Volume 15: Government and Public Administration
9. Local government
Funding
Capital expenditure
Revenue expenditure
Monitoring of financial and other performance

9.16 Local authority expenditure represented a significant proportion of all public sector spending: 33 per cent in 1986 and nearly 36 per cent by 1996. Central government was therefore concerned to influence and where possible control that expenditure so as to ensure that the public sector as a whole did not absorb what it considered to be an inappropriate proportion of available financial resources.

9.17 Local authority expenditure was of two kinds, which were influenced or controlled separately: (a) capital expenditure on land, buildings, plant and vehicles; and (b) revenue (sometimes called 'current') expenditure on wages, salaries and other day-to-day running costs, including the interest on loans taken out to finance capital expenditure.

Capital expenditure

9.18 The control regime for capital expenditure in place in 1986 dated from 1981. Each local authority was given annual spending allocations for each service or block of services, with a limit on how much it could spend. However, councils could exceed these annual allocations by using receipts from the sale of assets such as council houses. They could also evade them by leasing a capital asset (for example, a new town hall or library) rather than by purchasing it outright; the leasing payments counted as revenue expenditure. The Government introduced a new control system in 1990/91, which aimed to control the acquisition of capital assets however these were funded.

9.19 Some capital expenditure was supported by specific grants from central government (ie, grants paid to support a specific project), but most was funded by loans which had to be repaid from revenue. These annual repayments were supported by the grant system described below.

Revenue expenditure

9.20 This was financed to some extent from the local property tax (the 'rates' ¹). but mainly from Central Government grant. ² The support and control system in place in 1986 was also introduced in 1981. Determining how much grant each local authority would receive was a complicated process. The Government took a view on the appropriate level of total revenue expenditure by local authorities, how much each individual council needed to spend (its Grant Related Expenditure Assessment, or GREA ³), how the 'rates' should be calculated and what proportion of total expenditure they should fund, and how much each council could raise locally. Grant payable was calculated by deducting each authority's deemed local tax revenue from its GREA. Authorities that spent more than their GREA were penalised by having their grant reduced and, later, by 'rate capping' - explicit limits on their budgets.

9.21 When rates were replaced in 1990 by the Community Charge, ⁴ the calculation was similar in principle but meant significant changes for individual authorities because their new tax base was quite different in nature. Spending needs (now called Standard Spending Assessments, or SSAs) were also worked out differently. The grant payable to a council was equivalent to its SSA less the amount it raised in Community Charge and its share of the pool of business rates. In 1993, the Community Charge was replaced by a property-based Council Tax, but the grant calculation system remained the same.

9.22 Throughout the 1980s, the Government reduced the proportion of spending that it met from grant, so that local authorities had to increase their revenue from rates. The intention was to make local ratepayers and voters more aware of the financial consequences of decisions made by their local authority on policies and services, by increasing the proportion of local spending which had to be funded from local taxation. The steady reduction in grant was reversed from 1991/92 by transitional grants designed to ease the switch from the Community Charge regime to the Council Tax, but the grant percentage subsequently declined once more.

9.23 It is impossible to measure the impact of these developments on how local authorities addressed their responsibilities for BSE-related functions. These were a very small part of the services they provided. On the SBO ban, MAFF did not agree with a suggestion that

. . . additional enforcement responsibilities placed on local authorities will have resource implications for the authorities concerned

adding that:

. . . we do not foresee that the proposed regulations will place a significant additional burden on enforcement authorities. ⁵

9.24 For their part, local authorities did not seek more funds from central government in connection with the introduction of the SBO ban. When asked about MAFF's view on the funding of the SBO ban, Mr Brian Etheridge, who worked for the former Association of District Councils for most of the BSE period, told the Inquiry:

I cannot recall the Association ever making an enormous issue about the resource implications.

However, he added that the cumulative resource implications of a succession of small changes to a number of Regulations could become significant. ⁶

Mr Nicholas Hibbett, in written evidence on behalf of the Chartered Institute of Environmental Health, noted that:

As far as I am aware there was never any additional direct payment made by way of Rate Support Grant nor any other means to cover Local Authorities expenses and additional resource requirements [of the SBO ban]. ⁷

Monitoring of financial and other performance

9.25 Auditors were appointed to conduct the annual audits of the accounts of local authorities by the Audit Commission (for councils in England and Wales), the Accounts Commission for Scotland and the Northern Ireland Audit Office. These Commissions also undertook 'value-for-money' studies intended to help local authorities improve their efficiency, for example, by comparing the performance of groups of authorities with similar characteristics in order to identify good practice.

9.26 An important purpose of the annual audit was to establish that all the authority's spending was intra vires (within its powers). If the auditor found that some expenditure was ultra vires (outside its powers), this had to be reported to the council. If it appeared to an auditor that an individual (that is, a councillor or an official) had failed to account for any sum, ⁸ or that their wilful misconduct had caused a loss or a deficiency, he or she could surcharge them - ie, certify that they were personally liable for the sum or amount concerned. ⁹ The procedure the auditor had to follow was set out in statute. Although such a finding was uncommon, it was not unknown and some councillors were surcharged. This possibility therefore concentrated the minds of local government officials and councillors on whether they had power to do what they wanted to do.

9.27 Councils which were contemplating doing something novel and possibly contentious would often consult auditors in advance to get advice on whether, if it went ahead, they would be likely to find the expenditure ultra vires. For example, auditors were consulted about the leasing schemes and other unusual financial arrangements which were such a feature of local authority capital finance in the 1980s.