CHAPTER 1
Local government
1.0.1 This chapter provides an overview of the functions, structure and financial context of local government in England. It is divided into the following sections:
1.2 What local government does
1.3 How local government is structured
1.4 How big is local government?
1.1 What is local government?
1.1.1 Local government is one way in which the country's governance and administration is carried out, and its public services delivered. Two features distinguish local government from other local service providers - most local authorities are elected and most have the ability to raise taxes locally.
1.1.2 Local councils, their members and the administrative units supporting them have a number of objectives, amongst which are:
- Delivering national objectives locally;
- Using national and local resources to meet the diverse requirements of different neighbourhoods and communities.
1.1.3 The style and constitutional arrangements under which local government operates has changed and is still changing. Traditionally local government was about the delivery of a range of services. Over time, more and more of these services have been delivered by outside agencies and the role of local government has changed as a result.
1.1.4 Increasingly, local government is about securing a strategy for the local community, delivering the right outcomes by managing and using its assets effectively, working with central government as well as with the local business and private community in its area.
1.2 What local government does
1.2.1 Local government delivers a wide range of services either directly through its employees, indirectly by employing others or by facilitating delivery by other bodies.
1.3 How local government is structured
1.3.1 The structure of local government varies across the country. Map 1.3b shows the shire counties, metropolitan districts, unitary authorities and the Government Office regional boundaries. More detailed regional maps showing individual shire districts are provided in Annex A1 (Map A1a, Map A1b, Map A1c and Map A1d).
1.3.2 In London (Map A1e), most functions are delivered by the London boroughs and the City of London. Since 3 July 2000, there has been an upper tier consisting of the Greater London Authority (GLA) and its four functional bodies. The GLA itself comprises a directly elected Mayor, a separately elected Assembly and about 400 support staff. The four functional bodies are:
- Metropolitan Police Authority (MPA)
- London Fire and Emergency Planning Authority (LFEPA)
- Transport for London (TfL)
- London Development Agency (LDA)
1.3.3 In 2001-02, magistrates courts became the responsibility of the new Greater London Magistrates Court Authority, which covers the whole London area shown in Map A1d.
1.3.4 In the six metropolitan areas (Greater Manchester, Merseyside, South Yorkshire, Tyne and Wear, West Midlands and West Yorkshire), most services are run by metropolitan districts. However, fire, police, passenger transport and, in some cases waste disposal, are the responsibility of single purpose authorities as shown in Map A1f, Map A1g and Map A1h.
1.3.5 In most of the rest of England, called the shire areas, there are two main tiers of local authorities: shire counties and shire districts. These have different responsibilities. However, in some parts of the country, shire county and shire district responsibilities are carried out by a single unitary authority. 46 of these were created between 1 April 1995 and 1 April 1998: in most of these instances a shire district became a unitary authority by taking over most of the county authority's responsibilities. Most unitary authorities did not take over responsibility for the fire and rescue service, so shire counties that were affected by the creation of unitary authorities also have a combined fire authority to administer these services in the old county area - see Map A1f. In the shire areas, there is also a police authority for each constabulary; these cover counties or sometimes combinations of counties - see Map A1g.
1.3.6 Most information in this publication is supplied by the principal authorities mentioned above, plus the national parks authorities shown in Map A1h.
1.3.7 Information is not collected from the third tier of local government, the 8,700 parish councils (of which about 400 are town councils) or 1,500 parish meetings where there is no parish council. Further details on parish and town councils are given in Annex A2.
1.3.8 Table 1.3a shows the responsibilities for major services in the local authorities and Annex A3 gives details of the main changes to local authority structure in recent years.
Map 1.3b: Government office regions; shire counties (upper tier), metropolitan districts and unitary authorities in England
1.4 How big is local government?
1.4.1 Local authorities in England spend around £100 billion a year and employ about 2.4 million staff.
1.4.2 Around half of all local authority employees (1.3 million) work in education, with 0.3 million employed in social services and 0.2 million employed on law and order: police, traffic wardens, police civilians and in magistrates courts.
1.4.3 There are some 20,000 elected councillors serving on 389 local authorities. A further 89 single purpose authorities do not have directly elected councillors.
