The Scottish Government

« Previous | Contents | Next »

Listen

LOCAL GOVERNMENT FINANCE SETTLEMENT: 2005-06, 2006-07 AND 2007-08

Dear Chief Executive

LOCAL GOVERNMENT FINANCE SETTLEMENT: 2005-06, 2006-07 & 2007-08

1. This Circular provides details of the provisional Scottish Executive Aggregate External Finance (AEF) and supported borrowing allocations for each local authority for the next 3 years.
2. These proposals form the basis for consultation between Scottish Ministers and COSLA ahead of the Local Government Finance Order 2005 which is to be debated by the Scottish Parliament in early February 2005. COSLA are invited to respond to the provisional allocations in writing by 14 January 2005.
3. The Annexes to this Circular are:

4. Annex 1: All Scotland aggregate totals;

   Annex 2: Outcome of Spending Review 2004;

   Annex 3: AEF Allocations, and Explanatory Notes to AEF Distribution;

   Annex 4: Explanation of the minimum grant increase ("floor") calculation;

   Annex 5: Estimated payments to each local authority from specific grants;

   Annex 6: Loan Charge Support and Supported Borrowing Allocations

   Annex 7: Non-Domestic Rates 2005-06 Distributable Amount

   Annex 8 Reconciliation of AEF 2005-06 between Circulars No 2/2004 and No 8/2004.

   Three-Year AEF Settlement 2005-06 to 2007-08

5. Ministers' Spending Review 2004 announcement on 29 September 2004 set out the aggregate (AEF) totals for Scottish Executive support to local government for each of the 3 financial years between 2005-2008 (see Annex 1). The policy outcomes that the additional Spending Review allocations are aimed at supporting are summarised at Annex 2. In addition to the AEF allocations, the Spending Review resulted in other revenue grants to local authorities increasing from 987 million in 2004-05 1,108 million in 2007-08, and capital grants increasing from 344 million to 465 million over the same period. Details of these revenue and capital grants outwith AEF will be provided shortly in a separate circular.
6. Consultation with local authorities has confirmed that the current system of 3 year AEF settlements has enabled them to improve the planning and delivery of their budgets and services. This settlement therefore again provides local authorities with the stability of 3 year funding allocations .
7. Accordingly this circular provides each local authority with revenue (AEF) allocations for the next 3 years. The allocations are not expected to be subject to redistribution during the 3 year settlement period, although there will be scope to make adjustments for transfers out of or into the grant totals, for example to reflect any new policy initiatives for which additional financial provision is being made. The 3 year revenue allocations will once again provide councils with the certainty to plan their budgets and council tax figures. As for the current 3 year settlement, in response to the allocation of firm 3-year grant figures it is expected that councils will again publish 3 year council tax levels - actuals for 2005-06 and indicative for 2006-07 and 2007-08.
8. Ministers confirmed during their meeting with COSLA elected members on 24 November 2004 that the current 3 year settlement for local government is based on councils increasing council tax by no more than 2.5% in 2006-07 and 2007-08 as a contribution to the overall GAE uplift underlying the settlement. For 2005-06, Ministers have confirmed that they expect council tax rises to be kept as low as possible and have urged local authorities to take all steps possible to improve council tax collection rates to help minimise council tax rises.

