Scottish Public Finance Manual

The Scottish Public Finance Manual (SPFM) is issued by the Scottish Ministers to provide guidance on the proper handling and reporting of public funds.

Local government finance


1. This section gives guidance about the structure and operation of the local government finance system. The guidance is aimed primarily at the core Scottish Government (SG) and the other constituent parts of the Scottish Administration.

Key points

2. Where SG business areas consider that a new policy initiative or legislative change might place an additional financial burden on local authorities they should contact Local Government Finance Unit at the earliest possible stage and the additional expenditure should be fully funded by the relevant SG policy area. If the additional financial burden is not fully funded then approval by the Cabinet Secretary for Finance and Economy must be sought and agreement reached between the policy area and the Convention of Scottish Local Authorities (COSLA) on how the additional expenditure will be managed.

3. The original Concordat set out the terms of the relationship between central and local government and although time has moved on the terms of the relationship remain. It is the responsibility of each local authority to allocate the total financial resources available to it on the basis of local needs and priorities having first fulfilled its statutory obligations and the jointly agreed set of national and local priorities.

4. Support for local government finance settlements is determined through negotiation between Scottish Ministers and COSLA. The total revenue funding is made up of 3 components: a general revenue grant (GRG), distributable non-domestic rate income (NDRI), and a small number of specific revenue grants.

5. The total revenue funding available is distributed between Scotland's local authorities using a "needs-based" distribution formula that is kept under constant review and agreed each year with COSLA. In addition, to ensure a stable distribution of the funding available, the distribution formula includes both a minimum grant "floor" within the settlement calculation, to ensure that no local authorities experiences particularly large variances in support from one year to the next and an 85% floor which guarantees each local authority receives at least 85% of the Scottish average revenue funding per head.

6. The guaranteed combination of GRG and NDRI (known as the block grant) accounts for 80% of local authority revenue funding, with the remainder met largely from the council tax collected and retained by individual local authorities.

7. Legislative powers exist to cap local authority expenditure, by imposing a reduced council tax level, where they consider an authority's expenditure or expenditure increase to be excessive however the current administration have made it clear that they do not intend to use these powers.

8. Capital funding relates to the provision and improvement of fixed assets such as schools, houses and machinery that are used to deliver services. The Scottish Government provide a general capital grant and specific capital grant to local authorities. Local authorities are also permitted to finance capital expenditure through capital receipts, i.e. income from selling buildings or other capital assets and borrowing. In deciding the level of borrowing that is affordable individual authorities have to apply the CIPFA prudential code principles of affordability, prudence and sustainability.


9. The local government finance system supports revenue expenditure on services and capital investment in infrastructure by Scotland's 32 local authorities across the full range of their non-housing responsibilities - including education, social work, environmental services, roads and transport, etc.

10. SG revenue support is paid to local authorities on a weekly basis under an Order made by Ministers under Schedule 12 of the Local Government Finance Act 1992. Councils are advised of their grant allocations for a single year or 3 year period, however approval is required from the Scottish Parliament each year for the annual Local Government Finance (Scotland) Order. Schedule 12 also requires that Ministers consult "such associations of local authorities as they consider appropriate" before laying the annual Order. This requirement is fulfilled by the SG's consultation with COSLA which is normally undertaken throughout the year preceding the start of the new financial year when the new budget will come into force as well as an annual consultation Finance Circular.

11. Capital investment by local authorities is funded through the SG's payment of specific and general capital grants, borrowing and capital receipts. Entirely separate finance arrangements operate for local authority housing. These are described in the Annex to this section on the operation of the Housing Revenue Account.

12. The detail of the local government finance system can appear complex. In part, this reflects the variety of functions that it must fulfil, for example it must:

  • provide a stable and equitable allocation of revenue and capital grants between Scotland's 32 local authorities,
  • reflect councils' diverse characteristics and expenditure needs, including any changes in circumstances over time, such as population movement;
  • provide councils with the certainty to plan their future spending and investment;
  • reflect new financial pressures on councils as they arise, including new policy initiatives or transfers of responsibility between central and local government; and
  • acknowledge the wider impact of local authority expenditure and investment on public finances.