Table 1.4a: Size of local government
1.4.4 In addition there are over 10,000 parish councils, town councils or parish meetings in England, which are there to handle very local issues. This publication is not directly concerned with this tier of local government, but some further details are provided in Annex A2.
1.5 Local government in the national context
1.5.0 This section sets out local government's expenditure and income in the context of the public sector as a whole, local government's part in meeting HM Treasury's fiscal policy rules, and the size of the local government sector in the UK economy as a whole.
LOCAL GOVERNMENT IN THE PUBLIC SECTOR
1.5.1 Local government is a part of the public sector, and local authorities' expenditure is part of public expenditure that pays for the delivery of public services. The main services funded by central government are the National Health Service, social benefits and pensions, defence, and higher and further education. The main services delivered by local government are primary and secondary education
and social services.
- HM Treasury measures public expenditure using the aggregate Total Managed Expenditure. In the United Kingdom, local government expenditure is about a quarter of Total Managed Expenditure, and this proportion has changed little for many years.
1.5.2 The data underlying Chart 1.5a can be found on Table 1.5g.
1.5.3 Government needs to raise revenue to pay for its expenditure. Some of the main sources of UK government income in 2003-04, based on data from the UK National Accounts are:
- Income taxes, including income tax, corporation tax and capital gains tax;
- Value Added Tax (VAT);
- social contributions (mainly National Insurance).
- Council tax is about 5% of UK government revenue, though this figure excludes contributions paid by the Department of Work and Pensions (DWP) on behalf of Council tax benefit claimants.
- National non-domestic rates are about 4% of UK government revenue. In consequence, local government also needs funds from taxes raised centrally, provided in the form of grants, to pay for all of its expenditure.
1.5.4 The data underlying Chart 1.5b can be found on Table 1.5h..
LOCAL GOVERNMENT IN THE FISCAL POLICY FRAMEWORK
1.5.5 The objectives for fiscal policy, and how they are to be implemented, were introduced in 1997, and are set out by HM Treasury in Budget Reports.
1.5.6 The fiscal policy objectives are:
- over the medium term, to ensure sound public finances and that spending and taxation impact fairly both within and between generations; and
- over the short term, to support monetary policy and, in particular, to allow the automatic stabilisers to help smooth the path of the economy.
These objectives are implemented through the golden rule and the sustainable investment rule:
- The golden rule states that, over the economic cycle, the Government will borrow only to invest and not to fund current spending.
- The sustainable investment rule states that Public Sector Net Debt, as a proportion of Gross Domestic Product (GDP), will be held over the economic cycle at a stable and prudent level.
1.5.7 Performance against the golden rule is measured by the Public Sector Current Budget, expressed as a percentage of GDP, averaged over the economic cycle.
- The public sector had large deficits on current budget from 1991-92 to 1996-97, followed by large surpluses in 1998-99 to 2001-02 and a return to deficit in 2002-03 and 2003-04.
- Throughout that period the Local Government Current Budget stayed close to balance. This is a consequence of the local government revenue finance system, which requires revenue expenditure and movements in reserves to be financed from council tax, redistributed national non-domestic rates, and government grants.
1.5.8 The data underlying Chart 1.5c can be found on Table 1.5i..
1.5.9 Public Sector Net Borrowing is also used to show the overall financial position of the Public Sector: this measure includes revenue expenditure and capital expenditure.
- When the public sector had large deficits on current budget, it also had substantial net borrowing. Also, when the public sector had large surpluses on current budget, net borrowing was generally negative, and the public sector was able to repay debt.
- As with Current Budget, Local Government Net Borrowing was close to balance in most years. This is a consequence of the local government capital finance system, which controls the sources of finance for capital expenditure.
- In 2003-04 Local Government Net Borrowing was -£2.0 billion. This was partly due to high capital receipts and also due to transactions associated with the transfer of London Underground from the Department of Transport to Transport for London in July 2003.
- In 2002-03 Local Government Net Borrowing was -£1.6 billion. This was mainly due to large payments made by ODPM and Scottish Executive to enable a small number of local authorities to complete Large Scale Voluntary Transfers of their housing stock and to repay overhanging debt. The largest such payment was of over £1 billion from the Scottish Executive to Glasgow City Council. Similar capital transfers were made to the New Towns in 1992-93.
