Council And School Funding - After Health, Funding For Scottish Councils Is The Second Largest Item In The Scottish Government's Budget

5th February 2023

After health, funding for Scottish councils is the second largest item in the Scottish Government's Budget. In the original 2022-23 budget as passed by the Scottish Parliament, the Scottish Government allocated £10.6 billion to councils as part of the main local government portfolio, with further funding from other portfolios increasing the amount initially provided in the annual local government finance settlement for resource (i.e. non-capital) spending to £12.0 billion.

This funding supports a range of service areas including schools, early-years education and childcare, adults' and children’s social care, environmental and regulatory services, local transport, leisure and cultural services, planning and local economic development, and housing advice and regulation. Additional funding is raised by councils themselves through council tax and sales, fees and charges, and via contributions from public sector bodies such as the National Health Service (NHS).

The 2010s saw cuts to councils’ funding and spending, but more recently funding has been increasing again. This chapter of the report therefore first looks at how Scottish councils’ spending on local services changed during the 2010s, splitting spending into spending on schools and spending on other services to allow for easier comparisons of trends in England (although differences in data and responsibilities mean these comparisons are somewhat rougher for the ‘other services’ category). It then looks forward to 2023-24 and 2024–25, looking at the outlook for overall council funding including for schools, and how this compares with England.

Key findings
1. Changes in the responsibilities of Scottish councils over time mean that it is not possible to carry out a fully like-for-like comparison of their funding over time. However, it is possible to adjust for some of the main changes in councils’ responsibilities, such as the centralisation of police and fire services. After doing this, we estimate that Scottish councils saw a real-terms reduction in funding from grants from the Scottish Government and council tax of around 9%–10% between 2009–10 and 2018–19, equivalent to a fall of around 13% per person.

2. Funding for Scottish councils has increased since 2018–19, and as of 2022–23 is around 2% lower in real terms than in 2009–10, which is equivalent to a fall of around 5% per person. However, part of the recent increases in funding relate to new responsibilities and, most notably, to the expansion of free childcare for children aged 2, 3 and 4. Stripping out ring-fenced funding for this particular ‘new burden’, council funding remains around 5% lower in aggregate and 8% lower per person than in
2009–10.

3. Scottish councils received approximately £1.8 billion in COVID-19 grants during 2020–21 and 2021–22 to address pandemic-related pressures. Net expenditure did increase for a range of services, often reflecting the fact that additional grant funding had to make up for the loss of income from sales, fees and charges (such as parking charges). But councils also increased their general fund reserves by around £1.3 billion over the same two years, which suggests that the additional funding they received exceeded the short-term financial pressures they faced, or that they struggled to spend funds well. Councils may now be drawing down these reserves, given unexpectedly high inflation, with further drawdowns likely in future in light of a challenging funding outlook.

4. Within the overall cuts to councils’ funding, some services have seen spending increase. For example, after initially falling, real-terms spending on early-years childcare and schools is likely to be around 19% above 2009–10 levels by 2021–22. This partly reflects a big boost to teachers’ pay in Scotland in 2019–20, as well as the aforementioned expansion of free early-years childcare.

5. As a result of these spending increases, school spending per pupil aged 3–18 is estimated to have been 17% higher in Scotland in 2021–22 than in 2009–10. This is in stark contrast to England where it is estimated to have been 2.5% lower than in 2009–10. Spending per pupil in 2021–22 is estimated to be 25% higher in Scotland (£8,800) than in England (£7,100), up from 4% higher in 2009–10.

6. Scottish councils’ spending on social work and social care also increased in real terms during the 2010s: by 8% on a net basis between 2009–10 and 2019–20, or 15% on a gross basis, also accounting for client charges and contributions from other organisations such as the NHS. But spending on other council services fell substantially during the 2010s: central administrative services (−55% net and −39% gross), planning and development (−52% net and −23% gross), housing (−38% net and −27% gross), roads and transport (−29% net and −9% gross), and culture (−29% net and −29% gross). This pattern is similar to England although the overall cut to non-schools spending is somewhat lower in Scotland, especially after accounting for its slower population growth (which means spending has to provide for fewer additional people).

7. Turning to the future, it appears that after several years of real-terms increases, Scottish councils’ funding may fall again in real terms. For example, after adjusting for in-year top-ups to councils funding in 2022–23 and stripping out funding for new burdens next year, grant funding for Scottish councils is set to fall by around 1% in real terms. Even 5% council tax increases would not be enough to fully offset this, and would still leave funding around 0.3% lower in real terms in 2023–24 than in 2022–23.

8. The outlook for 2024–25 is uncertain but is likely to be even tougher, given that overall funding for Scottish Government non-benefit spending is set to fall by 1.6% in real terms. If grant funding for Scottish councils were to change in line with this, 5% council tax increases would still see a further real-terms cut to overall funding of 0.5% on top of that seen in 2023–24. The cuts to councils’ funding in 2024–25 would be substantially larger – potentially 4% – if the Scottish Government were to increase funding for health services and ‘net zero’ by the same percentage as in the Budget for 2023–24, and reduce grant funding for councils in line with the rest of the Budget.

9. The contrast with England over the next two years is therefore striking. Big increases in grant funding for councils announced in the November 2022 Autumn Statement mean that funding for English councils and schools (which is a separate budget line in England) is set to increase by 3% in real terms in 2023–24 and 2% in 2024–25, even if council tax rates are frozen in cash terms; with 5% increases in council tax rates, the real-terms increases would be 4.5% and 3.7%, respectively, for these two years. Given current plans and forecasts, the next few years are therefore likely to see something of a reversal of fortunes for Scottish and English councils and schools.

Note
This article is from The Institute for Fiscal Studies.
See it on the IFS web site at
https://ifs.org.uk/publications/council-and-school-funding