Scottish local government finance - Green Book: 2023-2024

1 Introduction and Background

1.1 Context

This report details the methodology, data, and calculations that are central to the Scottish Government's distribution of revenue funding between Scotland's 32 local authorities, for financial year 2023-24. Any methodological or data changes since the 2022-23 local government finance settlement are also explained.

Grant Aided Expenditure (GAE), Former Ring-fenced Grants (FRFGs), redeterminations, Special Islands Needs Allowance (SINA), and other allocations are the first steps in the calculation of the General Revenue Funding (GRF) which each local authority receives annually from the Scottish Government.

The subsequent steps in the calculation of GRF involve taking into account income local authorities receive from specific grants, Council Tax and Non-domestic Rates. These additional details are set out in Local Government Finance Circular No 03/2023.

An overview of the process is available in The Funding of Local Government in Scotland, 2022-23, published on 2^nd March 2023.

1.2 What is GAE? And what are the other allocations?

GAE is the needs-based methodology used to allocate the pre-determined Spending Review funding totals equitably amongst local authorities, based on a 'client-group approach' (described in next section). Total GAE of about £9.86 billion is split into 76 individual local authority sub-services which had, until the 2020-21 settlement, generally been maintained at the same levels since 2007-08 (see section 2.1). The individual sub-service totals are referred to as 'lines' (for example, the Primary School Teaching Staff GAE line) and each has its own methodology to calculate the allocations for each local authority.

Redeterminations are additional areas of spend identified and supported by central government that have been added to the settlement since 2007-08. Former ring-fenced grants (FRFGs) were originally distributed for strictly defined purposes, but since 2007-08 have been part of the general revenue funding allocation. They are however still distributed based on the formulae designed to match the client-base that the original grants served, as local authorities generally still hold those responsibilities. Together the redeterminations, FRFGs and new allocations account for £3.3 billion, about a quarter of the amount distributed.

However, in recent years, in an effort to simplify allocation arrangements, various of these formulae have been merged, changing the amounts they distribute, new funding in those areas has also simply been added to the historical amounts, and any remaining distinctions between GAEs, redeterminations and FRFGs have been removed. For the first time this year we have therefore combined all of these types of funding together in their relevant service area, so that, for example, all of the education-related funding formulae are now grouped together. As part of this reorganisation we have also separated out the lines related to housing and homelessness into a separate section.

Once all lines have been calculated, they are summed to give totals for each local authority.

It is important to note that the individual service allocations are not budgets or spending targets; they are simply an allocation methodology designed to distribute the overall levels of resources to be made available. They are not intended to be used by local authorities to allocate resources. The decisions about the amounts allocated to individual services are made entirely by the local authority on the basis of local needs, having first fulfilled its statutory obligations and the jointly agreed set of national and local priorities.

Additional general support is, since 2022-23, distributed in proportion to the sum of GAE, redeterminations and FRFGs for each authority.

The following are other funding lines in the settlement:

• Special Islands Needs Allowance (SINA) is an allocation for local authorities with island populations. Broadly speaking, SINA adds about 12 per cent onto the total GAE, FRFG and redeterminations for island authorities or populations, but excluding any of those funding lines that already take account of islandness in their distribution formula.
• Other allocations provide support for servicing outstanding debt and PPP projects.
• A funding floor is used to provide protection against large year-on-year changes, whether that be due to year-on-year changes in the funding formulae or due to historical levels of support being higher than that received from the formula. Once all funding lines have been calculated, a lower limit is set on the percentage change that any authority can receive compared to the previous year. Those authorities above that limit pay into a pool which is then used to lift those below the limit up to the floor. As in recent years, the floor in 2023-24 was set at 0.25 per cent below the Scotland average. Certain funding lines, such as those funded by specific grants, those where changes are being transitioned over a few years, and most new money, are excluded from the calculation of the floor.

1.3 The client-group approach (i.e. methodology)

The client-group approach is an objective method used to estimate, within a controlled total, the relative allocation to local authorities and is designed to take into account variations in the demand for services and the costs of providing them to a similar standard and with a similar degree of efficiency. Central to the approach is the identification of factors associated with inter-authority expenditure variation.

Statistical data describing the 'clients' that are understood to benefit from each individual GAE, FRFG and redetermination service are used to achieve this; for example, the number of school pupils is used as an indicator of expenditure on school teaching staff.

In addition, other demand and cost factors which are also outwith the control of local authorities, which offer plausible explanation for, and which can be shown or can be logically argued to be associated with inter-authority expenditure variation are utilised as indicators. Examples of these include indicators of population dispersion (i.e. rurality) and deprivation.

All indicators must be factors which plausibly affect either the demand for services or the unit cost of meeting that demand. They were selected after thorough discussions with local authorities and other service specialists.

In some cases, a pair or group of indicators can be shown to be clearly correlated with inter-authority variations in expenditure. In such cases, the size of the allowance made for each indicator may be derived mathematically from the relationship between past expenditure and the indicators. For instance, the GAE for primary school teaching staff, which is mainly based on pupil numbers, also has a factor which takes account of the higher ratio of staff to pupils in rural areas.

For the 2023-24 calculations, all such dual indicators would normally have been tested against the latest available expenditure data from the 2020-21 Local Financial Returns that the Scottish Government collects from local authorities. However, as those data, and some of the relevant indicators, we affected by the pandemic, it was agreed that we would repeat the models used in the 2022-23 settlement. As usual however, the data were then re-priced in order to update them from the year of analysis of past expenditure to the year for which GAE is being estimated. Finally, in the interests of stability, they are averaged with the weights used in the previous settlement, which in this case was again 2021-22.

Composite indicators are single indicator expressions which encompass a number of factors, each considered to be plausibly associated with inter-authority variation in expenditure, and are often used to include a more complex mix of factors.

The total support from GAE, FRFGs, redeterminations (excluding any new lines in 2023-24) and SINA, for each local authority, are used to distribute any additional changes in funding resulting from subsequent Spending Reviews.

The client group approach used is well established, and much of the methodology is unchanged between settlements. A full description of the Client Group Approach is provided in Finance Circular 11/1992. This methodology for Dual Indicator Reviews has however been adjusted, so that both indicators are now tested for significance (see section 2.2 of the 2020-21 Green Book).