CHAPTER 2
How is the money found?
2.0.1 This chapter describes the main sources of income for local government in England. It is divided into the following sections:
2.0.2 Further information can be found in Annex B - Council tax exemptions.
2.1 Summary of sources of local government income
2.1.1 The main sources of income for local government in England are:
- Council tax;
- Redistributed business rates;
- Other government grants;
- Borrowing and investments;
- Interest receipts;
- Capital receipts;
- Sales, fees and charges; and
- Council rents.
- Total gross local government income increased steadily from £77.2 billion in 1997-98 to nearly £107 billion in 2002-03.
- About 62% of income in 2002-03 took the form of government grants, compared with 64% in 1997-98.
Table 2.1a: Summary of gross income 1997–98 to 2002–03
2.1.2 The remainder of this chapter provides more information on council tax, business rates, grants and sales, fees and charges. Further information on other sources of income can be found in the following chapters:
- Council rents and other Housing Revenue Account income
Chapter 3
- Capital grants and capital receipts
Chapter 4
- Borrowing and investments
Chapter 5 2.1.3 In addition, local authority pension funds had a total income of approximately £7.0 billion in 2002-03. However, this falls outside the usual definition of local authority income. Further information is provided in Chapter 6.
2.2 Council tax
2.2.1 Council tax was introduced on 1 April 1993. It replaced the community charge (poll tax) system which, in turn, replaced domestic rates on 1 April 1990.
2.2.2 Council tax is the main source of locally-raised income for local authorities. It is, therefore, the main source of funding used for meeting the shortfall between an amount a local authority wishes to spend, and the amount it receives from other sources, such as government grants.
2.2.3 The impact on council taxes of increasing budgets varies widely between local authorities. This effect, known as gearing, can be thought of as a balance of funding between budget met through council taxes and budget met through other sources.
2.2.4 Gearing works such that an authority meeting a large proportion of budget through council tax will require a smaller increase in council tax for a given increase in budget. For example, an authority that meets 25% of its budget through council tax has a gearing ratio of 4.0. Therefore, a 1% increase in budget would lead to a 4% increase in council tax. In contrast, an authority that meets 75% of its budget through council tax has a gearing of 11/3. For this authority, a 1% increase in budget would only lead to a 11/3% increase in council tax.
2.2.5 Table 2.2a gives national totals for the amount of council tax budgeted for each year since 1997-98. It shows how the amounts were derived when setting budgets, and how they changed during the course of each year, for example by council tax becoming due from new properties that had not been included in the budget calculations. The table also includes figures for Council Tax Benefit, which is a means-assessed social security benefit.
Table 2.2a: Council tax budgets and outturn
2.2.6 The amount of council tax payable on a property depends in part on the valuation band to which it is allocated. There are currently eight bands in England ranging from Band A for dwellings valued at less than £40,000 on 1 April 1991 to Band H for dwellings valued at more than £320,000 on that date.
- Nationally, 26% of properties are in Band A, and only 9% are in the top three bands.
- However, the pattern varies widely across regions, with the percentage of properties in Band A ranging from 58% in the North East to 3% in London.
Table 2.2c: Number of dwellings on valuation list at 31 March 2004 (by region)
2.2.7 Within an authority, the council tax for each valuation band is a fixed ratio to that for Band D. For example, a Band A dwelling will pay 6/9 the Band D amount, and a Band H dwelling will pay twice the Band D amount. The ratios for all bands to Band D are shown in Table 2.2c.
2.2.8 Band D is used as the basis for calculating the taxbase (the number of Band D equivalent properties) and for year-on-year comparisons of tax levels set. However, as only a minority of properties in each local authority are in Band D, the average Band D council tax does not enable direct comparison to be made of the average amounts of council tax payable by people in different areas.
2.2.9 In contrast, average council tax per dwelling reflects the wide variation between authorities in the distribution of properties across bands. It is therefore a helpful measure to use when comparing the amounts payable in different areas. Variations between figures on this basis are due to a combination of local authority tax-setting decisions and the distribution of properties across bands within each authority's area.
2.2.10 The Government has the power to cap the budgets and hence council taxes of authorities whose budgets it regards as excessive. For 2004-05, it has capped the budgets of six authorities in-year, resulting in an overall reduction in budgets of almost £3 million. In addition, it has set notional budgets for eight authorities for 2004-05. These are lower than the authorities' actual budgets, and will form the basis for making comparisons with 2005-06 budgets for capping purposes.
2.2.11 Table 2.2e shows trends in average council taxes since 1993-94, expressed in two ways: the average Band D figure (including amounts funded by Council Tax Benefit); and the average council tax per dwelling. The table also gives figures for increases in the Retail Price Index (RPI) and average UK earnings.
- The average council tax per dwelling is lower than the Band D council tax because most dwellings are in Bands A to C and discounts are applied for single persons and second or empty homes.
- Band D council taxes, including amounts funded by benefit, increased by about 105% in cash terms or 56% in real terms between 1993-94 and 2004-05.
