Setting a political budget

Councillor Alan Waters, Deputy Leader, Norwich City

CouncilLearning & Development

Manager LGIU

National Picture

The Political Context

Local Government Finance – The Context

• Local government grants from central government will reduce as a contribution to the overall deficit reduction programme.

• Reductions in government grants confirmed to 2015/16 and can be anticipated at least up to 2017/18 and beyond!

• Schools funding is the exception and is currently protected, but ring-fenced – mostly removed from Local Government control

• Incentives for economic growth: Community Infrastructure Levy; New Homes Bonus; Localisation of Business Rates

• Impact of Localism and Localism Act.

Cuts in central government grant: why are poorer areas most

affected?

• Councils with a low council tax base (lower tax banded properties) need more grant (RSG) than councils who have a large number of properties in higher tax bands.• Impact of Localisation of Council Tax Benefits• Effect of reliance on economic growth for funding• New Homes Bonus

LGA Funding projections 2010 - 2020

Education and Public Health

Education School funding largely removed from local authorities either through DSG or Academy/Free Schools models, though responsibility for some services and early years remainsPublic Health Now the responsibility of Local Authorities Funded from a ring-fenced government grant for 2013/14 and 2014/15

The wider £ implications: welfare reform

Implementing Welfare Reform –e.g. Localisation of support for Council Tax Housing benefit cap & ‘bedroom tax’ Pressures on services from the impact of Welfare reform changes Impact on local economy

Reducing budgets – Government view.

Savings can be made through

- different types of partnership working to deliver “affordable services” - more “outsourcing & private sector practices” - “Community budgets”

‘Look after the pennies’: don’t overspend on bottled

water!

Why is local government being treated so badly?

• Ring-fencing of NHS, schools, International development; growth in welfare budget

• Local government unprotected & hostile Secretary of State at CLG

• Local Government has shown that “it can take it” – so government will continue to cut.

Issues of financial viability• Audit Commission• 43% larger single tier councils• 34% district councils • Short or medium term risk of not

being financially viable

The Pickles Plan

Reason for the frontloaded cutsIt is important that local government restructure its administration and its services, and the only real way to do that is to start the process early on’

Eric Pickles – CLG Select Committee 2010

The Government’s ‘Vision’.“Even if there was 10% growth next year we would still want to shrink the State”Brandon Lewis, Under Secretary of State for Local Government

Key political point in managing the cuts

The Poll Tax question…….. WHO GETS THE

BLAME?

BACK TO BASICS

How the system works

Back to Basics• The law• Capital and Revenue• The General Fund and the Housing

Revenue Account

The Law• Local Government Act section 151

– The council must make provision for effective financial management

– The “Section 151 Officer”• The Local Government Act 2003

– Medium Term Financial Strategy– “Balanced” and “robust” budget with

“adequate” reserves– Councils must follow “proper accounting

practice”Important residents know that you are running a tight ship.

The Law• Localism Act 2011

– Local referendum on “excessive” rises in Council Tax

• Local Government Finance Act 2012– Business Rates Retention– Local support of Council Tax– Changes on Council Tax for empty and

second homes

Four Budgets

• General Fund budget ( under most pressure)

• Non-Housing Capital Programme• Housing Revenue Account• Housing Capital Programme

Capital and RevenueRevenue

• Running costs expenditure – under 1 year useful life

• Employee costs, maintenance and repairs, utility bills, supplies and services

• Income sources CAN be spent on capital expenditure

Capital• Expenditure on funding

and improving assets – over a 1 year life

• New build, renovation, new vehicles and infrastructure

• Most councils have a “de minimis” level before expenditure becomes capital

• Income sources CANNOT be spent on revenue expenditure

General Fund and HRAHousing Revenue Account• Only required if

council is a “landlord” to housing tenants (including ALMOs)

• Therefore not required if council has sold its housing stock to an RSL

• Income and expenditure is “ring-fenced”

General Fund• All other services• Will include non-

landlord based housing services e.g. some housing benefits, support to RSLs

HRA Funding

• New system from April 2012 for councils with their own housing stock.

• In exchange for taking a “one off” distribution of housing debt able to invest housing rents in upgrading and building new homes.

