UNITED KINGDOM

The United Kingdom is a parliamentary constitutional monarchy, and a unitary state with an asymmetrical decentralisation system composed of four constituent countries: England, Wales, Scotland and Northern Ireland. At the central level of government, the legislative power is vested in the bicameral parliament composed of a lower house, the House of Commons, and an upper house, the House of Lords. Members of the Commons, known as Members of Parliament (MPs), are elected by direct universal suffrage to represent constituencies and they hold their seats until Parliament is dissolved. Following the Fixed-term Parliaments Act 2011, Parliamentary terms are fixed at five years, except in exceptional cases (a vote of no confidence, passing of an "early election" motion). Membership of the House of Lords, also known as the House of Peers, is granted by appointment or by heredity or official function. The Government is led by the Prime Minister and the Head of State is the Queen.

The UK has no written constitution, and therefore no constitutional provision for local governments, which rely instead on Acts and Bills passed by the Houses of Parliament. Wales was incorporated into the governance structure of England through the so-called Act of Unions of 1536 and 1543, and the Acts of Union of 1706-1707 brought Scotland together with England and Wales to form Great Britain. Finally, the 1800 Acts of Union brought Great Britain and Ireland together as the United Kingdom, before the Republic of Ireland became a separate nation again in the early half of the 20^th Century. During their incorporation into the United Kingdom, Scotland and Ireland preserved their own separate legal systems, whereas Wales was merged into England’s legal system, resulting in three legal systems today within the UK: the laws of England and Wales, Northern Irish laws, and Scottish laws.

Administrative devolution took place in 1999, permitting Wales, Scotland and Northern Ireland to have their own elected assembly and government. The powers and responsibilities of the three devolved bodies vary in nature and scope, as each devolution Act was drafted independently. The devolved institutions in Wales and Scotland have subsequently evolved and taken on greater powers, whereas the process has been more precarious in Northern Ireland, with devolution suspended several times over the course of the 20th century.

Scotland has a Parliament, a deliberative body whose members are elected by direct universal suffrage for a four-year term, and an executive government, led by a First Minister nominated by the Scottish Parliament and appointed by the Queen. Scotland has full legislative powers over a wide range of matters, i.e. all issues except those reserved to the UK Parliament. A further transfer of mainly tax and borrowing powers to the Scottish Parliament was enacted via the Scotland Act 2012. A referendum on Scottish independence from the UK was held in 2014, with 55.3% voting against leaving the UK’s union. Following the referendum, the Scotland Act 2016 was passed by the UK Parliament, which set out amendments to the Scotland Act 1998 and devolved further powers to Scotland, including taxing and new borrowing prerogatives.

In Wales, the deliberative body is the Welsh Parliament (known previously as the National Assembly for Wales), whose members are elected via direct universal suffrage for a four-year term while the executive branch of government is led by the First Minister, nominated by the Welsh Parliament and appointed by the Queen. The Welsh Parliament has a more limited range of legislative powers than the Scottish Parliament, i.e. mainly on secondary legislation. However, a referendum held in March 2010 enhanced its primary law-making powers. The Welsh Parliament can legislate without having to consult the UK parliament in devolved areas. The Wales Act 2014 and Wales Act 2017 devolved taxation and borrowing powers to the Welsh Government and the Welsh Parliament.

In Northern Ireland, devolution was restored in 2007. The Northern Ireland Assembly is the devolved nations deliberative body with members who are elected by direct universal suffrage for a four-year term. The Assembly appoints the Northern Ireland Executive, led by a First Minister and deputy First Minister.

England, which outweighs other constituent countries in terms of political and economic power, remains the only nation without its own devolution settlement. The project of devolution of limited political powers to four elected regional assemblies in North East England, North West England, Yorkshire and the Humber was debated in the early 2000s. The Regional Assemblies (Preparations) Act 2003 would have also entrusted these new assemblies with some political powers. However, the proposal was suspended indefinitely during the first referendum (three other planned referendums were postponed and later dropped) held in the North-East of England in November 2004. The main reasons behind this “no” vote were the lack of consensus over where the “regional capital” would be, the lack of convincing arguments in favour of the reform, and the fear of adding another layer of politicians, public servants and taxes. Nevertheless, there is devolution of certain powers to certain parts of England though “combined authorities” (see below).

