Scottish Local Government Finance - Green Book: 2024-2025

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 2024-25. Any methodological or data changes since the 2023-24 local government finance settlement are also explained.

Grant Aided Expenditure (GAE) and Special Islands Needs Allowance (SINA), 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 that local authorities receive from specific grants, Council Tax and Non-domestic Rates. These additional details are set out in Local Government Finance Circular No 2/2024. 

An overview of the process is available in The Funding of Local Government in Scotland published each year on the Scottish Government website.

1.2 What is GAE

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). 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.

Until the 2024-25 settlement, the term GAE referred to the historical funding lines covering about £8 billion of support that had remained fixed from 2007 08 until the 2020-21 settlement. There were also funding lines referred to as redeterminations and others that were Former Ring-fenced Grants (FRFGs), amounting to a further £3 billion. Since 2020-21 the distinction between these different categories has diminished and as there is, from 2024-25, now no distinction between them, they are all now referred to as GAE.

Once all GAE 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 in a way that takes into account all relevant indicators of need. 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. 

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 for island authorities or populations, but excluding any of those funding lines that already take account of islandness in their distribution formula.

Any additional general support is then distributed in proportion to the sum of GAE and SINA for each authority. 

Other allocations provide support for servicing outstanding debt and PPP projects.

A funding floor is then used to provide protection against most 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 relevant 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. In recent years the floor was set at 0.25 per cent below the Scotland average, but in 2024-25 this was set at 0.50 per cent below the 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. It 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 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 used 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 2024-25 calculations, all such dual indicators have been tested against the latest available expenditure data from the 2021-22 Local Financial Returns that the Scottish Government collects from local authorities.  The data were then adjusted 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 2023-24 settlement.

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 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. The 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).