• Councils developing long term investment plans for their housing stock & some modest new build.

But..

• Changes to the RTB scheme may reduce councils housing stock and the variety of homes it owns

• ‘Help to buy’ – which may already be pumping up house prices - could have built 175,000 new affordable homes.

• A cap on Housing Revenue Account borrowing – loss of estimated new build of 66,000 council houses.

General Fund Revenue – Key Issues

• Council Tax• Business Rates and Government

Grants• The New Homes Bonus• Fees and charges• Reserves and Balances

Council Tax• Local referendums for “excessive”

increases – 2% for 2014/15• Council Tax Freeze Grants available from

2011/12 through to 2014/15• Freeze grant now part of the council’s base

funding, but below inflation increases still erode the Council Tax base

• Any support for Council Tax is a discount and so also affects the Council Tax base

Council Tax – always newsworthy!

• Last year some councils not taking the council tax freeze grant got attacked for hitting “the hard pressed local taxpayer”.

Important to get public endorsement for CT decision

Business Rate Retention• All councils benefit from any above

inflation increases in business rates income

• However, the percentage retained locally varies between councils

• The level of (and collection rate for) business rates is now very important for councillors to understand

Government Grants – the SUFA

• Start-Up Funding Assessment• The new way Government funding

works….

• SUFA = Formula Grant + Specific Grants

that have been “rolled in”

An example - LB Ealing’s SUFA

2013/142013/14

£000Revenue Support Grant 101,248

Business Rates – Individual Authority Baseline (30% of Business Rate)

39,190

Business Rates – Top-Up 28,168Start-Up Funding Assessment 168,606

The New Homes Bonus• Commenced in 2011/12• “Match funding” for every new home

and existing homes brought back into use

• Funding available and builds over 6 financial years

• Individually calculated, but included within your SUFA

• “Top-sliced” in London, but not elsewhere

Fees and Charges• Check the legal position – some services

must be free at the point of delivery• The Local Government Act 2003 enables a

council to charge for all “discretionary” services

• Under the LGA 2003 the charge can cover the full cost including overheads and depreciation

• Do you know how what services you subsidise and are you clear why?

Investment Interest• Councils invest all surplus revenue and

capital money to earn interest• All interest can be used to support revenue

spending• Each authority has a Treasury

Management Policy and investment strategy to determine where money is invested

• The balance between “risk” and “return” is key

Reserves and Balances

• All councils retain a variety of different reserves• LGA 2003 requires council to agree a minimum

level of balances as part of its budget setting process

• All reserves (including capital reserves) attract interest that can be used to fund revenue and capital expenditure

• Note: the level of reserves is set by assessing risk or uncertainty facing a council

• Also allows the council to ‘buy time’.

Capital Funding• Capital receipts• Borrowing – “affordable” and

“prudent”• Capital Grants• “Section 106” agreements• The Community Infrastructure Levy• Revenue contribution

Contributions from Developers

• Town and Country Planning and Land Act 1990 section 106– A contractual agreement between

council and developer to fund public realm etc. in a development

– Individually negotiated• Community Infrastructure Levy

– A tariff based charging scheme– A proportion must be spent locally

What is the role of elected members

in the budget process?

Member Involvement in the

budget process

• Why should elected members involve themselves in the budget process?

Elected members legal obligations

• Local Government Act 2000 – responsibility of the full council to approve the budget and council tax demand

• Executive must act within the budget• Local Government Act 2003 – council

required to prepare a medium term financial plan and

• Chief Finance Officer required to make formal report to members when considering the budget

• Section 151 officer• Section 114 1988 Act re unlawful

expenditure or unbalanced budget

Member Involvement

‘Budget planning, setting, scrutinising and monitoring can be a time-consuming exercise but it is important that all councillors are involved in or take an interest in the budget process’. (Councillor’s Guide LGA)

Member involvement‘ The budget process concerns choices that may be :- Politically led- Policy led- Aimed at redirecting the way existing services

spend- An aid to cross-party working’The key thing for a councillor is to ensure that the strategy and policies agreed by the council influence and inform the budget setting process ( LGA: Councillor’s Guide 2011/12)

