by Jonathan Eida, researcher
Holding local councils to account requires an understanding of their funding mechanisms. This blog serves to lift the lid on council funding and see what lies beneath. With this comes several significant takeaways. Mismanagement plays a significant role in defining council tax decisions. Croydon Council didn’t see an unusual rise in demand for services requiring a 15 per cent hike in rates. They crashed their finances. But there is more to it than that.
To illustrate, take two very distinctive councils: Westminster and Rutland. They have one thing in common. Both councils were long-standing Conservative-run councils, but have recently changed their political makeup. Westminster is now Labour-run while Rutland council has a Liberal Democrat minority administration. Westminster council has the lowest council tax in the country while Rutland has the highest. The band D total council tax for 2023-24 in Westminster was £912, while Rutland’s stood at a whopping £2,366. What explains such a huge gulf?
Every council will broadly have four main sources of income: council tax, government grants, business rates and sales, fees and charges. These form the backbone of a council’s funding. However, the weighting of these income flows differs from council to council.
Firstly, some context is required. Westminster council lies in the heart of London and boasts a population size of over 200,000 people, with a council tax base of over 135,000 people, or 66 per cent of the population. Comparatively, Rutland is a rural unitary authority in the East Midlands nestled between Leicester and Peterborough. The population of Rutland is one fifth of Westminster’s, with a population of just 41,000, and a council tax base of almost 16,000, or 38.5 per cent of the population.
Secondly, the age demographic in each local authority is significant because it impacts on central government funding, i.e. government grants. In Westminster, 17.6 per cent of the population are 19 years old or under and 12.1 per cent are above sixty-five. Meanwhile, in Rutland 21.7 cent of the public are under the age of 19 and 25.3 per cent are above sixty-five. The most significant difference, however, relates to the number of people between the ages of 25-34. Westminster has over double that of Rutland. This points to Westminster having a younger workforce while Rutland can be categorised as an older, middle-aged population more likely to have families.
For Westminster, the bulk of their total income comes from government grants and contributions. For the year 2022-23, Westminster council received over £700 million in grants and contributions. Of this, almost £180 million was available to Westminster council in non-ring fenced grants that the council can use at their discretion. The rest consists of dedicated, ring fenced grants where the council acts as a conduit for central government. All in all, grants formed almost half of Westminster council’s income for the year. Comparatively, Rutland’s total grant income stood at £24 million which equated to less than 35 per cent of the council’s income. A House of Commons report found that the trend in grant allocation is for metropolitan districts to receive more settlement funding per person while shire councils receive the least. The report also shows that London boroughs spent the most per person while shire counties spent the least.
A further explanation for the disparate levels of grant funding is the economic demographics in the respective areas. The Office for National Statistics (ONS) labelled Rutland as “less deprived” while Westminster's deprivation level was considered “flat”. An analysis of each council’s specific and special revenue grants from 2021-22 show that Westminster received almost £400 million in total revenue grants while Rutland received almost £22 million. This grant is made up of mini grants. Included among these are grants like universal infant school meals and homelessness grants. In both categories Westminster received significantly more than Rutland, due to increased levels of deprivation.
Westminster also led Rutland in the amount of business rates retained by the council. Councils retain fifty per cent of the business rates they collect while the other half gets distributed among other councils. The retained business rate of Westminster council amounted to 17 per cent of the total income, while in Rutland it was just 6.6 per cent. Considering the economic advantages that being in an urban city, especially the economic powerhouse that is London provides, combined with a younger workforce driving economic growth means that Westminster council can maximise their business rates income. According to the ONS, Westminster had over 53,000 businesses compared to Rutland that had under 2,000. Westminster is, after all, home to the West End. Moreover, the cost of property in London and the method business rates are calculated by means that by virtue of the property value alone Westminster council will receive more per property than Rutland. This gives Westminster a major advantage in securing income outside of council tax.
Fees, charges and other service income also saw Westminster receive substantially more than Rutland council. Westminster received over £425 million or 28.1 per cent of total income in fees, charges and other service income, compared to Rutland who received under 9 per cent. Once again, Westminster received a far bigger chunk of their total income than Rutland. This allows Westminster to cover their services with this income and not have to rely on council tax to fund their services.
The divergence in fees, charges and other service income can be explained by the location and area classification of the councils. With Westminster being in the heart of London, this gives the council an advantage in raising finance through fees and charges over a council like Rutland which is a rural council. An example of where this distinction emerges is in the amounts received from highway and transport services. Westminster received the most amount of income of any council from sales, fees and charges relating to highway and transport services. Over £95.5 million was received by Westminster council in 2021-22 compared to £694,000 in Rutland. Accounting for population size, Westminster received £468 in highway and transport fees per person compared to Rutland which received under £17 per person. Although this is just an indicative statistic, it offers some insight into why some councils are at a disadvantage when it comes to raising revenue through fees and charges.
