Council funding explained

chelseykirklees

2 years ago

We receive a lot of comments online, asking us to spend money elsewhere or where does council tax go.

So, to try and help provide some clarity we have pulled together information about how the council is funded and how it works. Kirklees Council, like all UK local authorities, is funded from a combination of different sources.

Our main funding sources include:

Central Government grants: the government allocates funds to councils based on different factors such as population size, levels of deprivation, and specific needs. These grants are to support a range of services, from education and social care to waste management and transportation.
Council Tax: Council tax is paid by residents and is based on the value of their property. The revenue generated from council tax is used to fund local services like education, police, fire services, and waste collection. In the financial year 2023/24 we will collect approximately £259 million in council tax. Around £39.4 million of that goes to fund police, fire and parish council services. The £219.5 million that goes towards running the council is just 33% of what it actually costs.
Business Rates: the council also receives income from business rates, which are taxes paid by businesses based on the value of the commercial properties they occupy. This source of funding contributes to local services and infrastructure development. In the financial year 2022/23 we collected approximately £95 million in business rates. The council keeps 50% of the business rates we collect – the rest goes to central government. The £47.5 million we kept is just 7% of what it costs to run the council.
Fees and Charges: the council charges fees for certain services, such as parking, licensing, venue hire and planning applications. These fees help cover the costs of delivering those specific services.
Grants and Funding Streams: In addition to central government grants, we sometimes receive grants from other sources, including non-governmental organisations and charities.
Reserves: It is sometimes possible to use reserves or savings from previous years to support our budgets. We have done that to help with the budget situation for 2023/24 but do not have enough reserves to do that again for 2-24/25. We must have some reserves at all times.
Rental Income: the council can generate rental income from leasing or renting out properties.
Housing Revenue Account (HRA): The council operates a Housing Revenue Account, which is ringfenced specifically to manage its 21,806 (2022-23) social housing properties. Income is generated through charging rents and service charges, which covers the cost of managing and maintaining its properties and delivering the housing service. A proportion of receipts from the sale of right to buy properties is used to develop new properties and buy back properties to increase social housing properties available to let.

The combination of these funding sources allows the council to finance essential public services and maintain infrastructure within our communities. The allocation and distribution of funds varies based on factors like the specific needs of the local area, government policies, and economic conditions.

Commonly asked questions we receive online, explained.

The difference between ‘capital’ and ‘revenue’ budgets

In UK local authorities, the terms ‘capital budget’ and ‘revenue budget’ refer to two distinct types of financial planning and spending:

Capital Budget: The capital budget is focused on funding long-term investments in physical assets e.g. buildings, land, vehicles, plant and machinery and infrastructure. These are usually large-scale projects that have a lasting impact and are expected to provide benefits over an extended period of time. Capital spending involves the creation, enhancement, or purchase of assets that contribute to the overall development of the local area. Examples of capital projects include building new schools, roads, parks, and other major infrastructure projects, including town centre regeneration projects.

Capital budget:

Long-term projects and investments.
Funding used to buy, improve, or create assets.
Typically involves borrowing funds, through a mix of grants from external bodies (Government, West Yorkshire Combined Authority), borrowing and capital receipts generated through the sale of land and buildings.
Capital budgets are often less flexible and subject to longer planning and implementation processes.
Revenue Budget: The revenue budget, on the other hand, focuses on day-to-day operational expenses and the provision of ongoing services. This budget covers the costs associated with running various services, such as education, social services, waste collection, and maintenance of existing infrastructure. Revenue spending is related to the regular and recurring activities of the council.

Revenue budget:

Short-term operational expenses.
Funding used for salaries, supplies, maintenance, and other ongoing costs.
Generally financed through recurring income sources like council tax, business rates, fees, and grants.
Revenue budgets are more flexible and subject to adjustments based on changing needs and priorities.

The main difference between capital and revenue budgets in UK councils is their focus and purpose. Capital budgets fund long-term investments in infrastructure and assets, while revenue budgets cover the day-to-day operational expenses of providing essential services.

Both types of budgets play a crucial role in ensuring that local authorities can effectively manage their finances and meet the needs of their communities.

Why we can’t use the capital budget to ease pressures on the revenue budget

UK local authorities are generally not allowed to use capital funding for revenue costs for legal and financial reasons.

Here’s why:

Legal Restrictions: Capital funding and revenue funding have different legal purposes and rules. Capital funding is intended for long-term investments in physical assets and infrastructure, while revenue funding is meant for ongoing operational expenses, such as salaries, supplies, and maintenance. Mixing these funds could lead to misallocation and misuse of resources, which could have legal consequences and make financial reporting less transparent.
Financial Prudence (being sensible with money): Using capital funding for revenue costs can lead to financial problems further down the line. Local authorities are allowed to borrow to fund capital projects as long as the level of borrowing is affordable and sustainable. Using these borrowed funds for short-term operational expenses could create a financial burden in the future when the borrowed money needs to be repaid. This practice could also impact the local authority’s creditworthiness and ability to secure funding for necessary capital projects.
Accountability and Reporting: Separating capital and revenue funding allows for clearer financial reporting and accountability. Local authorities are required to maintain accurate records of their expenditures and demonstrate responsible financial management. Keeping capital and revenue funds separate ensures that both types of expenditures are appropriately tracked and reported to stakeholders and oversight bodies.
Long-Term Planning: Capital funding is crucial for addressing infrastructure needs and promoting the long-term development of a community.
Grant and Funding Agreements: Many capital funding sources, such as grants from central government or specific earmarked funds, come with restrictions and conditions that are strict about how the money can be used. Not following these rules could lead to the loss of funding or penalties.