13. Not all of these aims are necessarily compatible, for example, pressure to reflect changes in councils' circumstances must be balanced against the need for stability, to allow councils to plan for changes in their expenditure and service provision. Ultimately, the system allocates resources from a fixed pot and as a consequence any adjustments usually impact on all councils. It is important, therefore, that the system is transparent and, as far as possible, commands broad agreement. As a result the grant distribution methodology is kept under constant review to ensure that it is as fair and equitable as possible.


14. Within the SG, responsibility for local government finance matters rests with the Cabinet Secretary for Finance and Economy for Public Finance Planning and Community Wealth. However, many of the elements of local authority expenditure relate to policy areas that are the responsibility of other Ministers, e.g. education, social care, environmental services, leisure and recreation, etc. As part of the spending review process the Cabinet Secretary for Finance and Economy holds bilateral discussions with other Ministers as well the series of discussions and negotiations with COSLA about the allocation of resources for local authority revenue expenditure and capital investment.

15. Responsibility for the administration of the local government finance system rests with the Local Government and Analytical Services Division within the SG's Local Government and Communities Directorate covering local authority revenue expenditure, revenue grant distribution, capital grants and policy on council tax and non-domestic rates. However, as noted above, responsibility for specific policy areas remains with the relevant portfolio lead.

16. The SG consults with councils collectively about the financing, structure and operation of the local government finance system, through COSLA. The Settlement Distribution Group (SDG) is a joint group attended by Scottish Government, COSLA and Local Authority officials. The SDG considers any new local government funding and distribution, whilst providing a forum for officials to discuss future issues. Decision taken at the SDG are then passed to COSLA leaders and Scottish Ministers for approval.

17. It is for local authorities to determine their expenditure priorities from the resources available to them, on the basis of local needs and priorities having first fulfilled their statutory obligations and the jointly agreed set of national and local priorities.

Best value

18. In taking decisions about their revenue or capital expenditure, local authorities are expected to demonstrate their commitment to pursue Best Value across the full range of their activities. Best Value is an approach to effective performance management that encourages the pursuit of continuous improvement through the collection and appraisal of information about current performance, alternative options for service delivery, and the assumptions and objectives which underpin such services. An important means of collecting this information is consultation with stakeholders, and the maintenance of a positive attitude to transparency and accountability.

Local government finance settlement

19. The details of each settlement are set out in full in the relevant Local Government Finance Circulars including details of the agreed package of measures to underpin revenue and capital grant settlements for each council. A further overview of the process to determine the local government finance settlements can be found here via this publication.

Total revenue funding

20. The total level of revenue funding is determined by Scottish Ministers in discussion with COSLA as part of the annual consultation process. Total revenue funding provided by the SG is made up of 3 components: General Revenue Grant (GRG): Distributable Non-Domestic Rate Income (NDRI) and Specific ring-fenced Grants:

  • "General Revenue Grant" makes up the balance of total revenue funding each year after estimates of specific grants and distributable NDRI have been subtracted from the national revenue funding total. All Scotland's local authorities are responsible for the full range of local services, including education, social work, maintaining the local roads network etc. General Revenue Grant supports councils' recurring expenditure on these services, for example on staff costs, etc. It also supports the historic debt servicing costs of some local authority borrowing to fund capital investment, leasing payments and approved Public Private Partnership projects.
  • Distributable "Non-Domestic Rates" are collected and retained by all 32 authorities. From 2018-19 the Scottish Fiscal Commission is responsible for preparing the forecast for NDR income to be collected, based on a number of factors including revaluations, appeals and the likely poundage set. The forecast is then redistributed to local authorities in proportion to each local authorities share of the most recent prior year non domestic income return. Adjustments are made, either up or down, to the level of General Revenue Grant (GRG) to reflect variations between the estimated Non Domestic Rates Income (NDRI) and the actual amount collected, so the amount collected by an individual authority has no direct impact on the total funding as the SG guarantees each local authority their formula share of GRG plus NDRI.
  • "Specific ring-fenced Grants" form a very small part (8%) of the overall grant support to local government through the annual local government finance settlements. Their allocation and distribution are set centrally and linked to specific ongoing policy initiatives and expectations. Following the signing of the Concordat the number of specific grants has been reduced considerably and the general presumption is against the establishment of additional hypothecated allocations within the local government settlement.