This all goes some way in explaining why Rutland is so dependent on council tax, and why there is such a gap. In total, Westminster receives 4.2 per cent of its revenues from council tax; Rutland raises almost 45 per cent. Clearly, there is no uniform funding mechanism dictating how councils receive their income.
So is that the answer? Rutland can’t be blamed for its high level of council tax, nor can Westminster be praised? There’s certainly more to it than that. Particularly regarding the amount of discretionary spending available to each council which can be seen in the core spending power available to each council. Core spending is the resources available to councils to fund services. Funds are made available through the Local Government Finance Settlement which is money provided by the government for spending on capital projects such as roads or school buildings, revenue spending on council housing and revenue expenditure, mainly on pay as well as other costs of running services other than council housing. It also includes the amount received from council tax and retained business rates.
The amount of core spending made available to Westminster for 2023-24 was £265.5 million while Rutland received just over £41 million. This translated to Rutland receiving £2,298 per dwelling which was £258 above Westminster which received £2,040 per dwelling, meaning that Rutland received more per dwelling than Westminster. Moreover, 35.7 per cent of Rutland’s total grants were non-ring fenced in comparison to 24.6 per cent of Westminster’s. The result of this is that Rutland has more flexible spending to invest in its services. While this does not automatically mean that there will be more wasted spending, as after all even the ring fenced grants are often misappropriated, there is far more room for wasted spending as the grants do not have the same fixed requirements as ring fenced grants.
This doesn’t mean we should get rid of non-ring fenced grants. The advantage of non-ring fenced grants is that money can be allocated by local knowledge to fit local services as opposed to a central, top down approach. This has the potential to lead to more efficient spending. Nevertheless, it is a double edged sword as the risk of waste is higher. Rutland is never going to have council tax as low as Westminster, but it is certainly possible that Rutland requires the level of council tax it currently levies in part because of the misuse of taxpayer money.
Proving misuse systematically is not easy. Bar some blatant accounts of shoddy uses of public money, most spending will have a justification attached to it. Nevertheless, the cumulative amounts spent by councils may lead to councils failing to balance the books effectively and running aground or requiring the public to cough up more in council tax. To establish which payments constitute misuse, however, would require an audit of each individual payment which may prove beyond the remit of this investigation. It nonetheless remains a possibility that this is the cause of Rutland’s high levels of council tax.
A further factor that may partially offer an alternative explanation is in the amount paid to staff, i.e. not directly on services. Employee benefit expenses for Rutland council were over £23 million which accounted for over 28 per cent of the total council expenditure. In comparison, Westminster’s was just over £248 million, but accounted for under 18 per cent of their expenditure. Now there may be reasonable explanations for this. One possible explanation is that Westminster council is a bigger council that requires more administration and, therefore, employee benefits form a smaller chunk of the overall pie compared to Rutland.
Alternatively, the rural location of the council may necessitate a relatively larger workforce than a city council. A rural council may require staff to manage issues such as countryside management or more staff may be required to access resources from further afield. However, this hypothesis seems improbable as the location of a council can swing the necessity for finances either way. Urban councils like Westminster have to grapple with a wide range of issues, particularly social issues related to deprivation, which all require staff. The administration of sales, fees and charges collected by the council requires manpower as would the collection of business rates and the like. Additionally, due to the level of grants received by Westminster council, one imagines they require staff to ensure that the use of these grants are allocated in a proper fashion. This is especially pertinent considering the variety of grants that Westminster council receives. Therefore, it is hard to conclude that the geography of the council is the cause of the disparate expenditure on employee benefit expenditure leaving a question as to the nature of the divergence.
There is also a more concerning possibility in that Rutland council may not be run as efficiently as it could be, leaving a staff bill which is disproportionately large. Looking at the senior employee remunerations, Westminster council had at least 5 senior employees earning over two hundred thousand pounds in 2022-23, while Rutland had none. This can be explained due the size of the council, which rightly or wrongly, would be a form of justification for salary size. It means the problem is certainly not at the top of the scale. But clearly staffing efficiencies is an area that Rutland would be well -advised to look at.
Clearly the issue is more complicated than a simple binary of a well-run and poorly-run council. Rutland, as is clear, will never compete with Westminster. But clearly council bosses in Rutland still have questions to answer. And they even more clearly have a new year’s resolution worth adopting: to try and make council tax bills only the second most expensive in the country. That would be a start.
 https://www.westminster.gov.uk/about-council/transparency/annual-accounts/2022-2023-annual-accounts Page 65 for total income
 WCC share of NDR Collection fund deficit/(surplus) page 59 and page 65 total income
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 Local authority revenue expenditure and financing England: 2021 to 2022 individual local authority data - outturn - GOV.UK (www.gov.uk) Highways and transport services - Sales, Fees and Charges Worksheet 2: Revenue Outturn (RO) 2021-22 Final: Service Expenditure Summary (RSX) data