1. There is a wide range of differing funding
systems used by Government departments to allocate resources.
Some of the main ones are described below.
Local government funding in England
2. For England, the Government starts by
deciding how much spending by local government as a whole it is
prepared to support through grants. This amount is known as "Total
3. Central government helps meet the cost
of about three-quarters of Total Standard Spending by distributing
to local authorities grants and business rates collected centrally.
Together this funding is known as "Aggregate External Finance".
The difference between Total Standard Spending and Aggregate External
Finance is the approximate amount local authorities would need
to raise locally through Council Tax if they spent at the level
of Total Standard Spending.
Specific and special grants to local authorities
4. The Government covers another part of
Total Standard Spending through "specific and special grants"
that fund particular services. For example, there is an Under
Five Education grant for which local authorities can apply if
they plan to increase the number of places for children under
five year-olds in pre-school education in their area.
Sharing out resources between authoritiesthe
Standard Spending Assessment
5. To work out each local authority's share
of Total Standard Spending (apart from specific and special grants),
the Government calculates a "Standard Spending Assessment".
The total of all local authorities' Standard Spending Assessments,
plus special and specific grants, makes up Total Standard Spending.
6. When working out Standard Spending Assessments,
the Government takes account of the population, social structure
and other characteristics of each authority. The Government, in
consultation with local government, has developed separate formulae
covering the following major service areas:
personal social services;
environmental, protective and cultural
7. The Standard Spending Assessment blocks
are split into sub-blocks. For example, the education sub-block
comprises funding for pre-school, primary, secondary, post-16
year-olds and adult education. As an example, the formula for
secondary schools takes into account pupil numbers, free meals,
sparse population, additional educational need and area cost adjustment.
These formulae are based on research and analysis of statistics.
They apply to all authorities providing a particular service.
8. In practice, local authority spending
levels can vary for three reasons:
a local authority may take a conscious
decision to aim for a high or a low council tax or to give one
service a higher priority than another, reflecting the judgement
of local politicians about what local people want from their council;
some authorities are more efficient
than others; and
there are factors beyond the control
of any individual authority.
9. Standard Spending Assessments seek to
identify this last group of factors. It does this primarily by
looking for statistical correlations. It assumes that, if there
is a strong correlation between the amount that different local
authorities spend on a service and a given variable, this suggests
that the variable has a real impact on the cost of providing the
10. A three year programme of research is
currently being carried out to see if a fairer, simpler and more
stable way of distributing grants can be found. During this period,
the Government does not expect to make changes to the way it distributes
grants except, for example, where there are changes in the functions
of local authorities or in the way particular services are funded.
The Government is committed to introducing new grant formulae,
replacing SSA, from 1 April 2003, as described in the DTLR White
Paper on local government in December 2001.
11. The total that the Standard Spending
Assessment formulae give for each major service area is usually
slightly different from the amount the Government allocates to
each major service area (the "control totals"). To make
the two figures match up, the Standard Spending Assessments for
each major service are scaled up or down as appropriate.
Revenue Support Grants
12. Every year the Government provides a
"Revenue Support Grant". The Grant is simply the part
of Aggregate Exchequer Finance that is not provided from business
rates (or non-domestic rates) or from specific and special grants.
13. Broadly speaking, the Government distributes
this grant so that if every local authority set its budget at
the level of its Standard Spending Assessment, the Council Tax
would be the same for all properties in the same valuation band
14. The amount of Revenue Support Grant
a local authority gets is:
its Standard Spending Assessment;
the amount it will get from the national
pool of business rates (or non-domestic rates); less
the amount it would get if it set
its Council Tax at a national standard rate.
Regional Development Agencies
15. The budgets from the various Government
departments that fund the Regional Development Agencies were merged
into a Single Budget from April 2002, enabling the Regional Development
Agencies to target their resources more flexibly and effectively.