9. Revenue Grant Distribution

10. Ministers agreed with COSLA that the distribution for 2005-06 should remain as calculated for No.14 Order 2004 (Circular 2/2004 gives details) except for any additional resources or transfers of responsibility (Teachers Pensions). For 2006-07 and 2007-08, Ministers and COSLA elected members agreed that the existing formula should be retained and updated to take account of the recommendations of the joint COSLA/Scottish Executive 3-Year Settlement Working Group. A notional 2005-06 distribution was calculated using updated data - e.g. 2003 mid year population estimates, September 2004 school pupil rolls, most recent budget/expenditure information, and all census based indicators were updated using information from the 2001 Census. Secondary indicator coefficients were also recalculated using most recent data. As for the current 3 year settlement, the notional 2005-06 distribution was used as the basis for distribution for years 2 and 3, where applicable calculations are updated using pupil and population projections. These arrangements continue to base the 3-year allocations on the existing needs-based formula.
11. The distribution of the notional 2005-06 and actual 2006-07 and 2007-08 allocations will be confirmed after the end of the formal consultation period between Ministers and the Convention on 14 January 2005. Final GAE calculation detail, including indicator data and the GAE service and sub-service split, for notional 2005-06 and actual 2006-07 and 2007-08 will be published in electronic format following Parliamentary approval of the Local Government (Scotland) Order 2005. Local Authority GAE service and sub-service allocations as at this Finance Circular will be available at www.scotland.gov.uk/stats/gaestats from the 9th of December
12. Annex 3 sets out the distribution of AEF between authorities. The calculations outlined there were broadly as follows: Estimated Service Expenditure (ESE) includes the Special Islands Needs Allowance (SINA) (see paragraph 10). To the assessments of ESE were added resources for Quality of Life initiatives, allowances for loan and leasing charges; and the floor adjustment (see paragraph 11). This produces a figure for Total Estimated Expenditure (TEE) for each authority. AEF totalling 8,079.720 million was then distributed to produce a uniform difference between TEE and AEF per Band D equivalent property across Scotland, adjusted to reflect Ministers' commitment that the costs of the teachers' pay award in 2006-07 and 2007-08 would be met in full by AEF as a result of this settlement. Annex 3 also shows the allocation of the 3 elements of AEF for each authority.
13. The SINA payments are contained within ESE and were frozen at 2001-02 levels as a minimum for Eilean Siar, and Shetland. Since 2003-04 Orkney's SINA allocation has increased above the frozen amount. Therefore Orkney, Argyll and Bute, Highland and North Ayrshire receive SINA payments as calculated through the formula agreed after the review of SINA in 2001.
14. To ensure that all councils continue to benefit from the increases in grant arising from the Spending Review, a "floor" is incorporated within the settlement calculation, providing a minimum guaranteed grant increase for each council for each year. The level of the minimum increase has been set with reference to the aggregate increase in distributable grant. The "floor" has been set at 3.4% for 2005-06, 2.0% for 2006-07 and 1.75% for 2007-08 and the effect is set out at Annex 4.
15. Annex 5 gives a breakdown of individual councils' shares of specific grants as used in the calculation of RSG. for 2005-06 and AEF for 2006-07 and 2007-08.
16. The distribution of the actual 2005-06 and notional 2006-07 and 2007-08 allocations will be confirmed after the end of the formal consultation period between Ministers and the Convention on 14 January 2005. Full details of the distribution methodology, including details of the GAE service and sub-service split, for 2005-06 and notional 2006-07 and 2007-08 will be published in electronic format following Parliamentary approval of the Local Government (Scotland) Order 2005.

17. Loan Charge Support and Supported Borrowing Allocations

18. From 2004-05 the Prudential framework replaced the previous system of Section94 capital expenditure consents. Local authorities are now able to determine the level of capital investment they make, with proper regard however to the Prudential Code for Capital Finance in Local Authorities.
19. The Scottish Executive is continuing to support Local Authority capital programmes through a combination of loan charge support for historic debt and specified levels of assumed new in-year borrowing, and a range of capital grants. Capital expenditure by local authorities, the sources from which it derives, and the future forecasts of expenditure, will continue to be monitored through the Capital Payment Returns in order to feed into national data collection by HM Treasury.
20. Annex 6 provides detail of the loan charge support and related supported borrowing allocations for 2005-06 to 2007-08. The methodology for calculating loan and leasing charges and support for Public/Private Partnership (PPP) projects, known as Level Playing Field Support is also set out . As requested by the 3 year Settlement Group, the floor mechanism has not been re-applied for 2006-07 and 2007-08. Support for loan and leasing charges and the Level Playing Field Support are now identified in two separate columns in Annex 3.

21. NDR 2004-05

22. Scottish Ministers have decided that the Distributable Amount of NDRI for 2005-06 will be 1,879.073 million The balance of Distributable AEF comprises (a) an estimated total of 718.120 million for specific grants (including Police Loan Charges specific grant) and (b) RSG for the year of 5,464.527 million.
23. The Distributable Amount of NDRI incorporates a forecast of net income from non-domestic rates in 2005-06. It draws on councils' estimates of the amounts they will contribute to the pool from NDRI in 2004-05. Included in the calculation are: gross income; expected losses from appeals; the expected in-year cost of the transitional relief scheme; estimated expenditure on mandatory and other reliefs as well as write-offs and provisions for bad debts. Adjustments are also made for amounts carried over from previous years. Annex 7 shows how the Distributable Amount was calculated.

24. Reconciliation with Circular No. 02/2004

25. Councils have indicated in the past that it is helpful to have a reconciliation from one circular to the next. In recognition of this, a reconciliation of AEF 2005-06 from Circular No 2/2004 to Circular No. 8/2004 is included in Annex 8.

26. Conclusion and Contacts

27. A separate copy of this Circular has been sent by e-mail to your Director of Finance and to Brenda Campbell at COSLA.
28. Enquiries relating to this Circular should be addressed to the following:

29. GAE, Settlement totals and expenditure policy

    Bill Stitt
    0131 244 7044
    Bill.stitt@scotland.gsi.gov.uk

    AEF, RSG, Floor, NDRI and distribution policy
    Laura Sexton
    0131 244 7047
    Laura.sexton@scotland.gsi.gov.uk

    Capital allocations
    Hilary Pearce
    0131 244 7950 Hilary.pearce@scotland.gsi.gov.uk
    

    Yours sincerely
    DR A J RUSHWORTH
    Head of Local Government Constitution and Funding Division

« Previous | Contents | Next »