The Scottish Government

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Section 4: Local Government Finance in Scotland Today

Introduction

1. Since 1996, there have been 32 local authorities in Scotland. There is a wide variation in the population, area and character (urban and rural) within the 32 authorities. Populations range from 578,790 in Glasgow to 19,590 in Orkney; ³⁵ and areas range from Dundee City Council covering 5,983 hectares, to Highland Council spreading across 2,565,934 hectares.

2. This section sets out fact and figures about local government finance in Scotland, and comparative information about how local services are financed in other countries.

Local Government Expenditure

3. Public services are paid for through a mixture of taxes, duties and charges. In 2005-06, an estimated total of £486.1 billion was raised in the UK. This included £21.0 billion from council tax and £20.3 billion through non-domestic business rates.

Figure 4.1: UK Tax Revenue³⁶

4. Total general fund expenditure by Scotland's local authorities in 2004-05 amounted to £11.7 billion. ³⁷ A breakdown of this expenditure is shown in figure 4.2.

Figure 4.2: Expenditure by local authorities in Scotland in 2004-05

Local Government Funding

5. Funding for local government comes from four principal sources:

• Scottish Executive support (Revenue Support Grant and other grants);
• Non-domestic rates;
• Council tax (including rebates through Council Tax Benefit); and
• Fees and charges.

Scottish Executive funding (including non-domestic rates)

6. The Scottish Executive estimates what the total amount that all local authorities require to meet their commitments. The relative spending needs of authorities are assessed by what is known as the "client group" methodology which allocates to each of the 32 authorities a share of the Grant Aid Expenditure ( GAE) total. GAE is the Scottish Executive's view of what all the local authorities need to spend on local services to meet their statutory obligations. The distribution of GAE among local authorities takes account of a range of factors which affect spending needs, including:

• Population;
• Population dispersion;
• Pupil numbers (for education);
• Standardised Mortality Rates (for aspects of social work);
• Road Lengths; and
• Measures of the relative deprivation in that area and crime rates.

7. Each local authority receives specific funding through a single large block of funding known as Aggregate External Finance ( AEF), supplemented by a range of separate grants. AEF is distributed to local authorities in order to equalise both (a) the relative needs of each authority in incurring expenditure on the provision of local services and (b) the local taxation base. The AEF comprises three components:

• Revenue Support Grant ( RSG);
• Specific grants from the Executive, most notable of which is a 51% specific grant on the police service; and
• Income from non-domestic rates ( NDRI). Non-domestic rates are set centrally but collected locally by local authorities on behalf of the Scottish Executive.

8.AEF for Scotland's local authorities in 2006-07 amounts to £8.3 billion. ³⁸ This is the equivalent of around 28% of the Total Managed Expenditure of £29.7 billion planned by the Scottish Executive in 2006-07. ³⁹

The significance of local taxation

9. Although local authorities receive some income from fees and charges, the primary sources of funding are AEF support from the Scottish Executive and income from council tax. In 2004-05, local authorities received £7.7 billion from the Scottish Executive ⁴⁰ and £2.0 billion from council tax (including council tax rebates). ⁴¹ The ratio between Executive support and council tax income was consequently 79.8:20.2, i.e. almost exactly 4:1.

10. Figure 4.3 sets out the composition of local government income in 2004-05:

Figure 4.3: Sources of local government income 2004-05⁴²

11. However, as the following figure demonstrates, the composition of local government funding can vary greatly from one local authority to another, depending on such factors as the population density of a local authority area, the nature and extent of the local population's service needs and the ability of the local population to contribute towards the cost of these services from local tax.

Figure 4.4: Sources of local government income 2004-05: Comparison of local authorities⁴³

Comparisons with Local Taxation in Other Countries

12. Figure 4.5 shows the yields of the main regional and local taxes as percentages of Gross Domestic Product ( GDP). The key points to note are as follows:

• Income taxes, property taxes and sales taxes are the most common;
• Local income taxes are of exceptional importance in Scandinavian countries;
• Local property taxes tend to be important in English speaking countries;
• Although local sales taxes are quite common, their form of implementation very rarely allows local authorities any discretion over tax rates.

13. Some countries levy "other taxes" at subnational level. The most common "other taxes" are payroll taxes: these exist in a pure form in Australia, Austria and Canada. Australia's states have yet another "other tax" in the form of licence duties on retail outlets, such as filling stations and liquor stores.

14. It is clear from Figure 4.5 that the highest yielding subnational tax is an income tax. Allowing that some countries operate this tax at both state and local levels, the average yield at subnational level across the 19 countries is about 4.0% of GDP. Perhaps a tenth of this arises from taxes on corporate incomes, but the great bulk of it arises from taxes on individual incomes. Income taxes come well ahead of property taxes, which account for an average of 1.7%. Taxes on goods and services raise around 1.8% of GDP.

Figure 4.5: Sub-national tax revenues by type of tax as a percentage of GDP⁴⁴

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