Budget Setting Process within Local Governments in the UK Introduction

Finance is one of the key resources available to local authorities for use in providing their services and for meeting their statutory obligations to their residents. Other resources include staff, systems, property/buildings and information. Finance is the resource that allows all the other resources to be secured and as such managing it becomes a very important activity to ensure an efficient use of all resources. Finance also becomes important to local authorities because it represents public money entrusted to them and therefore requires statutory accountability on the part of chief officers of the use of this money. About 75% of Local Authorities funding comes from central government in the form of revenue support grants. The remaining balance comes directly from council tax on residents. Central Governments funding to local authorities represents about 25% of public expenditure in the UK. Although Council tax forms only about 4% of UK the national tax revenue, their impact on the public is very visible as they are seen as an additional tax burden. In the UK, Central Government through Parliament exercises the overall control over public expenditure to ensure that resources are directed and used effectively within the overall economy, This includes the funding it gives to local authorities yearly and the revenues they collect from local taxpayers in the form of council tax. Central government is able to control local government expenditure by limiting the grants it gives to them, by applying pressure over council tax increases and by legal limitations on what local authorities can do. Local authorities must therefore organize their affairs efficiently to ensure that resources they use are within government constraints. The budgetary process is one of the ways of ensuring that this is achieved. Budget Strategy Local authorities generally use their resources to provide services to their residents as required by law and by their constitutions. This is achieved within a framework of locally identified priorities agreed through a policy and resource strategy and met by central government grant settlement constraints and a level of an affordable council tax. Administratively, an integrated business and budget planning process ensures that: a. resources are allocated to achieve an identified national and local priorites and other statutory requirements and obligations, b. financial prudence is satisfied from allocation of resources through to spending, monitoring and evaluation, c. there is a continuous improvement of services by reviewing existing performance levels and d. value for money prescriptions to identify efficiencies are carried out. Objectives of setting budgets Local authorities set budgets for the following reasons:a. to meet statutory requirements and obligations, b. to set council tax, c. to determine rent levels, d. to express service plans for the new year in financial terms, e. to allocate available financial resources,

f. to set targets against which performance are monitored, g. to provide authority to the finance director to commit expenditure within a framework of financial regulations, standing orders and the scheme of delegation and h. to meet the requirement of the external auditors that financial controls are exercised. Types of budgets There are two types of budgets within local authorities, revenue budgets and capital budgets. Revenue budgets are budgets for recurring expenditures and incomes for the year. Capital budgets are budgets for capital expenditure planned for the year as part of a capital program. Capital budgets must conform to the Prudential Code for Capital Finance as approved by CIPFA which requires local authorities to consider the affordability and long term effects of borrowing and also the revenue implications of capital funding. Revenue budgets are divided into two, the general fund budgets and housing revenue budgets. This separation results from a statutory requirement on local authorities to account separately for the provision of housing and the provision of all other services. The General Fund budgets result in the setting of council tax for the budget year and Housing Revenue budgets are for the calculation of rent for the budget year. The General Fund budget are funded by Revenue Support Grant level determined by the government, and National Non Domestic Rate. The government also determines the level of Early Intervention Grant and the Council Tax Freeze Grant. The rest of the of the funding is largely through Council Tax. The Housing Revenue Budgets are funded by rents, service charges, housing subsidy and leasehold service charges and other housing related income. Capital Budgets are funded from the general fund account or from Housing Revenue Account or from special government grants. Revenue Budget The Revenue budgets look at one year at a time in the context of a three or four year plan which projects forward financial plans and include the full year effects of first year decisions. Revenue budgets are formulated on an incremental basis with an emphasis on changes in last years budget rather than zero based or budgets formulated from the scratch. The plans starts from the beginning of the new year where resources are looked at, pressures on budgets are identified and estimated and the current years budgets are projected forward. These projections are reported to the executive of the council in the form of a strategic review and medium term financial forecasts. A strategy for the budget process is identified, formulated and recommended to the Executive of the council on the basis of the review. This could take the form of a savings exercise necessary to bridge the gap between resource availability and expenditure requirement in the new year. To be more effective, the savings exercise would be concentrated on service areas where it is considered acceptable to find savings. Progress reports go to the Executive at every stage of the process to inform, discuss and consult members of the council.

In November to December in the year before the new budget year, the government issues provisional revenue grant information about the level of grant settlement to local authorities in the new year. This gives a clearer picture of the new budgets and are subsequently reported to the Executive of the council. The council on the basis of the government figures also set their own provisional cash limits for each directorate or departments. Individual departments are then able to prepare detailed revenue budgets to present to the Executive in January to February of the year before the new year. As said previously the detailed budget will look at the budget for the current year and adjusted for any pressures or increases in expenditure, savings identified, current years one-offs not needed next year and inflation assumptions in the new year. A final report goes to the Executive at the end of February after the final grant figures are released by the government. The detailed budgets are finalized and referred by the Executive to a full meeting of the council between February and March where they are approved. As part of the process the approved budgets are loaded on the councils financial management system ready for commitment of resources, virement of budgets within departments and for budget monitoring. Capital Budgets Capital budgets are normally prepared from the authorities capital program within the context of its capital strategy. They are normally prepared for the current year and three or four subsequent years depending on the program. Capital budgets are also looked at and approved by the Executive as and when Revenue budget are being approved, They are also loaded on the financial management system for commitment and monitoring in the new year