Activity:Member Involvement

What part do each of the following play in the

Budget process:• The ruling group on the council• Cabinet members• The opposition groups on the council• Scrutiny members• Ward Councillors• Newly elected councillors

Relating to the Budget ProcessAndrew Coulson 2005

April/May

June/July

September/October

October/November

November

December

January – February

March

Initial Projections

Review Baseline Budget –In Strategic Context

Identify known Pressures

Capital Programme, IncludingPrudential borrowing

Identification of Savings,Efficiency Measures, and Alternatives

Budget agreed by Council

Government Settlement

Budget formulated

The Financial Management Process

ObjectivesThe Corporate Plan

Service Plans

Performance Review

Financial PlanningThe MTFS

The Annual Budget

Budgetary Control

The Financial Management Process

ObjectivesThe Corporate Plan

Service Plans

Performance Review

Financial PlanningThe MTFS

The Annual Budget

Budgetary Control

Planning • corporate strategy direction makes clear

the priorities and aims of the organisation. Have strong headlines.

• service planning translates them into measurable actions

• capital planning integrated into medium and long term financial planning

• Important to have good information to help decide on budget priorities.

QUESTION

What does ‘growth’ mean in an overall cuts budget?

Audit Commission research

Is there something I should know? encourages decision makers to be more demanding about the information they seek and use when making decisions

Value for Money• Value for money is a balance of cost,

output and outcome• Do you have the information you

need to evaluate whether a service provides value for money?

• How do you compare with other providers (council, private sector, third sector?)

• Best Value & Social Value Act

Constructing the annual budget ‘Front line and back office’

:“Front-Line” ServicesRunning costs

+Support Service charges

=Total expenditure

-Income from fees and charges

=Net Expenditure

“Central” ServiceRunning costs

+Support Service charges

=Total expenditure

-“Recharges”

=0

Financed by Council Tax and SUFA

Statutory Services: Services which a local authority are

obliged by statute to provideNon – Statutory (‘discretionary’) Services which an authority has the

power but not the duty to provide

A word about Statutory and Discretionary services

Not a straight forward choice

• Cut all the discretionary services to protect statutory responsibilities?

- but many ‘discretionary’ services very popular – leisure; grants; parks and generate income (car parks)

- and what level should Statutory services be funded at?

Plan B?

The case for the proper funding of local government

in Greenwich

LGIU/MJ annual survey on local government finance

• Survey of 130 councils - 80% want the freedom to set council tax locally rather than another ‘deal’ - 45% wanted to see additional taxes localised - 90% not intending to employ TIF - 80% Community Infrastructure levy would not offer benefits.

Funding transfers rather than cuts

• By 2013/14 the Spending Review will have cut grants to councils by £4.3bn; while corporation tax to companies has been cut by £3.75bn.

• Not forgetting lost tax revenues….

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Macro EconomicsFiscal Multipliers & the IMF

• Then• £10bn of spending cuts will reduce

GDP by around £5bn• and now…. £10bn of spending

cuts will reduce GDP by between £9bn and £17bn).

Importance of making the case for Local Government

Investment in public services and

proper funding for local government is key to economic growth and

stability.

Local multipliers• Government acknowledges the importance of

local government – stimulating private sector activity (reluctantly!)

• Benefits of public expenditure:• Every £1 of public money invested public services

a further 64 pence is generated in the local economy.

• Real Wages stagnated to 2003 levels• Welfare benefit changes millions lost to local

economies• Multiplier 2*: For every public sector job .4 of a

job created in the private sector

Spending Review bids: the LGA approach

• Removal of council tax restrictions• End ring-fencing for health and schools

budgets• Increase in the local share of business

rates• Set fees and charges locally.• More control and expansion of growth

funds & more of the benefits retained

Spending Review bids• Remove housing revenue account

borrowing ceiling• Investment fund for housing building• More local control and support over the

operation of welfare reforms and funding for ‘burdens’.

• Community budgets – preferred model of delivery method for government departments – devolve more central government funding to local government.

Reading

• Future funding outlook for Councils from 2010/11 to 2019/20 (LGA)

• Rewiring public services (LGA)• The cuts: UK’s damaged future. A

report for UNISON by CLES Consulting

• Municipal entrepreneurship (APSE)

Final Comments