This Single Budget is allocated between the nine Regional Development
Agencies (including the London Development Agency) primarily by
16. The allocation formula includes a number
of indicators: unemployment, deprivation, Gross Domestic Product
per head; research and development expenditure per head; population
of Rural Priority Areas; amount of derelict land and pre-used
land with planning permission, and proportion of the working age
population classed as partly skilled or unskilled, as well as
a flat and population-based element. A floor of the previous year's
budget is incorporated into the mechanism, to ensure that no individual
Regional Development Agency receives a cut in its budget as a
result of applying the formula. In 2002-03, 98.5 per cent of the
Regional Development Agencies' total Single Budget of £1.55
billion will be allocated by this formula. In 2003-04, this figure
by formula falls to 95 per cent of the £1.7 billion total,
with the remainder as a performance element and a reserve.
National Health Service resource allocation
17. Since the abolition of regional health
authorities in 1996, NHS allocations have not been made to regions
as such. The existing formula has been used to inform the allocations
to 95 health authorities. From April 2002 these have merged to
form 28 health authorities. From 2003-04 the intention is that,
subject to the passage of legislation through Parliament, allocations
will be made direct to some 300 primary care trusts. Main revenue
allocations to health authorities are determined annually by the
Government taking account of health authorities' baselines, capitation
targets and how far each health authority is away from target.
The Government decides the pace of change each year; how quickly
to move authorities to capitation targets. Over the past few years,
most health authorities have moved within 5 per cent of their
18. The capitation target for each health
authority is calculated by weighting resident populations for
age, additional health needs of the population, and unavoidable
cost variations, mainly the "market forces" factor.
19. The age weights reflect greater use
of services by the elderly and younger age groups. The needs indices
reflect the underlying health needs of populations with high morbidity
and deprivation. These are proxied by indicators taken from the
1991 Census and other sources, such as (self-reported) limiting
long-standing illness, unemployment, elderly living alone and
premature mortality. There are separate age weights and needs
indices for hospital services, community health services, mental
health services, prescribing and parts of general medical services.
In each case, the age and needs weights are derived from statistical
analyses of existing utilisation of health services.
20. The market forces factor identifies
the premium that has to be paid to recruit staff in different
parts of the country. This is derived from a statistical analysis
of the New Earnings Survey.
21. The existing formula has been derived
with the underlying objective of equal access for equal need.
The Government announced in 1998 that there would be wide-ranging
review of the formula, with the aim of "contributing to reducing
avoidable health inequalities". This review is being taken
forward by the Advisory Committee on Resource Allocation. The
intention is that, following the review, the new formula will
be ready for 2003-04 allocations.
22. The Assisted Areas are those areas of
Great Britain where state aid may be granted under European Union
law for regional development purposes. The legal basis for designating
Assisted Areas in Great Britain is Section 1 of the Industrial
Development Act 1982, which requires that in designating Assisted
Areas Ministers have regard to "all the circumstances, actual
and expected, including the state of employment and unemployment,
population changes, migration and the objectives of regional policies".
In practice, selection of Assisted Areas in Great Britain is largely
governed by the European Commission's regional aid guidelines.
In Great Britain, the Assisted Areas are divided between Tier
1 and Tier 2, with an additional Tier 3 area that is governed
by the European Commission's Small and Medium Enterprises guidelines.
Tier 1 and 2 areas were decided in 2000 and are likely to remain
in place until 2006.
23. These are co-terminous with the Objective
1 areas under the Structural Funds, and are areas with low GDP
per capita relative to the European Union average. The current
Tier 1 areas are Cornwall and the Isles of Scilly, Merseyside,
South Yorkshire, and West Wales and the Valleys.
24. These are effectively agglomerations
of wards into compact contiguous areas with a population of over
100,000. They are not synonymous with Objective 2 areas, although
there is a substantial overlap.
25. Each European Union Member State designated
the regions which are disadvantaged in relation to the rest of
that country, subject to a population ceiling and other constraints
determined by the European Commission (in Great Britain the ceiling
was 28.7 per cent of the population for Tiers 1 and 2 combined).
The statistical indicators used in Great Britain to decide areas
eligible to be proposed for Tier 2 were the employment rate, residential
unemployment, work-force unemployment, and dependency on manufacturing.
