CHAPTER 3
How is the money spent? – Revenue accounts
3.0.1 This chapter deals with the costs incurred by local authorities in:
- employee costs such as the salaries of staff;
- procurement costs, such as transport, fuel and building maintenance;
- levies paid to other local authorities which provide a service for example, a metropolitan district pays a waste disposal authority;
- payment of awards/benefits on behalf of central government for example, mandatory rent allowances;
- recharges to other accounts.
Such spending is often referred to as current or revenue expenditure, in order to distinguish it from capital spending. However, the terms current expenditure and revenue expenditure also have particular meanings in the context of local government finance – see section 3.1.
3.0.2 The chapter is divided into several sections, which cover:
- 3.1 Expenditure definitions
- 3.2 Current expenditure by service
- 3.3 Labour, goods and services purchased
- 3.4 Pattern of spending by region
- 3.5 Time series of expenditure and balance of funding
- 3.6 Maps of expenditure and balance of funding
- 3.7 Capital charges
- 3.8 Reserves
- 3.9 External trading services
- 3.10 Housing revenue account
3.0.3 Detailed figures on revenue account spending for 2004-05 and 2005-06, along with budgeted estimates for 2006-07, can be found in Annex C.
3.1.1 Current expenditure is the cost of running local authority services within the financial year. These include the costs of staffing, heating, lighting and cleaning, together with expenditure on goods and services consumed within the year. This expenditure is offset by income from sales, fees and charges and other (non-grant) income, which gives net current expenditure. This definition can be used to describe expenditure on individual services. Net current expenditure includes that expenditure financed by specific government grants within and outside Aggregate External Finance (AEF). This definition of net current expenditure is useful, as it is similar to the National Accounts’ concept of current expenditure on goods and services.
3.1.2 The term revenue expenditure is used to describe expenditure funded from AEF, council tax and authorities’ reserves. Revenue expenditure is equal to net current expenditure plus capital financing costs and a few minor adjustments, but excluding expenditure funded by grants outside AEF. Revenue expenditure is a familiar and widely used measure of expenditure. It is used particularly in the context of funding of local government expenditure.
3.1.3 Net revenue expenditure is revenue expenditure excluding that funded by all specific grants except Police Grant.
3.1.4 Budget requirement is net revenue expenditure excluding that funded from local authority reserves. It is the amount of expenditure, which is funded by council tax, Formula Grant, General Greater London Authority (GLA) grant and some minor items.
Important note
3.1.5 Expenditure on individual services has traditionally been collected on a Net Current Expenditure basis. Following an initiative by the Chartered Institute of Public Finance and Accounting (CIPFA) enshrined in the Best Value Accounting Code of Practice (BVACOP), authorities were instructed to complete final accounts on what is called a Financial Reporting Standard 17 (FRS17) basis from 2003-04 onwards.
3.1.6 The main implication is the costs of entitlements to retirement benefits (pensions) are accounted for in the year in which employment gives rise to the entitlement rather than the year in which cash payments of contributions or pensions take place. On an FRS17 basis, revenue expenditure is now financed by appropriations from pension reserves in addition to appropriations from other reserves, Revenue Support Grant, National Non-Domestic rates, Police Grant and Council Tax.
3.1.7 In order to make like-for-like comparisons with previous years, from 2003-04 local authorities were requested to provide summary service expenditure on both an FRS17 and a non-FRS17 basis on their Revenue Summary (RS) and Revenue Accounts (RA) returns.
3.1.8 Where FRS17 is relevant, each of the tables in this chapter have footnotes to show whether the data in the table are on an FRS17 or a non-FRS17 basis. To allow comparisons between years nearly all of the data in this chapter are on an FRS17 basis.
3.1.9 The data in Annex C1 and Annex C3 are on an FRS17 basis and so data in this chapter may not be consistent with data in Annex C1 and Annex C3 for this reason.
3.2 Current expenditure by service
3.2.1 Tables 3.2a and 3.2b show expenditure on the main services that takes place through the General Fund Revenue Account in 2004-05 and 2005-06. Recharges of administration and support services within the accounts have been eliminated to remove double-counting. A detailed breakdown of expenditure and income for both years can be found in Annex C.
- Net current expenditure on services totalled £97.2 billion in 2005-06 compared with £91.9 billion in 2004-05, an increase of 5.7%.
- The largest share of net current expenditure in 2005-06 was on education services with 38% of the total. Social services accounted for a further 18%. (See Chart 3.2c).
3.3 Labour, goods and services purchased
3.3.1 Another way of analysing revenue expenditure is to look at the labour, goods and services purchased by local authorities.
3.3.2 Since 1998-99 a sample of local authorities have completed the Subjective Analysis Return (120 up to 2004-05 and 145 from 2005-06). This shows how net current expenditure is broken down between pay and the procurement of goods and services. Pay is analysed to show the major pay negotiating groups. Procurement of goods and services is analysed to show goods and services purchased directly and services provided by external contractors (private contractors and voluntary organisations) or internal trading services (Direct Labour Organisations and Direct Service Organisations).
