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Last Updated: Monday, 27 March 2006, 09:41 GMT 10:41 UK
Guide: Local council funding
Who should you blame if you don't like your council tax bill - your local town hall or ministers in London?

Every year there is a blame game, with councils claiming ministers do not give them enough money and government saying council tax is set locally. Here we explain how councils get their money each year.

WHERE DOES THE MONEY COME FROM?

Only about a quarter of the money spent by councils is raised locally through council tax and charges such as housing rents.

The rest comes from government grants raised through national taxes and business rates. Business rates are collected by local councils but are set by ministers in Whitehall and put into a national "pot" which is then shared out between different areas.

SHARING OUT GOVERNMENT GRANTS

Each year a series of complicated formulae is used to dole out the cash to each local council. There are separate formulae for various blocks of services: education, social services, highway maintenance, environment and culture, and capital financing.

Each formula takes account of:

  • The population being served

  • Deprivation

  • A "top up" to take account of differences in wages and business rates around the country

  • Extra money decided by factors like the number of visitors and commuters to an area and whether it is a built-up town or a sparse rural area

Census results are a crucial factor in deciding how the formulae are used and council leaders worry if they think the census does not really reflect the reality of life in their area.

But the government also takes into account each council's ability to raise council tax - which depends on how many homes are in the area and how expensive they are. Areas with lots of high-price homes will find it easier to raise council tax than others, for example.

Each year all councils are also guaranteed a minimum increase in their grants. Adjustments are made so councils who would not have got the minimum through the formulae are brought up to that "floor". Other councils have their money scaled back to pay for the adjustment.

COUNCIL TAX

Council tax was introduced in 1993 to replace the poll tax and did not provoke too much controversy in its early years.

The reason the tax causes a furore now is simple: council tax rises expected this year will mean bills for Band D properties have increased by 84% since 1997.

Critics say that people on fixed incomes, such as pensioners, are hit worst by the rises. They want a fairer system.

Council tax is a mix between a property tax and a poll tax. It is set by local councils, although ministers do have the power to cap annual rises in bills.

Homes are placed into one of eight bands according to their value in 1991. In each area, council tax on Band A - the cheapest - properties is one third of the bills given to homes in Band H, the most expensive.

But there are discounts for people living on their own and those on lower incomes can apply for council tax benefit.

One of the reasons for rising council tax bill is because council tax only makes up a small share of what local authorities spend.

This means that if councils want to use the tax to generate more cash, they have to raise it by a disproportionate amount.

Councils also complain that national targets mean they are not free to choose how they spend much of their money.

But ministers say they have ploughed extra investment into councils in recent years.

WHAT ABOUT REVALUATION?

Council tax is still based on 1991 values for homes. In England, 22 million homes were due to be revalued next year. But ministers have postponed the exercise until after the next election. Sir Michael has said revaluation would probably mean higher bills for four million homes. But 3.6 million homes would end up paying less.



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