The release of the latest council financial statistics this week went mostly unnoticed. And unless you’re a bit of politics junky or a data nerd it will likely seem, well, dull. But councils provide services that are vital to a civilised society, such as education, social care, transport and refuse collection. For that reason alone, it’s worth taking an interest in their finances.
But there’s one aspect which does make the headlines and gets people’s attention: councils say they’re not receiving sufficient funds whereas the Scottish Government says they’re getting a fair deal.
It’s a bit “he says, she says”. So what’s the truth?
I’m not going to answer that question in this post. Instead, my aim is to explain the jargon behind council finances so you can read them for yourself and arrive at your own answer to this question and, I hope, quite a few others.
There are three levels of government in Scotland. The UK Government, the Scottish Government and Local Government, i.e. councils. The latest numbers published this week are in the Scottish Local Government Finance Statistics 2015-16 report(1). Unless otherwise stated, all numbers quoted are from this source. A numbered list of sources is given at the end including the spreadsheet that accompanies the report with my additions to show any working mentioned below.
Do not worry if numbers aren’t your thing. Nothing more than basic arithmetic is required and you don’t have to look at the spreadsheet unless you want to. The difficult bit is in understanding what the words and concepts surrounding the numbers mean. I’ve approached it as a series of questions that I found myself wrestling with when I first tried to get to grips with council finances.
If you spot any errors or bits that are unclear, please let me know. Constructive feedback is very welcome.
Q1. What is the total spent by all councils in 2015-16?
In the report’s executive summary it says gross revenue expenditure on services was £15.3 billion and net revenue expenditure on services was £10.1 billion.
Here, 2015-16 refers to the financial year from 1 April 2015 and 31 March 2016 inclusive.
Q2. What’s the word ‘revenue’ doing in there? Sound a bit oxymoronic.
For councils, ‘revenue’ means one-off spending. For example, paying a teacher at the end of the month gets you just that one month of work. In contrast, capital spending has an effect that lasts longer, e.g. building a school will create an asset with decades of use ahead of it.
Capital spending also differs because councils are, by law, permitted to borrow to fund it. This is not allowed for revenue spending so capital and revenue must be tracked as two separate accounts.
At the Scottish and UK levels of government the word ‘resource’ is used instead of ‘revenue’.
Q3. What’s the difference between gross and net?
It’s peculiar to council finances. Here ‘net’ means some income is deducted from the gross total. This income is from a mixture of sources, from parking charges to rents paid for council property, but it also includes significant funding received from the UK government for housing benefit.
The concept of net expenditure can be confusing. It’s akin to a household that spends £30,000 saying their net spending was only £20,000 because they decided to view Dad’s earnings of £10,000 differently from Mum’s £20,000.
To be fair, this analogy is partial, and civil servants do have good reason to treat income sources differently, which we’ll touch on below, but those looking at council finances for the first time are bound to be left scratching their heads when they see net expenditure.
Q4. So it’s best to go with the gross figure of £15.3 billion. What about capital expenditure?
Total capital expenditure in 2015-16 was £2.5 billion. This money was spent on constructing and improving buildings and public infrastructure, such as schools and bridges.
Q5. Going back to revenue expenditure, what does the “on services” bit mean?
The word ‘service’ means the type of activity, such as Education or or Environment or Transport. What you’d count as Gross Revenue Expenditure beyond services is financing, specifically debt repayments and interest paid on existing debt. Financing totals to £1.5 billion and is classed as revenue expenditure even though the borrowing itself can only be for capital projects.
Q6. So Gross Revenue Expenditure (not just on services) totals to £15.3 billion + £1.5 billion = £16.8 billion for all councils then?
[There is a wrinkle with all of the figures above in that the Housing Revenue Account (HRA) for council housing is included in the total but, by law, must be handled in a separate account. This needn’t bother us just now but it might matter depending on what you’re looking for in council finances. As it gets a bit technical I’ll shunt HRA stuff to the end of this post so it doesn’t get in the way.]
Q7… What is the expenditure on each service?
This chart shows the main areas of spending(4).
31% goes on Education, 26% on Social Work, 15% on non-HRA housing, which is mostly housing benefit funded by the UK Government but administered by the councils. These three areas make up just under two-thirds of the total.
Q8. Where does the funding come from?
This chart shows the main sources of funding(4).
41% is from the General revenue grant, 30% from Service & other income, 16% from Non-Domestic rates, and 12% from Council Tax. (1% missing due to rounding.)
Q9. Council tax is the smallest? Really? I’ve never even heard of those other things.
Despite being best known, presumably because it’s the only tax that residents pay directly to their councils, Council Tax is indeed the smallest source of income for councils.
Q10. What’s the General revenue grant?
These are funds from the Scottish Government. According to Exhibit 1 in Audit Scotland’s report on council finances(2), the Scottish Government provided councils with £10.0 billion in revenue funding in 2015-16, which makes up 58% of Gross Revenue Expenditure.
