Heather Jameson 18 November 2013

Guide to local government finance

How is local government funded?

Local Government finance can be difficult to comprehend, with a complex system of formulas to dictate the level of funding need for each council, but the basics are relatively simple.

Local authorities are financed through a number of difference sources, but most funding is made up of central grant – including money from business rates – and councils tax.

In addition, councils are increasingly attempting to become more self-sufficient, through their powers to charge for services and trade.

The proportion of grant to council tax varies – called the ‘gearing effect’ – as councils with high deprivation levels and low house prices receive more grant and get less returns from their local taxes. More affluent areas are likely to get less grant, but higher returns from high rate council tax.

Money for councils is broadly split into ‘revenue’ – the money for the day-to-day costs incurred by the council – and ‘capital’ – the money which goes on projects such as buildings, roads and infrastructure.

The annual local government finance settlement puts forward money from the Government and dictates:

· the overall formula grant
· how the grant will be distributed
· ‘top slice’ money – the money ‘sliced out of the grant to give to other organisations, like the Local Government Association

Formula grant is made up of revenue support grant and redistributed business rates – which is also know as the national non-domestic rate - but it doesn’t include specific grant. Nor does it include schools dedicated schools grant, which passes down from the Department for Education, and is largely passported on directly to schools.

The Government’s spending review sets out its spending priorities and where the money – including the grant for local government.

The formula grant is ‘unhypothicated’ – which means it is not ring-fenced for specific projects.