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Part 1:
IntroductionThe aims of reform
1.1 Local government plays a large and important role. It provides essential services. It plans and shapes communities. It is the champion of local interests. It implements key national policies at the local level. It is a leading partner in efforts to promote sustainable development and to tackle difficult local social, economic and environmental problems.
1.2 In order to deliver such a broad agenda, local authorities need a strong democratic mandate from voters, and the support and involvement of a wide range of local stakeholders. They need a clear forward vision and firm leadership. They need to focus on getting Best Value in all areas. That is why we are promoting radical reform to modernise and reinvigorate local government.
Aims of a local government finance system
- fund all authorities adequately. This means getting the overall balance of resources right. We must then allocate grant fairly, taking due account of authorities’ differing needs and capacities to finance expenditure from their own resources;
- promote continuous improvement in service quality and efficiency in line with BestÊValue;
- provide a reasonable degree of predictability and stability. Authorities cannot plan ahead with confidence if they are subject to large or unexpected variations in grant. Taxpayers and other stakeholders would also like greater predictability and stability;
- balance funding for local government’s delivery of national priorities and targets with real financial freedom and responsibility for local authorities. The Government has a clear mandate to raise educational standards, to tackle crime, and to address other pressing national issues for which local government is primarily responsible. But local circumstances and priorities vary. Authorities need to be able to reflect this in their spending and charging plans;
- be fair to those who use and pay for local authority services. The system should ensure that they are fully protected;
- clarify accountability for financial decisions. If council tax increases are excessive or services are underfunded, people should know who to hold to account;
- be intelligible and transparent to all stakeholders. There cannot be true accountability unless people understand the system. At present, many do not;
- make partnership working easier. Local authorities need to co-operate with one another and with a wide range of public, private and voluntary sector partners to ensure the richness and diversity of provision which Best Value requires. The local government finance system should help, not hinder;
- encourage consultation, particularly with local taxpayers.
1.4 Some of these aims reinforce one another. Some are more relevant to some aspects of local government finance than others. Giving local authorities more financial freedom and greater certainty about future funding should help them deliver continuous improvement. Making funding more intelligible and transparent helps clarify accountability. But there are also some tensions between these aims, and balances to be struck. The delivery of national priorities should not be at the expense of local freedom and responsibility. Nor should local freedom be at the expense of fairness to those who use and pay for services.
Progress so far
1.5 In its first three years, the Government has concentrated on the biggest problems – the inadequacy of funding for local government and the lack of any certainty about future funding. The move to three-year spending rounds and the moratorium on changes to grant distribution formulae have produced greater predictability and stability. Chart A shows theÊannual rate of growth in central government support for local authority revenue expenditure (in cash terms and adjusted for inflation) since abolition of the poll tax. AfterÊdeclining in real terms between 1994/95 and 1997/98, it is now growing by 4 per cent a year.
Chart A: Central government support for local authority revenue expenditure 
Chart B shows the trend in support for capital expenditure.
Chart B: Central government support for local authority capital expenditure 
1.6 The Government has replaced compulsory competitive tendering with the new duty to secure Best Value on behalf of local people. Best Value requires local authorities to deliver continuous improvement in service quality and efficiency. It also gives them much more freedom to determine how to achieve this. We have also replaced the old system of crude and universal capping with new reserve powers, giving local authorities more freedom and responsibility for budgets, whilst protecting council taxpayers from excessive increases.
1.7 Finally, and most recently, we have announced a pilot scheme of local public service agreements (PSAs) which add financial and other incentives to complement Best Value and encourage continuous improvement. Next year we shall extend it to many other authorities, on a voluntary basis. The local PSA will be negotiated between the authority and Government. It will identify the extra contribution the authority is prepared to make over and above its requirements under Best Value to achieve key national and local priorities. In return, the authority will receive greater freedom in the means of delivery and some limited pump-priming funding. The achievement of outcome targets within local PSAs will be rewarded by additional grant of up to 21/2 per cent of the authority’s 2000/01 budget over a three-year period. Local PSAs will be rolled out more widely in 2002/03 if the pilot is successful.
1.8 These are significant improvements. But there is still much to do. The benefits of greater predictability and stability on revenue funding should be strengthened, and extended to capital expenditure programmes and to benefit other stakeholders. The finance system is not well understood. The grant distribution system and capital finance system are particularly complex and opaque. There are many constraints on borrowing and on powers to charge for services. There have been increases in the use of ring-fenced grant and in the number of area-based initiatives. These have delivered results, but at the risk of undermining local authorities’ financial freedom and responsibility.
What the green paper covers
1.9 This green paper sets out proposals for change in these areas1. It deals with:
- the distribution of general grant;
- the control of capital expenditure; and
- taxes and charges.
In some cases, the right way forward seems clear. In other cases, there are difficult choices to be made. Part seven of the green paper sets out what we see as the key questions.
1.10 The green paper covers what most people think of as local authorities – county and district councils and all-purpose authorities. But it also looks at how the system should deal with police and fire authorities, and with parish and town councils. A separate consultation document considers the case for reform in Wales.
1.11 As well as proposing practical reforms, we want to broaden the debate about local government finance. In the past, this has been treated as a private matter between central and local government, and as the preserve of experts. Getting the right relationship between central and local government is important. It is the focus of the European Charter of Local Self-Government, which a new finance system must respect. But everyone benefits from the work of local authorities. Some people – the housebound or young people in care – depend critically on their services. Providing these services is expensive. The average council tax bill in England is £697. In addition, Government pays grant equivalent to 10 pence in the basic rate of income tax. The business rate contributes £15 billion. Central and local government must take account of the interests and views of those who use and pay for local authority services.
1. Although the aims in paragraph 1.3 apply to council housing finance, the separate and different accounting arrangements, the size of the existing asset base and the continuing programme of stock transfer mean that different solutions may need to be adopted. This paper does not make proposals in respect of the separate Housing Revenue Account (HRA) subsidy regime but identifies particular housing issues arising from the proposed reform of the capital finance system.
Published 19 September 2000
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