Local Government: Finances

Understanding local council money in England is complex. Councils primarily get funds from four sources: Council Tax from residents, Business Rates from companies (partially retained locally), Central Government Grants, and Local Fees and Charges for services. Most of these funds aren't 'ring-fenced', giving councils spending flexibility. The Local Government Finance Settlement, decided annually by central government, determines grant levels and how business rates are shared. Councils are accountable to voters but can face government intervention for serious financial issues or failing their Best Value duty.

Key Takeaways:

• Local government finance in England is complex and distinct from other UK nations.
• Main funding comes from Council Tax, Business Rates, Central Government Grants, and Local Fees/Charges.
• Most funding isn't 'ring-fenced', offering councils spending flexibility.
• Council Tax levels are set locally but subject to government limits.
• Councils collect Business Rates, retaining 50% locally via a redistribution system.
• Central Government Grants include non-ring-fenced (like RSG) and specific grants.
• The Local Government Finance Settlement annually determines main grants and business rate distribution.
• Councils are accountable locally but face government intervention for failure or failing the Best Value duty.

Important Definitions & Concepts:

• Council Tax: A local tax on residential properties, set by councils based on property value bands determined by the VOA.
• Business Rates: A tax on non-domestic properties, collected by councils, with 50% kept locally via a redistribution system.

Discussion and Reflection Question: Considering the mix of local revenue sources and the annual nature of the main central government settlement, what are the potential challenges for councils in planning long-term finances and ensuring stable services for their communities?

Source: Local government in England: structures
Research Briefing
Published Tuesday, 22 April, 2025

Transcript

Amy: 0:00

Hello and welcome to The Bench Report. You're listening to Amy and Ivan. Today's third discussion on English local government looks at finances.

Ivan: 0:11

Indeed. And it's crucial to remember, isn't it, that we're talking specifically about England here.

Amy: 0:18

Absolutely. Scotland, Wales, Northern Ireland, they all have their own distinct systems.

Ivan: 0:23

Right. And the English system is, well, let's say it's Pretty intricate.

Amy: 0:27

So our aim today is really to unpack the main ways these local authorities actually get their money.

Ivan: 0:33

Let's start with probably the most well-known one, council tax.

Amy: 0:38

The tax based on your home. What's the key thing for people to grasp about how it works financially for councils?

Ivan: 0:44

The most important point is that the local authorities, the councils, they set their own rates. And crucially, they keep all the revenue that's collected from it.

Amy: 0:52

So they decide the rate, they keep the money. But who decides what my house is worth for tax purposes?

Ivan: 0:58

Ah, well, that's set centrally. The government defines the tax bands, the different value brackets.

Amy: 1:03

And then an agency puts the houses in the bands.

Ivan: 1:06

Exactly. That's the Valuation Office Agency, the VOA. handle the property valuations and bid assignments.

Amy: 1:12

And councils can't just hike the rates indefinitely, can they?

Ivan: 1:15

No, there are limits. The government sets caps each year on how much councils can increase the tax without needing a local referendum. These are called referendum principles.

Amy: 1:26

OK, so that's council tax. What's the next big income stream?

Ivan: 1:30

That would be business rates, the tax on commercial properties, shops, offices, factories.

Amy: 1:36

And how does that compare? Do councils keep all of that, too?

Ivan: 1:38

Not quite. The current system, it's basically a 50-50 split overall between central government and local government nationally.

Amy: 1:45

50-50 nationally. But does that mean my local council keeps 50% of the business rates collected right here?

Ivan: 1:51

Well, no, it's more complicated. The local government 50% share is pooled and then redistributed.

Amy: 1:57

Redistributed? How?

Ivan: 1:58

Through something called the tariff and top-up system. Essentially, areas that collect a lot in business rates might pay a tariff into the pool.

Amy: 2:05

And areas that collect less receive a top-up from it.

Ivan: 2:07

That's the idea. It's meant to sort of balance things out a bit across the country, reflecting different needs and resources.

Amy: 2:14

Has that system always been in place?

Ivan: 2:16

It evolves. And there have been pilot schemes where some areas were allowed to keep 100 percent of the business rates growth.

Amy: 2:24

Ah, interesting. But what was the tradeoff?

Ivan: 2:27

Usually in return, they'd receive lower amounts of central government grant funding. It's a constant balancing act.

Amy: 2:33

Which brings us neatly on to grants from central government.

Ivan: 2:36

Yes, another major component. There are various grants flowing from Whitehall to town halls.

Amy: 2:42

Is there one main grant or is it lots of little pots?

Ivan: 2:45

The biggest single one has historically been the Revenue Support Grant, the RSG.

Amy: 2:51

And what's special about that one?

Ivan: 2:53

Its main characteristic is that it's not ring-fenced.