Local governments are overseen by the devolved nations’ governments in Wales, Scotland, and Northern Ireland, and by the UK government in England. Therefore, organisation, responsibilities and finances as well territorial and decentralisation reforms differ from one nation to another as well as within England, although they have some common characteristics. Local governments in each of the four constituent countries are known as “councils”. These are governed by directly-elected bodies. Local councillors are elected at least every four years, either through the ‘first past the post’ system (England and Wales) or using the Single Transferable Vote system (Scotland and Northern Ireland). Councils are typically chaired by the leader of the largest single political group in the Council, along with a chief executive leading the executive arm. The 2000 Local Government Act enlarged the range of available options for local councils’ executive leadership in England and Wales, including directly-elected mayors. Thereby, all councils were required to review their executive arrangements, and some of them held referendums on such a proposal. As of 2022, 16 councils have directly-elected mayors, all in England. This figure does not include the Mayor of London or the nine “metro-mayors”, in Greater Manchester and other areas with combined authorities, which are covered by separate legislation (the Cities and Local Government Devolution Act 2016).

As a result of the EU referendum in June 2016, the United Kingdom formally left the EU on 31 January 2020, after which there was a transition period of 11 months.

TERRITORIAL ORGANISATION
Municipal Level [1]	INTERMEDIATE LEVEL	REGIONAL LEVEL	TOTAL NUMBER OF SNGs (2021)
374 Principal councils (unitary, upper, and second-tier councils; not including county councils)	24 County Councils; 1 Greater London Authority; 10 Combined Authorities	Devolved nations (Wales, Scotland, Northern Ireland)
Average municipal size: 179 719 inhabitants
374	35	3	412

[1] Name and number of sub-municipal entities:
11 930 local councils (town, parish, community, neighbourhood, and village councils)

OVERALL DESCRIPTION: The UK territorial organisation is highly complex and differs greatly in each of the four constituent countries. England has, in places, a two-tier subnational government system whereas in Scotland, Wales and Northern Ireland there is a single tier of local authorities. England has 35 local governments at the intermediary level (upper tier), comprising 24 county councils, the Greater London Authority (GLA) and 10 combined authorities. At the local level, England has 309 lower tier or first level authorities responsible for local services. In Wales, there are 22 local authorities, 32 in Scotland, and 11 in Northern Ireland (formerly 26).

In addition, there is a structured sub-municipal level of approximately 10 000 parish councils in England, 730 community and town councils in Wales, and 1 200 community councils in Scotland. These entities have elected councillors, deliver some services at the community level and are consulted by local authorities on issues regarding their community.

REGIONAL LEVEL: The three devolved nations represent 46% of the UK area but 16% of its population. They have very different characteristics in terms of area, demographics and socio-economic development. Scotland is the largest region both in terms of area and population (5.4 million inhabitants in 2020). It is followed by Wales (3.2 million inhabitants) and Northern Ireland (1.9 million). Regional disparities in terms of GDP per capita (measured by TL2) are high and have increased in the United Kingdom over the last 16 years. In 2016, the GDP per capita in Wales was equivalent to 41% of the GDP per capita in Greater London. The United Kingdom has the 4th highest regional economic disparities among 29 OECD countries with comparable data and recorded the 4th largest increase in disparities between 2000 and 2018.

MUNICIPAL LEVEL: The system of local government is asymmetric, depending on the UK regulation for England and on regulation of each devolved nation.