In drawing up its proposals, the Government's aim was to combine
areas of need with major areas of opportunity for employment creation,
investment and regeneration.
26. The European Commission's guidelines
on regional aid set limits on the level of aid, measured as a
percentage of net eligible project costs, which may be granted
in the Assisted Areas.
27. In the re-drawing of the Assisted Areas
map in 2000, the Government also introduced in England a new Tier
3 of additional Enterprise Grant Areas where assistance is available
to small and medium-sized enterprises employing below 250 people.
Tier 3 is a flexible measure to aid regional development. For
this reason, Tier 3 areas will be periodically reviewed in conjunction
with regional partners, including the Regional Development Agencies.
Regional Selective Assistance
28. Regional Selective Assistance is currently
the main form of Assisted Areas state aid in Great Britain, and
is granted to secure employment opportunities and increase regional
competitiveness and prosperity, particularly in areas of deprivation.
Regional Selective Assistance is a discretionary scheme that provides
grants in support of investment projects that will create or safeguard
jobs, generate benefits for the wider regional economy, and helps
to attract and retain internationally mobile investment. In England,
responsibility for RSA casework below £2 million grant has
been delegated to the RDAs (and LDA) with effect from 2 April
2002. Cases of £2 million and above continue to be appraised
centrally by the Industrial Development Unit of the DTI. In England,
the Regional Selective Assistance budget currently stands at around
£100 million a year.
29. On 1 January 2000, the Enterprise Grant
Scheme replaced "smaller case" Regional Selective Assistance
in England; Enterprise Grants are available in all 3 Tiers of
the Map. The budget for Enterprise Grants is £45 million
over the first three years of the scheme.
Neighbourhood Renewal Fund
30. The Neighbourhood Renewal Fund in England
is allocated to the 88 most deprived local authority districts,
primarily by reference to the Indices of Deprivation 2000 (ID2000).
Any authority which appears within the top 50 most deprived districts
on any of the six district level measures in the ID2000 are eligible
for the funding from the Neighbourhood Renewal Fund. The six district
measures of deprivation used are:
average of ward scores; and
31. On these criteria, 81 local authority
districts would be eligible for the Neighbourhood Renewal Fund.
There are also transitional arrangements for those areas that
would have been eligible under the Index of Local Deprivation
1998 (note there were only four measures, rather than six for
the ID2000), but are not included in the 50 most deprived authorities
on the district measures in ID2000. Under these arrangements,
an additional seven areas are eligible for the Neighbourhood Renewal
32. The Neighbourhood Renewal Fund was allocated
£200 million, £300 million and £400 million for
2001-02, 2002-03 and 2003-04 respectively. The sum allocated to
each local authority is based on a standard amount per head of
population in those wards in the local authority that are in the
most deprived 10 per cent of all wards nationally. The minimum
allocation is £200,000 for the first year for any eligible
local authority. This relates the level of funding to the severity
of deprivation within an authority, measured by the number of
their residents living in particularly deprived areas.
New Deal for Communities
33. To select the eligible local authority
areas for the 17 pathfinders and the 22 Round 2 areas, two broad
criteria have been used. First, the focus was on those districts
with the highest levels of deprivation. The 1998 (for 17) / 2000
(for 22) Index of Local Deprivation was used to establish this.
Secondly, a good spread of neighbourhoods across England was wanted.
At least one eligible local authority area was identified in each
region of England, more in areas where there are particularly
high concentrations of deprivation. The Government wishes to use
the New Deal for Communities to test different approaches to tackling
deprivation across as wide a range of deprived areas as possible.
34. For the further 22, the quota has been
based on "rolling out" selection to districts that were
not included as Pathfinders. However, the Department of Transport,
Local Government and the Regions, in consultation with Government
Offices, has considered the scope for a second New Deal for Communities
within larger Metropolitan Pathfinders, because these contain
large populations living in deprived neighbourhoods.
EU Structural Funds
35. The European Union allocates Structural
Funds to the UK, including European Regional Development Funds,
which promote economic development. Funding provided by the European
Union under these schemes require co-financing contributions from
the relevant Member State.