3.3.3 Table 3.3a shows a time series of this analysis from 2003-04 onwards. Total expenditure on pay and the procurement of goods and services is consistent with Revenue Outturn data, but has been adjusted to exclude double counting of expenditure that has been recharged between service blocks within the General Fund Revenue Account, or between one local authority and another. Discretionary transfer payments have also been excluded.
3.3.4 Detailed analyses of the Subjective Analysis Return for 2004-05 and 2005-06 are shown in Annex Tables C1o and C1p.
- In 2005-06, 53% of employee and procurement expenditure was used to pay teachers, police, fire fighters and other local government workers.
- Of the £56 billion spent on pay in 2005-06, £19 billion was used to pay teachers.
- £50 billion was spent on the procurement of goods and services in 2005-06, of which £21 billion was paid to external contractors.
3.4 Pattern of spending by region and class of authority
3.4.1 Chart 3.4a shows revenue expenditure per head for each English region.
3.4.2 Chart 3.4b shows revenue expenditure for each class of authority in England.
3.4.3 The regional variation in local authority expenditure per head reflects the relative resources available to local authorities, mainly government grant and council tax. In particular, London receives a higher level of grant per head than other regions reflecting its relative needs and high costs. Regional figures for council tax and grants are given in Chapter 2, sections 2.2 and 2.4. Detailed breakdowns of patterns of spending by region and class of authority can be found in Annex tables C3.
- Revenue expenditure per head is largest in London and other regions where there are major urban areas, and is smallest in the more rural regions.
- Revenue expenditure is largest for shire counties, and is smallest for the shire districts in England.
3.4.4 Total expenditure by region is shown in Annex C3, together with expenditure by class of authority.
3.5 Time series of expenditure and balance of funding
3.5.1 Table 3.5a includes budget estimates for 2006-07. The funding of school sixth forms changed between 2001-02 and 2002-03, resulting in a discontinuity in the time series. In 2002-03, the responsibility for this funding passed from local authorities to the Learning and Skills Council (LSC). The LSC received government grants of £1.7 billion in 2005-06 and purchased these services from local authorities. These payments are recorded as specific grants outside AEF. Expenditure on sixth form education from 2002-03 is therefore included in education net current expenditure, but not included in the definition of revenue expenditure. Chart 3.5b shows net current expenditure on the main services over time in real terms using the GDP deflator.
- Between 2000-01 and 2005-06, the biggest increases in expenditure in real terms have been in education and highways and transport services.
- Other services have remained relatively constant in real terms.
3.5.2 Table 3.5c shows the increase in local authority revenue expenditure between 1993-94 and 2005-06, in cash terms. This is shown graphically in Chart 3.5d, which also shows the expenditure in real terms at 2005-06 prices, using the GDP deflator to take account of inflation. Changes and comparisons over time can often be misleading owing to functions being added or taken away from the responsibilities of local government. Major function changes include responsibility for Post 16 Education transferred to the Learning and Skills Council in 2002-03.
3.5.3 Table 3.5c also shows the funding of revenue expenditure in terms of government grants, redistributed business rates and council tax from 1993-94 onwards. Expenditure met by sales, fees and charges and expenditure under other accounts, such as the Housing Revenue Account (HRA) are excluded. This is shown graphically in Chart 3.5d. The sum of government grants, redistributed business rates and local taxes does not normally exactly equal revenue expenditure because of the use of reserves.
3.5.4 The figures shown in the revenue expenditure column are expenditure financed from Revenue Support Grant, specific and special grants within AEF, redistributed business rates, council taxes and balances. The figures also include spending met by Standard Spending Assessment (SSA) reduction grant (1994-95 to 2002-03), Police Grant (1995-96 onwards), Central Support Protection Grant (1999-00 to 2001-02) and General GLA grant (2000-01 onwards).
3.5.5 The figures shown in the Government grants column are Revenue Support Grant and specific and special grants within AEF. In addition, also included are SSA reduction grant (1994-95 to 2001-02), police grant (1995-96 onwards), Central Support Protection Grant (1999-00 to 2001-02) and General GLA grant (2000-01 onwards).
3.5.6 The figures shown in the redistributed business rates column include City of London offset.
3.5.7 The figures shown in the council tax column are gross of council tax benefit and council tax transitional reduction scheme.
3.5.8 The large changes in specific and formula grants from 2005-06 to 2006-07 are largely due to changes in the way that expenditure on schools is funded. Since 2006-07, local authorities receive funding for schools through the specific grant entitled Dedicated Schools Grant (DSG) rather than as part of formula grant.
- Between 1993-94 and 2005-06, revenue expenditure has more than doubled in cash terms.
- However, in real terms, the increase in revenue expenditure was 51%.
3.5.8 Chart 3.5f illustrates the proportion of revenue expenditure funded locally since 1993-94.
3.6 Maps of expenditure and balance of funding
- 3.6.1 The following three maps illustrate sub-regional variations in expenditure and funding in 2005-06:
- Map 3.6a Total external financing per head;
- Map3.6b Aggregate external finance per head which comprises Revenue Support Grant, National Non-Domestic Rates and certain specific grants;
- Map 3.6c Council tax as a proportion of total external financing.
