Funding & Money Management

Funding and Money Management

Funding & Money Management

Councils continue to face pressure on their budgets. After a long period of austerity which hollowed out local services, the Pandemic unleashed a wave of pen-tup demand on top of ongoing issues of more complex needs and an ageing population. Councils are having to make difficult decisions around competing priorities and service cuts. They are also exploring more innovative and efficient ways of delivering services, particularly through service re-design and digital solutions.

Although councils have local flexibility around how they prioritise and spend their resources, some of the most expensive and statutory services like education, social services and housing must be funded to a level which delivers certain standards. This means that other discretionary services, those which are often most valued by the public, such as the local environment, libraries, leisure centres and the arts have been squeezed relatively harder when money is short. Councillors have a significant responsibility to ensure that public money is being spent responsibly. In 21/22 local authorities in Wales were responsible for gross revenue spending of nearly £8 billion on local services.  £1.8 billion is raised locally from council tax and over £1 billion is raised from business rates that are redistributed on a formula.

Revenue Budget

The money that councils spend on the day to day running of services is called the Revenue Budget. This includes expenditure on staff salaries and wages, payment to suppliers, running costs of property and loan repayments. Whilst this expenditure is partly funded from fees and charges and council tax, the main source of funding is from the Welsh Government. About 45% comes from the Welsh Government in the form of the Revenue Support Grant, 26% from specific grants and 13% from redistributed business rates.

The Revenue Support Grant from the Welsh Government is not ring fenced or hypothecated. This means that the grant is flexible and councils decide how it is to be used to meet local needs and priorities and invest in services.

Council Tax

Council tax funds on average only 15% of local council expenditure in Wales. So, despite the level of controversy and publicity it generates, it only contributes a small proportion of a local councils’ income. If a council needs to increase its expenditure, it can only do this by raising more money through the council tax which results in a disproportionate increase, as a 1% budget increase would require a 6% Council Tax increase.

The council tax bill includes a precept for police and community and town councils. (Fire and rescue authorities levy constituent councils for their share of the budget). Many people often do not appreciate that their council tax helps pay for police officers and fire-fighters, as well as the broad range of council services.

Capital Budget

A council’s Capital Budget covers the money it spends on investing in buildings, infrastructure and expensive pieces of equipment. To count as capital expenditure, new assets or additions to assets must have a life of more than one year.

Councils develop a medium term financial plan, which reflects their other corporate strategic plans and which links with their Risk Management and Asset Management Plans. Each year the annual budget will be developed in the medium term financial plan. As well as setting out the council’s spending plans for the following year, the budget process results in the setting of the council tax for the following year. The annual budget and level of council tax is set by the whole council on the advice and recommendation of the cabinet or executive board.

In a council, budget planning typically takes between 3-5 years. However, there is a need to approve individual budgets each year, culminating in the setting of the local council tax, usually in February/March each year. For the annual budget the following timelines typically apply.

JulyBudget Strategy Report considered
July – SeptemberDirectorates continue to develop budget proposals
OctoberProvisional budget settlement received
November/DecemberConsultation on draft budget savings proposals
DecemberFinal Budget Settlement received
JanuaryFine tuning of budget proposals and consideration of medium term financial plans
FebruaryApproval of Corporate Plan and budget and setting of council tax

The council is advised and supported in managing its finances by a senior officer, known as the Section 151 Officer, who is statutorily charged with responsibility for ensuring financial probity. This officer is often the Treasurer or Director of Finance. The management of financial transactions is governed by the financial regulations of the council.

As a councillor, you will need to know about and may be involved in the following financial activities:

  • Upholding financial management standards
  • Approving the Annual Statement of Accounts
  • Approving the Financial Strategy
  • Approving the authority’s budget, you may be able to ask for this to be amended or ask the cabinet to reconsider before giving approval
  • Approving fees & charges
  • Reserves & provisions, as part of the Statement of Accounts process
  • Setting the Council Tax
  • Approving the Council Tax Reduction Scheme on a yearly basis (currently a requirement of Full Council)
  • Approving the Treasury Management Policy statement
  • Staffing, that is determining how officer support for executive and non-executive roles within the authority will be organised.

