the government claimed would give local authorities more freedom to make local decisions.

Question 12

How important are central government determined sources of funding for local government revenue expenditure?

Answer 12

On average central government provides 65% of the funds for revenue expenditure but this varies from local authority to local authority – for some it may be as high as 75%, for others as low as 20%.

Question 13

What are non-domestic rates (business rates), who sets them, who collects them, and what happens to the money? What significant changes have happened to this source of funding in the last few years? How can individual local authorities currently increase their funding from this source?

Answer 13

The non-domestic rates (business rates) are a property tax on non-domestic properties – shops, offices, factories. They are set by central government, collected by local government, who since 2013 retain some of the money. The money not retained is handed over to central government who then redistributes it to more needy local authorities. By 2020 local authorities will be able to keep the business rates levied in their area and will be able to reduce the rate levied. BUT, the non domestic rates/business rates will in the main still be set by central government. Individual local authorities may receive more money from this source by agreeing to new non domestic development – guaranteed at least 75% of the additional receipts (100% if it is from fracking).

Question 14

How and by whom are non-domestic properties valued?

Answer 14

Properties are valued by valuation officers of the Valuation Office Agency of HM Revenue and Customs. The value is based on a theoretical annual rent and given a unique value (not a band).

Question 15

Who pays non domestic rates and how is the amount determined? Identify two types of properties that are exempt from non domestic rates and two reductions or reliefs that are available.

Answer 15

Non domestic rates/business rates are paid by the owner or occupier of a non-domestic property. The amount payable is the rateable value multiplied by the government set multiplier. Agricultural land and buildings used for religious worship are exempt. Charitable properties get an 80% reduction; small businesses pay less.

Question 16

What is the revenue support grant and roughly what percentage of government money is distributed this way?

Answer 16

The revenue support grant is a general grant and together with the much smaller local services grant comprise 18% of government revenue grants.

Question 17

What is the dedicated schools grant?

Answer 17

The dedicated schools grant is a major grant paid to the schools and local authorities may not touch it.

Question 18

What is the pupil premium?

Answer 18

Pupil premium is a grant paid to schools for each deprived pupil (lower amount for service children).

Question 19

Briefly sum up the consequences of recent local government funding settlements.

Answer 19

The massive cuts in funding have hit all local authorities, but in particular those poorer authorities who are more dependent on government grants. The consequences inevitably are cuts in services; increased charges; sizeable redundancies for staff.

Question 20

Define capital expenditure. Roughly what percentage of local authority expenditure is capital expenditure? What is the short-term future of local authority capital spending?

Answer 20

Capital expenditure is expenditure on long-term durable assets – items that will last for more than a year e.g. roads, schools, housing, plant and machinery. It amounts to about 18% of local authority expenditure. In these straitened times, the proportion of capital expenditure is likely to fall.

Question 21

List the sources of funding for capital expenditure.

Answer 21

Borrowing, capital grants, capital receipts, revenue sources, private sector (including grants from developers and private finance initiatives), European Union, National Lottery.

Question 22

From whom may local authorities borrow for capital expenditure? How important is borrowing as a source of funding? What controls exist?

Answer 22

Local authorities may borrow from the public sector (the government) or the private sector (banks, finance houses). Borrowing provides about a third of the money.

Controls: Central government controls the local authority borrowing to control the economy. Borrowing should be prudent and prudence is checked by external authorities.

Question 23

What are the key advantages and disadvantages of borrowing?

Answer 23

The key advantages are that it is fairer on local residents as it spreads the cost over the lifetime of the asset and it can be cost effective at times of inflation. The disadvantages are that it can be expensive and inflationary. The control is that it has to be prudent.

Question 24

What are capital grants? How important are they? What controls exist?

Answer 24

Capital grants are grants from central government for capital expenditure – mainly for roads and transport and education. They are the single most important source of funding – just over 40% of the money. Central government control is total – the government decides which authorities will get the money and how much they will get. [Often these days the money comes via local enterprise partnerships.]

Question 25

What are capital receipts? How important are they? What controls exist?

Answer 25

Capital receipts is money raised from the sale of a capital asset. It provides under 10% of the money. Controls – money realised has to be used to pay off debts or new capital expenditure, If money derives from the sale of council houses, the receipts have to be used to build replacement housing.

Question 26

How can local authorities use revenue sources for capital expenditure and why are they used?

Answer 26

Local authorities can use their revenue sources (other than specific grants) but they have to be careful to ensure that they have enough left to provide the services. This source is used because there are no controls. In the short term in the current economic climate, local authorities will be so short of money that they are unlikely to have surplus cash to use.

Question 27

What is a private finance initiative? What are the advantages and disadvantages of using PFIs?

Answer 27

The private company, and not the local authority, borrows the money, builds the development or purchases equipment and rents it to the local authority for a set number of years. The private sector takes more responsibility for the development and will be responsible for its maintenance, and, if relevant, its heating, lighting and cleaning.

Advantages – provides much needed money, it does not count as public sector borrowing, the asset should be of a better quality.

Disadvantages – cost; private companies want to maximise profits, local authorities have lost control of these assets.