You can see in the chart above that the General revenue grant is the largest block of council funding, and it together with NDR is very nearly all of the £10.0 billion from the Scottish Government. There’s also a small amount of Scottish Government funds in Service & other income.
Q11. What’s Non-Domestic Rates (NDR)?
NDR is like council tax but for businesses. It is collected by each council from businesses with premises in their area and then sent into a central pool which the Scottish Government then distributes back to the councils each year. The idea is that the redistribution can help top-up councils with smaller local incomes.
Q12. Is the funding provided by the Scottish Government to councils like the block grant sent from the UK Government to the Scottish Government?
In some ways. The main difference is that there is no equivalent of the Barnett formula and so the Scottish Government has more discretion than does the UK government in deciding on the size of its block grant.
Q13. What’s General Funding?
The General revenue grant plus NDR plus Council Tax can be used to fund any council service as well as debt and interest payments. For this reason these three sources are lumped together and called General Funding. By design, Net Revenue Expenditure equals General Funding, and this is the reason why council accounts focus on Net rather than Gross Revenue Expenditure.
Q14. And what is Service & other income?
About 60% of it raised locally and, as the name suggests, relates to the budget of a particular council Service, or department. So for example, monies received from renting out of a school hall would be counted as income under Education.
The other 40% of Service & other income is provided by the UK government for non-HRA Housing which is mostly housing benefit.
Q15. I heard something about a surplus or an underspend?
The total funding for revenue expenditure coming to councils in 2015-16 was £17.2 billion but Gross Revenue Expenditure was smaller at £16.8 billion.
Q16. Why didn’t the councils spend all that funding? Weren’t they saying they didn’t have enough money?
Gross Revenue Expenditure was underspent by £448 million in 2015-16, but £340 million of it went on “Capital Expenditure Funded from General Fund/HRA”, meaning that it was diverted into infrastructure projects such as school buildings or bridges. Only £108 million was placed into reserves for spending in future years.
Q17. Sorry, only £108 million? That still sounds like quite a lot.
The reserves account used for revenue expenditure had a balance of £1.3 billion on 31 March 2016, so £108 million is small relative to that. But the more important point is that governments of any kind have to plan ahead, and councils expect the years ahead to be leaner.
Funding received from the Scottish Government to cover both revenue and capital expenditure was £11.0 billion in 2015-16, and is budgeted at £10.3 billion in 2016-17, and in the budget for 2017-18 just passed in the Scottish Parliament, it’ll be £10.0 billion. So between 2015-16 and 2017-18 councils expect a 9.5% drop in funding from the Scottish Government.
These figures are in real terms in 2016-17 prices and can be found in the Scottish Parliament Information Centre’s budget briefing(3). See the “Local Government” line of the “Level 2 2010-2018 real” sheet.
Q18. How does this compare to the Scottish Government’s total budget?
Between 2015-16 and 2017-18, the Scottish Government expects its total budget to decrease by 0.1% from £37.44 billion to £37.40 billion, again in real terms at 2016-17 prices. Most of the Scottish Government’s budget is funded by the block grant from the UK Government.
These figures are from the same sheet as mentioned in Q17 and can be found on the final “Total Scottish Government Budget” line.
Q19. Where can I learn more?
The numbered references referred to above are:
- Scottish Local Government Finance Statistics 2015-16 published by the Scottish Government (includes spreadsheet): http://www.gov.scot/Publications/2017/02/1688/0
- Local Government in Scotland: Financial overview 2015/16 published by Audit Scotland:
- SPICE briefing on 2017/18 Scottish Government Draft Budget. This report contains actual (referred to as outturn) figures for 2015-16, see level 1 and 2 spreadsheet in particular. http://www.parliament.scot/parliamentarybusiness/102775.aspx
- I’ve annotated the spreadsheet available from (1) so you can understand and check my working and see how I constructed the above charts.
###The Housing Revenue Account (HRA)
If you’re a glutton for punishment, here’s a bit more detail on HRA.
Q20. What’s HRA?
The Housing Revenue Account. By law, this account must be kept separate from all other council accounts and covers income from renting council homes and expenditure on maintaining them.
The annual expenditure on this account is large, about £1.1 billion, but the income is almost the same. For 2014-15, the income was only £8.4 million larger than expenditure. It’s not possible to tell what the figure is for 2015-16 because the debt and repayment part of HRA is not stated separately in this year’s report(1).
Q21. Have the Scottish Government broken the law then?
No. There’s no legal requirement for it to be split in this report. It is Audit Scotland’s job to check council figures and in their assessment (published November 2016) they commented on this exact problem (Point 56 in their audit report). Curiously, and not mentioned by Audit Scotland, HRA debt and interest were stated separately in previous editions of the report.
Q22. What’s Gross Expenditure without HRA?
Even though it’s not stated, if we assume income and expenditure were about the same in 2015-16 as they were the previous year, then it would be £15.6 billion.