Local authority self-financed expenditure

21. In reaching their decision about total revenue grant, Ministers must have regard to the impact on council tax levels. Total revenue grants fund around 80% of Scottish local authority net revenue expenditure with the remaining 20% funded largely from the council tax. The proportion of local authority expenditure funded from the council tax is known as Local Authority Self-Financed Expenditure (LASFE) and counts towards total public expenditure at a GB level, but is not part of the Assigned Budget. It is for each local authority to set its council tax level, based on its own spending decisions and following consultation with its local electors. A further overview of the process to determine the local government finance settlements can be found here.

New burdens

22. In setting the total level of local government support Scottish Ministers must also consider local authorities' on-going responsibilities and any new burdens or transfers of responsibility. These issues are discussed on a regular on-going basis between the Scottish Government and COSLA. New burdens arise where central government policies give rise to an additional financial burden for councils. Adjustments can be made for new burdens or transfers of responsibility each year. Where policy divisions within the Scottish Government consider that a policy initiative or legislative change might place a new financial burden on local authorities they should contact Local Government Finance Unit and discussions must take place with COSLA at the earliest opportunity.

Distribution of local government finance settlement

23. The total revenue funding is distributed between Scotland's 32 local authorities using a "needs-based" distribution formula that has been developed over many years through consultation between central and local government and is kept under constant review. The system recognises key factors which impact on councils' relative revenue expenditure needs. Grant distribution is calculated on the basis of councils' Total Estimated Expenditure (TEE) funded from both grant and local taxation. Councils' expenditure needs are split between expenditure on services and debt servicing (loan & leasing charges).

Loan charge support

24. The Scottish Government supports the historic debt servicing costs of some local authority borrowing to fund capital investment, leasing payments and a few approved early Public Private Partnership projects. As no new support for borrowing is included in the local government settlement the schedule for loan charge support has been calculated and will reduce over time.

Grant Aided expenditure

25. Grant Aided Expenditure (GAE) do not represent budget, targets or expenditure guidelines but are simply a means of determining the share of the total revenue funding from the SG each local authority should receive on the basis of relative need. GAE estimates are made at the service level, e.g. Education and sub service level e.g. Primary School Teaching Staff and the total GAE for a single local authority would be the combined total of that local authorities share of each sub service GAE. If it made sense to distribute total GAE amongst authorities pro rata to population, it would not be necessary to produce service or subservice GAEs. However, it is recognised that there are other factors, in addition to population, that impact on councils' relative expenditure needs for different services. Since 2008-09 the total or quantum for each GAE subservice has generally been fixed and it is only the latest indicators that are updated e.g. population, deprivation, and road length that are updated each year and have an effect on the proportion that each council will receive.

26. The first stage in the Scottish distribution system was to allocate the aggregate level of GAE amongst services. This was known as the "GAE service split". The service split was a top-down process determined by the Scottish Ministers in consultation with COSLA, taking account of a range of factors, including: new burdens on authorities; actual levels of expenditure on particular services; and any political priority Ministers wished to give to particular services.

27. Once the GAE service split had been made, the next stage was to allocate the service GAE amongst sub-services. For example, there are around 36 Education sub-service GAEs - primary school teaching staff, secondary school teaching staff, etc. The aim of sub-dividing a service GAE was to introduce further refinement into the arrangements for distributing GAE amongst authorities. Each GAE allowance has, therefore, its own distribution formula.

Client group approach

28. The next stage was to give each authority a share of each sub-service GAE. This was done by means of what is known as the client group approach, which was first introduced in the 1980s and has been continually refined since then. The client group approach is an objective method of estimating the relative need of local authorities to incur expenditure on a particular service or sub-service. The approach takes into account variations in the demands for services and the costs of providing them to a similar standard and with a similar degree of efficiency. Fundamental to the approach is that the demand and cost factors must:

  • be outwith the control of local authorities¬∑ (i.e. so that the distribution of GAE cannot be manipulated by authorities' own policy decisions);
  • offer plausible explanations; and
  • be shown to be associated with inter-authority expenditure variation.