3.6.2 The maps show average expenditure and funding by billing authority. Services, such as police and fire (provided by joint and combined authorities and the Greater London Authority) have been proportioned to each billing authority accordingly.
- The maps show that total external financing is generally high in parts of the North, London and Cornwall, and that in other regions there is more variation within the region, with high levels of expenditure in the major urban areas.
- The pattern of high revenue expenditure generally reflects high grant levels, with a lower percentage of revenue raised through council tax in most of these areas.
- The lowest levels of revenue spending are generally in the areas with no large cities and these areas are characterised by lower levels of grant and a higher proportion of revenue raised locally.
Map 3.6a: Total external financing per head 2005-06
Map 3.6b: Aggregate external finance per head 2005-06
Map 3.6c: Council tax as a proportion of total external financing 2005-06
3.7.1 For the years 2004-05 and 2005-06 capital charges are limited to depreciation and the interest element calculated using the notional percentage specified by the Treasury. Capital charges have been calculated in accordance with the Chartered Institute of Public Finance and Accounting’s (CIPFA) Best Value Accounting Code of Practice (BVACOP).
3.7.2 The sum of total expenditure and capital charges gives gross total cost, as defined by BVACOP. This provides the link between expenditure definitions collected on the Revenue Outturn forms, and the definition of gross total cost. For more information on expenditure definitions, see the glossary.
- In 2004-05 and 2005-06 capital charges represented around 7% of gross total cost.
- Capital charges as a percentage of gross total cost are highest in Highways and transport and in Cultural services and lowest in Social Services.
3.8.1 Table 3.8a shows the level and use of revenue reserves by class of local authority. Reserves are an accumulated surplus income, which can be used to finance future spending and to provide working balances. The three main types are schools’ reserves, reserves which have been earmarked for other purposes, and ‘unallocated reserves’ for general contingencies.
- The total level of revenue reserves at 1 April 2005 was £11.1 billion, of which £8.3 billion were earmarked for schools or other purposes and £2.8 billion were unallocated.
- This is an increase of £1.6 billion between 1 April 2004 and 1 April 2005.
- Shire districts had the highest level of unallocated reserves as a percentage of revenue expenditure in 2005-06 (19%).
- Since 1998, the trend has been for schools and earmarked reserves to increase and unallocated reserves to decrease although this trend has been reversed for unallocated reserves since 2002.
3.9.1 Local authorities operate a variety of trading services, which are either defined under general or local Acts or by custom. They are services of a commercial nature which are substantially financed by charges made to recipients of the services.
3.9.2 External trading services are typically organisations funded mainly by sales outside the authority. These include civic halls and theatres, markets, industrial estates, tolled bridges, roads, ferries and tunnels. Their receipts are conditional on actual work done. They differ from public corporations in that they do not have a full commercial style set of accounts, or autonomy from the local authority in day to day business operations in their legal identity and financial transactions.
3.9.3 A breakdown of expenditure on the internal and external trading services account can be found in Table C1g in Annex C1.
- Expenditure in 2005-06 on external trading services totalled £734 million.
- These services generated income of £1,038 million.
- This resulted in a surplus of £85 million in the General Fund Revenue Account.
- Corporation estates, industrial estates and market undertakings generated the most income of all the services, together accounting for 41% of the total income.
3.10 Housing Revenue Account (HRA)
3.10.1 The HRA is a record of revenue expenditure and income relating to an authority’s own housing stock and dates back to the Housing Act 1935. Most other local authority services are funded through council tax and central government support for the benefit of all local taxpayers. However housing is provided directly to a relatively small sub-group of local taxpayers council tenants and funded by the rents they pay and by central government subsidy. The HRA is a ring-fenced account. The ring-fence was introduced in the Local Government and Housing Act 1989, to ensure that rents paid by local authority tenants make a fair contribution to the cost of providing the housing service. Rent levels can therefore not be subsidised by increases in the council tax and equally, local authorities are prevented from increasing rents in order to keep council tax levels down.
3.10.2 Housing revenue account information presented here is derived from housing revenue account subsidy claim forms. Information on transfers between the housing revenue account and the general fund revenue account differs marginally from comparable information given on revenue outturn forms.
- Housing Revenue Account expenditure amounted to £8.3 billion in 2005-06, £6 million less than total income.
- The pattern of expenditure does not vary much between either classes of authority or regions. At the national level, the main items of expenditure in 2005-06 are debt charges (36%), repairs (22%) and supervision and management (20%).
- The pattern of income varies more than expenditure between classes and regions. At the national level the main items of income are rents from dwellings (73%), varying between 63% in London and 84% in the East Midlands. Government subsidy provides 10% of income nationally, varying from 2% in the East of England to 18% in London.
- The pattern of expenditure and income has been relatively stable from year to year. However this disguises the effects of year-by-year changes in the size of the stock, HRA subsidy rules, interest rates and so on.