Jean-Yves Gilg

Editor, Solicitors Journal

Local authority budget-setting

Local authority budget-setting


Tiffany Cloynes considers local authorities' budget-setting process and the implications if a local authority struggles to stay within its budget

The intensive activities of local government officers and members
in recent weeks to enable their authorities to set their annual budgets has highlighted the complex nature of the budget-setting process. Local authorities must conclude their arrangements by 11 March each year. Those in England must calculate their council tax requirement and those in Wales must calculate their budget requirement by then.

As with all decisions, local authorities must act reasonably when taking decisions about their budgets and in accordance with their fiduciary duty to council tax payers, business rate payers, and other funders. Local authority budget decisions are often controversial, with those who object to the levels of funding proposed for particular services, or services in general, often deciding to make their objections known through protests and challenges. It is therefore essential that authorities ensure they comply with all requirements in the budget-setting process, and that their decision-making is reasonable and robust enough to withstand any challenge.

Local authorities' budgets must be calculated and council tax requirements set in accordance with part 1 of the Local Government Finance Act 1992. This requires a local authority to calculate its own budget requirement, taking account of expected expenditure, contingencies, and financial reserves; calculate its own element for all council tax bands; and take account of precepts issued by other authorities, such as the local police and crime commissioner.

Consultation requirements

Council tax or non-domestic rates payers and those who receive local authority services will expect to be consulted about local authority budget proposals. When carrying out consultation, local authorities must ensure they comply with the principles of consultation established by case law:

  • It must take place at a formative stage of a decision;

  • It must provide enough information to enable those being consulted to respond in an intelligent way;

  • It must allow sufficient time for people to prepare and present replies; and

  • The decision maker must take consultation responses into account conscientiously when taking the final decision.

A complication in this year's budgets has been the offer of the UK government for local authorities in England to take up a four-year funding settlement to 2019/20. This is to prepare for the government's decision, announced in the November 2015 spending review, to change the system of funding for English local authorities, ending the revenue support grant but allowing them to retain 100 per cent of business rates.

The government's consultation on this suggested that multi-year settlements can provide the funding certainty and stability to enable more proactive planning of service delivery and strengthen financial management and efficiency. However, the consultation also pointed out that the final determination of the local government finance settlement for any given year cannot be made until calculations taking account of the business rates multiplier are completed, and that the government will also need to take account of future events. In practice, even local authorities that have opted for four-year settlements may find it difficult to manage their finances while they move to the new system and seek to deliver as much as possible within the resources available to them.

Council tax referendums

Local authorities rely on income from council tax to provide them with resources to deliver services. However, English local authorities are limited in the extent to which they may increase council tax. Part 1 of the 1992 Act requires the secretary of state to set principles in a report which must be laid before the House of Commons, according to which it is to be determined whether a proposed basic amount of council tax is excessive.

For 2016/17, the principles require that local authorities with responsibility for social care must hold a referendum if the council tax is to be increased by 4 per cent or more, of which 2 per cent must be spent on adult social care. For district councils the threshold is an increase of 2 per cent and more than £5. For fire and rescue authorities and police and crime commissioners, the threshold is an increase of 2 per cent or more, other than for police and crime commissioners whose council tax is in the lowest quartile of their category of authority, for whom the threshold is more than £5. The threshold for the Greater London Authority is an increase of 2 per cent or more.

Any local authority proposing to set an excessive rate must seek approval for this in a referendum and identify an alternative rate that will apply if the excessive rate is rejected. The secretary of state has generally published the principles close to the time when local authorities are calculating their budgets, which means authorities do not have long to take account of these before setting their council tax. An authority might think it would be helpful to have a referendum before it sets its council tax, but the timing of the requirements makes this logistically difficult to achieve. So, authorities that decide they need to set an excessive rate of council tax will find themselves needing to deal with the administration of arranging a referendum, as well as reissuing council tax demand notices if the original proposed is rejected.

When the requirements relating to council tax referendums were introduced as part of the Localism Act 2011, the then communities secretary Eric Pickles described it as requiring local authorities to have a direct democratic mandate for excessive council tax increases. In practice, it seems unlikely that, even with the offer of excellent services, many people would choose to pay the higher of two proposed rates of council tax. Therefore, in practice, the legislation may act as a deterrent for local authorities rather than empowering their communities. So far, since the legislation came into force, there has been one council tax referendum - that caused by the police and crime commissioner for Bedfordshire in 2015 - in which the proposed increase in council tax was rejected by 69.5 per cent of voters, compared with 30.5 per cent in favour.

Staying within the budget

Once a local authority has set its budget, it must then stay within that budget. A local authority's chief finance officer has a duty to report to members if the authority or its executive has incurred or is about to incur expenditure that is unlawful or will cause the authority to exceed its resources. Once such a report has been made, the full council, or the executive if it relates to an executive action, must consider the report within 21 days and must decide what action to take.

Until it has done so, if the report has identified that the local authority is expected to exceed its resources, the authority will be prohibited from entering into new agreements that may involve it incurring expenditure without the authority of the chief financial officer. If the report has identified unlawful expenditure or anticipated unlawful expenditure, the course of conduct
that led to the report must not be pursued until the council has considered the report and decided what action to take. This is, therefore, a severe and limiting action for a chief financial officer to take, and will only be taken when absolutely necessary.

To avoid being unable to balance the books, local authorities will increasingly need to consider new ways of delivering services. Announcements in the UK government's March 2016 Budget reminded local authorities of the challenging financial situation in which they operate. The announcement in the November 2015 spending review that the revenue support grant would be phased out was at least balanced by news that when that happened local authorities would be able to retain 100 per cent of business rates.

However, the chancellor announced in the Budget that small business rate relief will be increased and the threshold for eligibility changed to apply to more businesses. He predicted this would result in occupiers of a third of properties paying no business rates and another 50,000 having tapered relief. The chancellor also announced an increase in the standard business rates multiplier threshold and said this will take 250,000 smaller properties out of the higher rate. Local authorities trying to prepare for new financial arrangements are now faced with the prospect that funding generated by business rates may be significantly less than expected.

In these circumstances, anything they can do
to improve the cost-effectiveness of their service delivery will be helpful. This could include working with other local authorities, for example, through delegation or joint discharge of functions, establishing new delivery vehicles
such as companies, and procurement of external providers. There are legal issues associated with each of these and it will be important to consider all such options to enable local authorities to meet their financial obligations. SJ

Tiffany Cloynes is head of public services (England) at Geldards