29. The approach involves determining a primary indicator (PI) for each service or sub-service and, where found to be justified, one or more secondary indicators (Sls). The PI is what is regarded as the most significant single determinant of expenditure on a service or sub-service. For example, the PI for the Primary School Teaching Staff GAE is the number of primary school pupils at the most recent date available. However, it is recognised that authorities need to maintain schools with relatively small rolls in rural areas and that those schools have a higher ratio of staff to pupils and as a result are relatively more costly per pupil to run. Therefore, for this GAE there is a SI which takes account of this and has the effect of skewing part of the GAE towards authorities which have to maintain small schools. A number of GAEs are distributed on the basis of councils' actual or budget expenditure in previous years, where no suitable alternative methodology has been determined.

30. A local authority's GAE is the sum of its share of each service or sub-service GAE. The detail of the make-up of each authority's GAE is contained in the so-called "Green Book" which is produced for each year after each spending review. For further information you can view the SG publication on Grant Aided ExpenditureThere had been a tendency to view councils' service and sub-service GAE allowances as spending targets or limits - which they are not. There had been a tendency to view councils' service and sub-service GAE allowances as spending targets or limits - which they are not. The GAE allocations merely contribute to the calculation of councils' total un-hypothecated grant allocation. As a result it was agreed as part of Spending Review 2007 that the additional funding resulting from that spending review would not be allocated to individual services or sub-service GAEs thus breaking the link between GAEs and funding.

Council tax equalisation

31. The grant distribution formula is calculated on the basis of councils' total estimated expenditure. As noted above, the gap between this level of expenditure and total revenue support is funded from the council tax. The distribution formula takes account of the resources that each council can raise from the council tax, by distributing the gap between TEE and total revenue support between local authorities on the basis of each council's council tax base (Band D equivalent properties). A council's total revenue support is calculated by deducting its estimated council tax income from its TEE. This "equalisation" adjustment is calculated on the basis that councils could set a standard Band D council tax level. In practice, each council sets its own council tax rate to match its actual expenditure decisions.

Minimum grant floor

32. To ensure a stable distribution of grant, the distribution calculations include a minimum grant "floor" to ensure that all councils receive at least a minimum guaranteed increase in total revenue support for each year when there is an overall increase in revenue funding or a maximum guaranteed decrease in those years where overall revenue funding decreases. The level of the floor for each year is set with reference to the aggregate increase in total revenue support. Where an individual council's total revenue support allocation from the distribution formula is below the "floor" in any one year, its allocation is increased up to the "floor", by redistributing grant from other councils based on their share of total revenue support.

85% funding floor

33. From 2012 Scottish Ministers introduced a further funding floor which guarantees each local authority receives at least 85% of the Scottish average revenue funding per head.

Revenue capping powers

34. Total revenue support support around 80% of local authority revenue funding, with the remainder met largely from the council tax. It is the responsibility of each local authority to allocate the total financial resources available to it on the basis of local needs and priorities having first fulfilled its statutory obligations and the jointly agreed set of national and local priorities.

Capital expenditure

35. Capital investment by local authorities funded through the general capital and specific capital grants provided by the SG, capital receipts (income from sale of assets) and borrowing.

36. The Local Government in Scotland Act 2003 abolished the previous limits on local authority capital expenditure known as section 94 consents. Instead the 2003 Act places a duty on local authorities to determine and keep under review the maximum amount they can afford to allocate to capital expenditure. This allows local authorities the freedom to make their own decisions about capital investment. In doing so regulations require authorities to have regard to a Code of Practice developed under the auspices of CIPFA, called the Prudential Code for Capital Finance in Local Authorities. This requires local authorities to ensure that their plans are prudent, affordable and sustainable. Together the different elements of this framework are known as the Prudential Regime. Local authorities also have a duty to adhere to statutory guidance on Best Value, which stresses the importance of good financial management and project management control and of linking expenditure plans to effective asset management.

37. Although no national or local limits have been set for borrowing, HM Treasury reserves the right to do so. In the meantime, the Scottish Government monitors capital plans, outturn expenditure and borrowing levels, and passes information to HM Treasury for monitoring on a UK-wide basis.

Page reviewed: June 2021

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