Some financial terms explained:

The Barnett Formula is the way the resources allocated to the Welsh Government is calculated by the UK government. More information here.

Capital expenditure is the money spent on assets (e.g. housing redevelopment, leisure centre construction).

CIPFA – Chartered Institute of Public Finance & Accountancy. This is the leading professional body for people in public finance. As the world’s only specialised public services accountancy body, they provide information, guidance, and determine accounting standards and reporting standards to be followed by local government. More information here.

Council tax is a local tax which is collected from occupiers of residential property. The amount of tax is calculated by reference to home value bandings. Council tax funds the council approved expenditure after taking off government grants, business rates, fees and charges. More information here.

The Green Book provides analysis of the Standard Spending Assessments by individual services used in the calculation of the revenue settlement for Unitary and Police Authorities in Wales.

HRA or Housing Revenue Account. If the council owns its own social housing stock, the HRA is a specific account of expenditure and income that every local authority housing department must keep in accordance with the Local Government & Housing Act 1989. The account is kept separate or ring fenced from other council activities. Income is primarily generated by the rents and service charges paid by tenants, while expenditure is on the management and maintenance of the housing stock, and capital financing charges on the HRA’s outstanding loan debt.

Hypothecation. Otherwise known as ‘earmarking’ or ‘ringfencing’ applies to funding from government that is meant for a pre-determined purpose such as specific grants. The Revenue Support Grant is un-hypothecated and is given to a council for it to determine how it is spent giving the council more flexibility in meeting its own objectives.

Inflation. The increase in costs of the same goods from one year to the next. Most commonly used measures of inflation bundle together the increase in costs of a range of goods such as food and fuel commonly purchased by households. The following are measures of inflation:

  • CPI (Consumer Price Index)
  • RPI (Retail Price Index)

When setting budgets, councils are particularly concerned with wage/salary inflation and increases in specialist large spending areas like residential care.

Local Government Funding Formula. This is the method that the Welsh Government uses to distribute the Revenue Support Grant to each council. It is based on the population and demographic, physical, economic and social characteristics of each area set out in the standard spending assessment, the standard spending assessment is a notional calculation of what each council needs to spend to provide a standard level of service.

Local Government Settlement. This is the official term for the Welsh Government’s funding for local government, and includes the Revenue Support Grant, specific purpose grants and non-domestic rates and is distributed based on the funding formula.

MTFP or Medium Term Financial Plan. The Medium Term Financial Plan covers a period typically of three years and forms part of the Council’s corporate planning processes. The MTFP aims to identify financial and funding pressures facing the council over the forthcoming three years that will lead the future budget setting process, outline the council’s budget position for the next three years, and set out future levels of government funding.

NNDR or National Non Domestic Rates. A levy on businesses collected by councils on behalf of the Welsh Government, and paid into an All Wales Pool. The Pool is then redistributed amongst all Welsh local authorities.

Revenue expenditure refers to day to day running costs (e.g. salaries, supplies, maintenance).

RSG – Revenue Support Grant. A grant paid by central government to aid local authority services in general (as opposed to specific grants for specified purposes). The grant makes up the difference between expenditure at Standard Spending Assessment, and the sum of a) the amount the authority would collect if council tax was set at the government’s standard level and b) redistributed NNDR.

The Standard Spending Assessment or SSA is a notional calculation of what each Council needs to spend to provide a standard level of service. The Welsh Government uses such an assessment as part of the formula for distributing Revenue Support Grant to local authorities. It is calculated to reflect the differing costs of providing services in each authority area because of their different demographic, geographic, and socio-economic characteristics.

Specific Grants. The Welsh Government provides some funding to local government in the form of hypothecated grants. These grants can only be used for the specific purposes for which they are provided.