Table 2.2e: Average council taxes and increase in Retail Prices Index 1993–94 to 2004–05
- The difference between Band D council tax and the average council tax per dwelling is greater in the northern regions of the country. This is mainly due to lower average property prices in the North.
Table 2.2f: Average council taxes by region and class 1997–98 to 2004–05
Map 2.2g: Band D area council tax 2004–05
Map 2.2h: Average council tax per dwelling 2004–05
- For 73% of the 354 billing authorities, the Band D area council tax for 2004-05 is between £1,100 and £1,250.
- For 60% of the 354 billing authorities, the percentage increase in Band D area council taxes between 2003-04 and 2004-05 was between 5% and 7%. For 21% of the 354 billing authorities, the percentage increase was above 7%.
2.2.12 Not every property on the valuation list is liable to pay a full council tax, which is partly based on the property and partly based on the occupants of the property. Some properties are exempt, for example due to being empty for less than six months, or subject to a discount. The full council tax bill assumes that there are two adults living in a dwelling. If only one adult lives in a dwelling (as their main home), the council tax bill is reduced by a quarter (25%). Before 1 April 2004, the council tax bill for a dwelling which was no-one's main home was reduced by a half (50%) in all local authority areas. However, since 1 April 2004, the Local Government Act 2003 has given councils in England the choice to apply council tax discounts of between 10% and 50% for second homes, to reduce or end discounts for long term empty property, and to grant discretionary discounts and exemptions. Information provided by billing authorities in advance of 2004-05 on the Council Tax Base Return (Supplementary) (CTB1(s)) forms indicated that 207 out of the 354 billing authorities were intending to reduce the discount for second homes in their area for 2004-05, and 156 were intending to remove or reduce the discount for long-term empty homes in their area.
2.2.13 Certain people are not counted when looking at the number of adults resident in a dwelling, such as students and severely mentally impaired people. More detailed information on council tax exemptions is set out in Table B1 and Table B2 of Annex B. Council tax exemptions are taken into account by billing authorities when they calculate their taxbase (the number of Band D equivalent properties in their area).
- Of the 21.0 million chargeable dwellings in England as at 16 October 2003, 0.6 million (3%) were entitled to a 50% discount and 7.4 million (35%) were entitled to a 25% discount.
Table 2.2k: Number of chargeable dwellings at 16 October 2003
- Average in year council tax collection rates have been slowly increasing, and reached 96.5% nationally in 2003-04.
- In addition, the collection of council taxes continues once the financial year to which they relate has ended. This means that the final collection rate achieved is somewhere between the figures shown and 100%.
Table 2.2l: Collection rates: Council tax 1997–98 to 2003–04
- It is estimated that £19 million of community charges and £1.6 billion of council taxes were outstanding as at 1 April 2003.
Table 2.2m: Outstanding arrears of community charge and council tax
2.3 Business rates
2.3.1 Since 1 April 1990 most non-domestic properties in England have been liable to nationally-set business rates, which are also known as national non-domestic rates (NNDR) (or sometimes the unified business rate). Before 1990, business rates were set locally. Since then, they have been set nationally, and paid into a central pool. They are then distributed among local authorities on a per head basis, with the payments being regarded as a type of government grant. Further details of this are given in section 2.4.
2.3.2 Liable properties include public buildings, pipelines and advertising hoardings, as well as businesses. Some non-domestic properties, such as agricultural land and associated buildings, and churches, are exempt however. Each property liable to business rates is known as a hereditament, and is recorded on a rating list that is compiled and maintained by the Valuation Office Agency of the Inland Revenue.
Table 2.3a: Number of non-domestic hereditaments on local rating lists at 1 April 2004
2.3.3 Each property has a rateable value that is based, broadly, on the annual rent that the property could have been let for on the open market at a particular date (currently 1 April 1998, using a list compiled for 1 April 2000).
2.3.4 In broad terms, the rates bill for a property is the product of its rateable value and the national non-domestic rating multiplier (45.6p in the pound for 2004-05), less any transitional or other reliefs which apply to the property. Legislation does not permit the multiplier to be increased by more than the increase in the RPI.
Table 2.3b: Rateable values on local rating lists at 1 April 2004
2.3.5 Rate reliefs can be granted in certain circumstances by local authorities. Mandatory reliefs are automatic entitlements in any local authority area, and discretionary reliefs are granted at a local authority's discretion, and paid for by them. An example of these two types of relief is properties held by charities, which are automatically entitled to mandatory relief of 80% and where local authorities have the discretion to top the amount up to 100%.
2.3.6 Another type of rate relief is transitional relief. This relief is granted after a revaluation so that significant bill changes are capped. The current transitional scheme following the 2000 revaluation will be revenue-neutral over the five-year life of the scheme, with losses made good by phasing in the decreases in the rate bills of those who will benefit from the revaluation. In July 2004, the Government announced that a four-year transitional scheme will come into effect on 1 April 2005, following the 2005 revaluation. This scheme will also ensure that increases are phased in, being funded by phasing in reductions in rates bills.
Table 2.3c: Mandatory and discretionary rate reliefs
- The gross business rate yield from local lists has increased by 76% from £10.2 billion in 1990-91 to £18.0 billion in 2004-05. This is partially due to almost all crown properties moving to the local list. In addition, from 2000-01 certain hereditaments transferred from the central to the local list.
