Local government finance - revenue expenditure (Council Tax)

LG Finance Past Paper

Following the Lyons Inquiry into Local Government Finance that drew attention to the lack of public understanding of local government finance, you have been asked to write a short feature explaining clearly to your readers how local government is financed.

(a) Describe in detail the sources funding for local government revenue expenditure, indicating clearly the role of central government.

Answer (a):

The sources funding for local government revenue expenditure includes Council Tax, National Non-Domestic Rates (NNDR), which is also known as Uniform Business Rates (UBR), the grants from the government such as Revenue Support Grant (RSG), Specific Grants and Area-Based Grants (ABGs) and then other sources such as fines, charges or fees. I will explain them as follows.

********* Council Tax *********

When John Major succeeded Mrs Thatcher, his environment Secretary Michael Heseltine has replaced the controversial Poll Tax with Council Tax. The local authorities are responsible for setting and charging Council Tax.

Council Tax bills in England, Scotland, and Wales are based on a banding system that divides domestic properties into one of eight bands (nine in Wales) – A – H, respectively according to their notional capital values.

In Wales, these bandings were most recently revised in 2005 after it had originally set on 1 April 1991, but in England and Scotland, the binding system has never been revised since 1 April 1993.

The highest Council Tax Band (H) in England currently applies to all homes valued at more than £320,000 in 1991, while at the time in Scotland the top rate starts at just over the £212,000 mark.

The lowest Council Tax band was set for homes worth £40,000 or less in England and £27 or less in Scotland, while the Datum Band covered those valued at £68,000 - £88,000 in England and £45,000 - £58,000 in Scotland.

Since 2005, a new system based on 1 April 2003 values was introduced in Wales. The new Welsh band A has covered properties worth £44,000 or less, with Datum Band D encompassing those valued at £91 – 13,000 and the new Band I all dwellings over £424,000.

Responsibility for valuing homes rests with the Valuation Office Agency (VOA), an executive agency of HM Revenue and Customs, but it is for individual billing authorities to maintain lists of valuations.

Then the listing officers (employed by one of the 85 regional officers of the VOA) are obliged to place individual homes into these property bands based on its market/capital value, with elements of a poll tax.

Local valuation officers (also known as district valuers) are responsible for running each district office, and it is his or her job to hear any formal appeals initiated by households unhappy with their property valuations.

Households will pay the Council Tax, and in each household, the tax is based on a maximum two “liable” adults. For example, full-time students are excluded to pay for the Council Tax.

Local billing authorities (or collection authorities) collects the Council Tax. In two-tier areas, billing authority is the district/borough council while in unitary areas is the unitary authority itself.

After the billing authority collects the proceeds, it then redistributes the money between itself and other precepting authorities, who entitled to set a 'precept' in the area.

In two-tier areas, money goes to the county council (its role is also as local fire authority), the local police authority and the billing authority itself (district/borough council). In unitary area, precepting authorities are the unitary authority, police and county council fire authorities.

The central government's role in Council Tax is that it has powers to prevent local authorities charging excessive Council Tax by introducing formal ceilings to stop bills rising above specified levels. This process is known as capping and introduced by the Tories in the Rates Act 1984.

Labour has generally been reluctant to cap authorities, although it retains reserve powers allowing it to do so under certain circumstances.

For example, in 2008 – 2009, the government announced its intention to cap Portsmouth City Council and seven police authorities – Bedfordshire, Cheshire, Leicestershire, Lincolnshire, Norfolk, Surrey and Warwickshire – after each announced Council Tax rises above the 5 per cent ceiling beneath which it had urged them to remain.

Ultimately, only Lincolnshire – which increased its precept by 78.9 per cent – was capped, although the other authorities face limits on precept increase in future.