Amy: 2:56

Meaning the council has flexibility on how to spend it.

Ivan: 2:59

Exactly. They can use it to support any of their services based on local priorities, unlike some other grants.

Amy: 3:06

Such as?

Ivan: 3:06

Well, you have grants like the Public Health Grant, which is ring-fenced. It has to be spent on public health functions.

Amy: 3:11

Okay, so some are restricted, some aren't. Any other examples?

Ivan: 3:14

Sure. There's the New Homes Bonus that's non-ring-fenced, rewarding councils for housing growth. Or the Rural Services Delivery Grant, also non-ring-fenced for obvious reasons.

Amy: 3:24

And presumably the way these different grants are shared out varies quite a bit.

Ivan: 3:29

Oh, absolutely. Absolutely. Each grant usually has its own specific formula or criteria for distribution.

Amy: 3:35

And what about really big areas like schools or the police? Are they funded through these grants, too?

Ivan: 3:44

No, that's important. Funding for schools, the dedicated schools grant, and funding for police and crime commissioners are handled entirely separately. They come with their own specific rules and are definitely ring-fenced.

Amy: 3:55

Got it. So council tax, business rates, central grants... Anything else?

Ivan: 4:00

Yes. Local authorities can also raise money through fees and charges for specific services.

Amy: 4:06

Like paying to use the local swimming pool or for a planning application?

Ivan: 4:09

Precisely. Though there are rules, generally the fee can't be higher than the actual cost of providing that service.

Amy: 4:16

And are those fees set locally or nationally?

Ivan: 4:18

It varies. Some are set nationally, others locally, but usually within that cost recovery principle. The income typically supports that specific service.

Amy: 4:28

And I suppose councils might own property or assets.

Ivan: 4:31

They do. And they can generate commercial income from these, maybe rent from buildings they own or returns from investments. This has become increasingly important for some councils.

Amy: 4:42

So all these different streams, council tax, rates, grants, fees, how does it all come together? Is there a central process?

Ivan: 4:50

Yes, there is. It's the annual local government finance settlement. This is the key yearly process.

Amy: 4:55

And what does that settlement actually settle?

Ivan: 4:58

Primarily, it determines the allocation of the main central government grants like the rsg and sets out the mechanisms for distributing the retained business rates the tariffs and top-ups we mentioned

Amy: 5:08

so it pulls together those core funding elements

Ivan: 5:11

it does it calculates what's called the settlement funding assessment or sfa for each authority it covers counties districts unitaries fire authorities the greater london authority

Amy: 5:20

but not police or schools as you said

Ivan: 5:23

correct and it also doesn't cover housing benefit payments that's separate again And critically, it's about revenue funding the money for day-to-day running costs.

Amy: 5:33

Not capital funding for big projects like building a new library.

Ivan: 5:37

No, capital funding has its own separate processes and sources.

Amy: 5:40

Is this settlement process legally required?

Ivan: 5:43

Yes. The government has a legal duty to publish the RSG allocations each year, and the whole settlement report needs parliamentary approval.

Amy: 5:50

Have they tried to make it more predictable? Planning year-to-year must be tough.

Ivan: 5:54

There have been moves towards multi-year settlements to offer more certainty. We saw one from 2016 to 2020, for instance.

Amy: 6:01

Then more recently.

Ivan: 6:01

There was a two-year settlement announced covering 2023-24 and 2024-25. And looking ahead, the Labor Party has indicated plans for a settlement covering 2026-27 if they form the next government.

Amy: 6:14

Does that make it easier to track funding levels over time? It

Ivan: 6:18

helps, but it's still quite difficult. The specific funding streams included within the settlement can change year on year. which makes direct comparisons tricky.

Amy: 6:26

A complex picture, then. Now, we're running short on time, but maybe just a quick word on accountability. Who makes sure all this money is spent properly? We're covering this next time, I know, but just briefly.

Ivan: 6:36

Of course. The primary accountability is democratic. It's to the local electorate through council elections.

Amy: 6:45

So councils are responsible for their own financial management.

Ivan: 6:48

Fundamentally, yes. They have a duty to ensure their own financial sustainability. Central government doesn't just But it can

Amy: 6:57

intervene.

Ivan: 6:57

It can, yes, but usually only in cases of serious failure. This is linked to their best value duty, the requirement for councils to deliver services efficiently and effectively.

Amy: 7:08

And which government department oversees all this?

Ivan: 7:11

That's the Department for Leveling Up, Housing and Communities, DLUHC. Its top official, the principal accounting officer, is ultimately accountable to Parliament for the system.

Amy: 7:22

So local democracy is key, but there's a layer of central oversight if things go badly wrong. We'll definitely dig into that more next time.