- However, contributions to the pool from local lists have only increased by 69% over the same period. This is due to the effects of transition, and changes to the policy on mandatory and discretionary reliefs.
Table 2.3d: Business rate yields since 1990–91
- Table 2.3e shows the proportion of net business rate yield in each region compared to the proportion of the total population in each region.
- This demonstrates that whilst 31% of the population live in London and the South East, these regions account for 42% of the net business rate yield.
Table 2.3e: Business rate yields by region 2004–05
- The average in-year business rate collection rate is slowly increasing, and reached 98.3% nationally in 2003-04.
- As with council taxes, the collection of business rates continues once the financial year to which they relate has ended. This means that the final collection rate achieved is somewhere between the figures shown and 100%.
Table 2.3f: Collection rates: business rates 1997–98 to 2003–04
- It is estimated that £680 million of business rate arrears were outstanding as at 31 March 2004.
Table 2.3g: Business rate arrears 1997–98 to 2003–04
2.3.7 Having been collected, the income from business rates is paid into a central pool and is then redistributed to local authorities on the basis of population. Each year, the Government estimates how much will be redistributed from the pool in the forthcoming year, based on the amount likely to be paid into it and the difference in previous years between the amounts payable to the pool and the amounts paid from it. This is known as the Distributable Amount. The calculation of the Distributable Amount for 2004-05 is shown in Table 2.3h.
2.3.8 Business rates come mainly from two sources: properties on local rating lists (which from 2000-01 have included Crown properties, such as central government properties and Ministry of Defence establishments) and properties on the central list (such as national utilities and pipelines etc). The income from properties on local rating lists is collected by billing authorities and paid by them into the pool. An Exchequer contribution is made towards the costs of transitional relief.
2.3.9 Further information on rateable values and business rates is given in the Inland Revenue's Non-domestic rating in England and Wales, which can be seen at www.inlandrevenue.gov.uk/stats/non_domestic/menu.htm
Further information on rateable values can also be seen in Commercial and Industrial Floorspace Statistics in the Planning statistics section of the Planning section of the ODPM website.
- The amount being redistributed to local authorities in 2004-05 is £15.0 billion. This was derived from estimated payments into the pool of £15.9 billion and an estimated deficit brought forward from 2002-03 of £0.9 billion.
Table 2.3h: Calculation of the Distributable Amount for 2004–05(a)
2.4 Revenue grants
2.4.1 The main non-housing revenue grants are referred to collectively as Aggregate External Finance (AEF). AEF includes Revenue Support Grant (RSG), business rates and certain specific grants. From 2003-04, business rates, RSG and Police Grant (where appropriate) are distributed together as Formula Grant. Specific grants are distributed by individual government departments.
- In 2004-05 AEF is £58.4 billion, up from £35.9 billion in 1997-98. The figures are not, however, directly comparable between years, due to changes in the responsibility for various functions.
- Within AEF, 21% of grants are specific and special grants in 2004-05, up significantly from 5.0% in 1997-98.
Table 2.4a: Aggregate external finance provided to local authorities, 1997–98 to 2004–05
- The average grant per head in 2002-03 was £992;At a regional level, figures varied from £793 in the South East, £1090 in the North East to £1,451 in London.
Table 2.4b: Grants towards revenue expenditure by region, 2002–03
2.4.3 Formula Grant (RSG, business rates and Police Grant) is the largest revenue grant paid to local government. It is not provided for a specific purpose and so can be spent on any service. From 1990-91 to 2002-03, it was allocated to local authorities through the Standard Spending Assessments (SSA) system. Following an extensive review of the Formula Grant Distribution System, from 2003-04 Formula Grant is being allocated to authorities using the new Formula Spending Shares (FSS) system. The new system is built on a basic 'per client' amount for each service area with top ups for deprivation, area costs etc. Formula Grant also takes into account each authority's expected ability to collect local income from council tax.
- Specific grants inside AEF went up from £1.8 billion in 1997-98 to £12.2 billion in 2004-05, an increase of over 650%.
Table 2.4c: Distribution of specific grants across services, 1997–98 to 2004–05
2.4.4 Further information on specific grants in 2002-03 (outturn figures) and 2004-05 (budget figures) are given in Table C2b and Table C4b of Annex C. These include a breakdown of the main specific grants outside AEF. These are generally central government grants paid directly by local authorities to a third party, such as housing benefit for non-HRA properties, whereas those within AEF are usually used to provide a council service.
2.5 Sales, fees and charges
2.5.1 Sales, fees and charges are the amounts received by local government as a result of providing a service. They vary widely between services in both the amount of money involved, and their nature, for example library fines and planning application fees.
- Sales, fees and charges totalled £8.9 billion in 2002-03, up 62% from £5.5 billion in 1997-98.
- The biggest percentage increase over the period was for non-HRA housing, which increased by nearly 200%.
Table 2.5a: Sales, fees and charges by service area, 1997–98 to 2002–03(a)
Last updated on 7 December 2004
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