Mixing these funds could jeopardise the financial stability and future prospects of the local authority and the communities it serves.

Can the council reallocate grant funding to cover costs?

UK local authorities typically receive grant funding for specific purposes, often tied to particular projects or initiatives. Kirklees Council currently has grants in place from several organisations including Heritage England, National Lottery Heritage Fund, Levelling Up Fund and West Yorkshire Combined Authority.

The process for being awarded this type of grant is often lengthy with detailed applications having to be written and submitted. They also come with strict guidelines on how the money can be spent.

The restrictions on using grant funding for different projects are in place for several reasons:

Accountability and Transparency: Grant funding is provided by external sources, such as central government, charitable organisations, or other organisations, with a specific intention in mind. These funding sources allocate grants based on the understanding that the money will be used for a particular purpose or project. Changing from the agreed-upon purpose could compromise accountability and transparency, as it may be difficult to track how the funds are being spent.
Intended Impact: Grant funding is often targeted to address specific needs or achieve particular outcomes in a community. Using grant funding for a different project might not be in line with the original goals of the funding source, potentially reducing the intended impact of the grant.
Contractual Agreements: Grants usually come with contractual agreements outlining the terms and conditions of the funding. These agreements set out how the funds should be used, the expected results, reporting requirements, and other rules. Using grant funds for different projects could breach these contractual terms and lead to legal or financial consequences.
Funding Source Requirements: Grant funding is often provided by organisations or government bodies with their own priorities and guidelines. These organisations allocate funds based on specific criteria, and diverting funds to different projects might not meet those criteria, potentially risking future funding opportunities.
Transparency and Public Trust: Local authorities are accountable to their residents and other stakeholders. Properly allocating and using grant funds for their intended purposes helps maintain public trust and demonstrates responsible financial management.
Competition for Grants: Grant funding is competitive, and local authorities often need to demonstrate the alignment of their projects with the goals of the funding source. Using grant funds for different projects could harm the local authority’s reputation and future chances of securing grants.
Risk of Overcommitment: Local authorities often have limited resources and need to carefully manage their budget. Using grant funds for different projects could lead to overcommitment of resources, causing financial strain or the inability to complete the original project.

Grant funds are provided for specific purposes and with certain expectations, and using them for other projects could have legal, financial, and reputational consequences for the council. It’s important for us to adhere to grant agreements and use funds as intended to ensure the best possible outcomes for our communities.

How is the council still spending money on regeneration projects if there is a budget problem?

Kirklees Council, like all UK local authorities, must continue to invest, even in times of financial challenges, for several important reasons:

Maintaining Essential Services: Continued investment ensures that essential public services, such as education, healthcare, social services, waste management, and public safety, are adequately provided to the community. Neglecting investment during financial challenges could lead to a deterioration of these critical services, negatively impacting residents’ quality of life.
Preventing Long-Term Costs: Delaying or avoiding necessary investments may lead to higher costs in the long run. For instance, postponing maintenance or repairs of infrastructure can result in more extensive damage over time, requiring even costlier repairs or replacements later.
Economic Stimulus: Local investments can stimulate economic activity within the community. Construction projects, infrastructure improvements, and other investments create jobs, boost local businesses, and generate revenue through increased economic activity.
Infrastructure Development: Investments in infrastructure, such as transportation networks, utilities, and public spaces, contribute to the long-term development and attractiveness of the area. This can lead to increased property values, better amenities, and improved liveability, which in turn can attract businesses and residents.
Meeting Future Demand: As communities grow and evolve, there will be increased demands on services and infrastructure. Investing during challenging times ensures that the council is prepared to meet these future demands and accommodate population changes.
Social Well-Being: Investment in community facilities, cultural centres, parks, and recreational spaces enhances the social well-being of residents. These amenities contribute to a sense of community, promote healthy lifestyles, and improve overall happiness and satisfaction.
Compliance and Regulation: Many investments are required to meet legal and regulatory standards. Failing to invest appropriately could lead to legal challenges, fines, or loss of funding.
Long-Term Planning: Local authorities need to take a long-term perspective when making decisions. Investing strategically, even during financial challenges, allows them to plan for the future and ensure that the community remains resilient and well-prepared.
Funding Opportunities: Some investments may be eligible for grants, partnerships, or funding from external sources. Taking advantage of these opportunities can help offset the financial burden on the council.

While financial challenges may create constraints, ongoing investment is crucial for sustaining essential services, promoting economic growth, meeting future needs, and ensuring the overall well-being and development of the community. Balancing immediate budget concerns with the long-term benefits of investment is a key responsibility of local authorities.