1.5.10 The data underlying Chart 1.5d can be found on Table 1.5j..
1.5.11 The sustainable investment rule is achieved if, other things being equal, Public Sector Net Debt is maintained below 40% of GDP over the economic cycle.
- Public Sector Net Debt rose to nearly 44% of GDP at 31 March 1997, but it then fell to 30% of GDP at 31 March 2002, before rising slightly in 2002-03 and 2003-04.
- In contrast Local Government Net Debt has fallen from 8% of GDP at 31 March 1991 to 3% of GDP at 31 March 2004. This partly reflects increased financial investments of capital receipts by local authorities, which reduce net debt.
1.5.12 The data underlying Chart 1.5e can be found on Table 1.5k..
LOCAL GOVERNMENT IN THE UK ECONOMY
1.5.13 Local government expenditure can also be compared to total domestic expenditure in the UK economy, as defined in the National Accounts. This also includes central government expenditure, final expenditure by households, and capital expenditure by all sectors of the economy.
- In calendar year 2003, local government's share of all domestic expenditure was 8.8%, the highest since 1992.
- This rose from about 8% in 1960 to a peak of over 12% in 1975, but has been back near to 8% again in recent years.
- The increase in local government's share of domestic expenditure up to 1975 was mainly due to growing current expenditure, whereas the subsequent fall was mainly due to reductions in capital expenditure.
1.5.14 The data underlying Chart 1.5f can be found on Table 1.5l..
1.6 How local government works financially
1.6.1 Local authority spending can be divided into revenue expenditure and capital expenditure, and broadly speaking, each is financed in a different way. On the whole, revenue expenditure is financed through a balance of central government grant including redistributed business rates and the locally raised council tax (see Chapter 2). Capital expenditure is principally financed through central government grant, borrowing and capital receipts (see Chapter 4).
1.6.2 Local authorities are required by law:
- to secure the necessary funds to finance their operations
- to provide an accurate account of where the money goes
- to provide accounts which balance the books
1.6.3 Not all the local authorities counted in Table 1.4a are allowed to collect money directly through council tax. Those which can are called billing authorities. Others receive funds indirectly either by precepting on a billing authority or by other channels.
- Of the 478 local authorities in England, 354 are billing authorities, which raise money via council tax, and 102 are major precepting authorities. Altogether these 456 authorities are known collectively as 'receiving authorities' because they receive revenue support grant.
Table 1.6a: Billing, major precepting and other authorities
1.6.4 Tables 1.6b and 1.6c combine the revenue and capital accounts in order to calculate a figure for local government gross expenditure and gross income. Transfers between the accounts are eliminated to avoid any double counting of expenditure or income.
1.6.5 The revenue accounts included are:
- General Fund Revenue Account (GFRA)
- Housing Revenue Account (HRA)
- External Trading Services Revenue Account (TSR)
1.6.6 Pension funds in the Local Government Pension Scheme are excluded: the actuarial reserves of the pension funds are owned by the fund members and these are part of the financial corporations sector in the National Accounts, not part of the local government sector. This information is given separately in Table 6.2b and Table 6.2e. Companies owned by local authorities are also excluded.
1.6.7 Where possible, the tables in this chapter eliminate double counting of flows of money. There are three types of such flows:
(i) Between services within the same account. The most significant flow or recharge of this kind is from general administration to other services and also recharges within general administration.
(ii) Between accounts of the same authority. For example, contributions by the General Fund Revenue Account to the Housing Revenue Account.
(iii) Between authorities. This occurs when an authority pays another authority for goods and services it provides (for example, payments to other local education authorities in respect of pupils educated outside their area of residence - education recoupment).
The most significant of these flows can be identified and eliminated but some cannot, such as recharges made by services other than general administration and some payments and receipts between authorities.
1.6.8 There are several different measures of gross expenditure. The measures used here exclude payments of rent rebates to tenants and payments of council tax benefit. These payments have been excluded because their purpose is to finance local authority expenditure rather than to increase it.
- In 2002-03, 62% of local authority gross spending (revenue and capital combined) was accounted for by just three services - education, social services and transport.
Table 1.6c: Local authority gross expenditure by service 2002-03
[ Key Facts and Trends ] [ Contents ] [ Chapter 2 ]
Last updated on 7 December 2004
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