Scottish Government

LOCAL GOVERNMENT FINANCE SETTLEMENTS: 2003-04, 2004-05 & 2005-06

For the complete version of this circular including all tables please view as a PDF document

Dear Chief Executive

LOCAL GOVERNMENT FINANCE SETTLEMENTS: 2003-04, 2004-05 & 2005-06

A. RENEWAL OF LOCAL GOVERNMENT FINANCE
B. GRANT DISTRIBUTION SYSTEM
C. NON-DOMESTIC RATE 2003-04
D. CAPITAL ALLOCATIONS

1. This Circular provides details of the provisional Scottish Executive revenue and capital allocations for each local authority for the next 3 years.

2. These proposals have been sent to COSLA today and will form the basis for consultation between Scottish Ministers and the Convention ahead of the Local Government Finance Order 2003 being debated by the Scottish Parliament.

3. The Annexes to this Circular are:

Annex 1: All Scotland aggregate totals;
Annex 2: Spending Review 2002;
Annex 3: Calculation of grant distribution and notes;
Annex 4: Calculation of the minimum grant increase floor;
Annex 5: Estimated payments to each local authority from specific grants;
Annex 6: Single capital allocations and notes;
Annex 7: Loan Charges methodology and support for approved PPP projects;
Annex 8: Non-Domestic Rates 2003-04 Distributable Amount

PART A - RENEWAL OF LOCAL GOVERNMENT FINANCE

1. In 2000, Scottish Ministers and COSLA elected members agreed an agenda for renewing the system of local government finance in Scotland. They agreed shared priorities for certainty, stability and simplification. Consultation with local authorities has confirmed that the current 3 year settlement has enabled them to better plan their budgets and service improvements. This settlement again provides local authorities with the stability of 3 year funding allocations.

2. The Spending Review 2002 announcement on 12 September set out the aggregate totals for Scottish Executive support to local government between 2003-04 and 2005-06 (see Annex 1) and the policy outcomes that the additional Spending Review allocations are aimed at supporting. These are summarised at Annex 2.

3. This circular provides each local authority with continued firm revenue and capital support for the next 3 years (see Annexes 3 and 6). 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 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 2003-04 and indicative for 2004-05 and 2005-06.

4. As confirmed by Ministers during their meeting with COSLA elected members on 5 November 2003, the Council Tax Benefit (CTB) subsidy limitation arrangements have been abolished and will not apply from 2003-04, although Ministers expect that councils will continue to show restraint in setting their budgets and council tax levels.

PART B - REVENUE GRANT DISTRIBUTION

5. Ministers agreed with COSLA that the distribution for 2003-04 should remain as calculated for No. 2 Order 2002 (Circular 7 2002 gives details) except for any additional resources (Quality of Life etc.) or transfers of responsibility (e.g. Public Service Ombudsman). For years 2 and 3 of the settlement, Ministers and COSLA elected members agreed that the existing formula should be retained, updated to take account of the consideration of the joint COSLA/Scottish Executive 3-Year Settlement Working Group. A notional 2003-04 distribution was calculated using updated data - e.g. from the 2001 population Census; September 2002 school pupil rolls, road lengths and budget/expenditure information. Secondary indicator quantums were also re-based. As for the current 3 year settlement, the notional 2003-04 distribution was used as the basis for distribution for years 2 and 3, but using population projections for school age children and older age groups. These arrangements continue to base the 3 year allocations on the existing needs based formula.

6. Details of the distribution methodology for the notional 2003-04 and actual 2004-05 and 2005-06 allocations will be sent in electronic format to all Directors of Finance in the next few weeks, including details of the GAE service and sub-service split and distribution data.

7. Annex 3 sets out the distribution of AEF between authorities. The calculations outlined there were broadly as follows: Estimated Service Expenditure (ESE) includes an element of Special Islands Needs Allowance (see paragraph 8). To the assessments of ESE were added resources for Quality of Life initiatives (see Annex 2), allowances for loan and leasing charges; the net costs of housing and council tax benefits rebates and the floor adjustment (see paragraph 9). This produces a figure for Total Estimated Expenditure (TEE) for each authority. AEF totalling £7,283.902 million was then distributed to produce a uniform difference between TEE and AEF per Band D equivalent property across Scotland. Annex 3 also shows the allocation of the 3 elements of AEF for each authority.

8. The SINA payments are contained within ESE and were frozen at 2001 02 levels for Eilean Siar and Shetland but uplifted for the other 4 authorities as calculated through the formula agreed following the review of SINA in 2000.

9. To ensure that all councils continue to benefit from the increases in grant arising from the Spending Review, a "guarantee" or "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 4.0% for 2004 05 and 3.4% for 2005-06 and the calculation is detailed at Annex 4.

10. Annex 5 gives a breakdown of individual councils' shares of specific grants as used in the calculation of RSG.

PART C - NON-DOMESTIC RATES 2003-04

11. The Minister for Finance and Public Services has also confirmed today the decision to freeze the national rate poundage for 2003 04 at the current level of 47.8p.The Minister also confirmed the level of the supplement to be levied on larger businesses and rate payers to fund the small business rate relief scheme. The supplement has been set at 0.6p.

12. Scottish Ministers have decided that the Distributable Amount of NDRI for 2003 04 will be £1,804.423 million. The balance of Distributable AEF comprises (a) an estimated total of £607.180 million for specific grants (including Police Loan Charges specific grant) and (b) RSG for the year of £4,872.299 million.

13. The Distributable Amount of NDRI incorporates a forecast of net income from non domestic rates in 2003 04. It draws on councils' estimates of the amounts they will contribute to the pool from NDRI in 2002 03. 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 8 shows how the Distributable Amount was calculated.

PART D - CAPITAL ALLOCATIONS

14. Subject to the necessary legislative provisions being in place, Scottish Ministers have confirmed that the existing system of controls on local authority capital spending will be replaced from 1 April 2004 with a new prudential system. This will allow local authorities to set the level of capital borrowing that they consider they can afford, within prudent indicators. Annex 6 reconfirms the single (formula) capital allocations for 2003-04 announced in Finance Circular 13/2000, although it should be noted that £50 million of these will now be allocated as specific capital grants.

15. Revenue grant will continue to be available to support the costs of local authority loan charges on borrowing for capital investment. Annex 6 includes notional capital allocations for 2004 05 and 2005-06 used in calculating each authority's share of loan charges support. Under the prudential system these notional allocations would not have any control on authorities' actual level of capital investment. A methodological note on the calculation of revenue support for local authorities' loan and leasing charges for servicing relevant debt and level playing field support for approved PPP projects is provided at Annex 7.

Conclusion and Contacts

16. A separate copy of this Circular has been sent by e mail to your Director of Finance and to Norie Williamson at COSLA.

17. Enquiries relating to this Circular should be addressed to the following:

General queries (settlement totals)
Hilary Pearce 0131 244 7950

General queries (Grant distribution, floor, NDRI, capital allocations)
Colin Cummins 0131 244 7004

Yours sincerely

CHRISTIE SMITH
Head of Local Government Finance & Performance Division