In Wales, there are 22 “principal” local government areas at municipal level, each of which has a locally-elected council. Municipalities are further divided into 735 community areas for which there may be a community council. The framework for local government in Wales is the Local Government Act 1972 (LGA 1972), which has been substantially amended since its enactment including, significantly, by the Local Government (Wales) Act 1994 which established the current system of principal local authorities. In Scotland, the current structure of local government, establishing the 32 council areas, is based on the Local Government (Scotland) Act 1994, which has been amended several times since. There are around 1 200 community councils in Scotland, which are voluntary organisations set up by statute by the Local Authority and run by local residents to act on behalf of their area. In Northern Ireland, the district councils are ruled by the Local Government Act (Northern Ireland) 1972, modified in 2005 and 2014. Most recently, Northern Ireland carried out an important local government reform reducing the number of local councils from 26 to 11, effective as of April 2015.

In England, the current structure of local governments results from continuous territorial reform. A general trend in recent years has seen the two-level system, still in place in rural areas, being replaced by “unitary authorities” in some areas However, the structure remains complex and includes 24 county councils, the Greater London Authority, and 10 combined authorities at the upper-tier and over 300 unitary and district councils at the lower-tier. In addition, the local government system in London comprises 32 London Boroughs, and 1 Sui Generis authority, the City of London Corporation. In England, decentralisation in the form of “localism” has gradually emerged since the 2000s. A process based on several white papers and reviews on local government led to the adoption of the Localism Act 2011. This act aimed to push decentralisation by giving local authorities general competences, transferring new responsibilities to local authorities and pushing for fiscal decentralisation. In parallel, the government has negotiated “Devolution Deals” with large cities, leading to the creation of combined authorities. The first deal led to the creation of the Greater Manchester Combined Authority in 2014. The Cities and Local Government Devolution Act 2016 was passed in 2016. It is considered an important step towards decentralisation, making various amendments to the 2009 Act to allow greater devolution of powers to these combined authorities. It also includes provisions for mayors to be elected directly and have various degrees of power as part of “Devolution Deals”. There are currently ten combined authorities in England, nine with directly-elected mayors (the North East Combined Authority does not have an elected mayor). In 2022 a government whitepaper was published which included nine additional areas invited to take part in devolution deals. Devolution deals are also found in Scotland and Wales.

Municipalities in the United Kingdom are large, with an average population of 179 000 inhabitants, which is among the OECD’s highest (with Ireland and Korea). Only two local authorities, the Isles of Scilly and the City of London (Borough), had a population of less than 20 000 inhabitants in 2020.

HORIZONTAL COOPERATION: Inter-municipal cooperation in the UK is developing. In England, in addition to the creation of combined authorities at metropolitan area level, more and more local authorities are involved in “Shared Service Agreements” which allows collaboration between two or more local authorities on a range of services, one major motivation being costs savings. In England, figures from the Local Government Association show that the current 626 shared service arrangements between councils (an increase from 416 arrangements in 2016), resulted in GBP 1.34 billion in cost savings (as of June 2019). In Scotland, councils are able to set up joint board or joint committee organisations with other councils to provide a service across a combined area of the participating local authorities.

At regional level, the system of devolution is sound but asymmetric. The three devolved nations have different levels of legislative, administrative and budgetary autonomy.

At local level, responsibilities vary from one constituent country to another but they typically include education, local economic development, housing, social services, local roads and public transport, culture and recreation, waste management, environmental protection and parks, health and public safety. A recent trend is the merger of health (a national power) with social care (a local one).

Several decentralisation processes are underway. In Northern Ireland (Local Government Reform), local government has undergone a significant reform process in terms of both the number of councils and their functional responsibilities. The latter have increased, particularly in the area of community planning, in addition to being granted a General Power of Competence. In England, the Localism Act 2011 provided local authorities and some parish councils with a General Power of Competence and transferred new responsibilities in several areas (housing, public health and social protection). In addition, the Cities and Local Government Devolution Act 2016 allowed greater devolution of powers (housing, transport, planning and policing powers) to combined authorities. The Greater London Authority has more powers and responsibilities than other cities in England.

In Scotland, the Scottish Government launched a review of local governance in 2017 to explore how to improve local democracy by increasing capacity for community decision-making; the review is ongoing with an interim report released in 2019.

In Wales, the Local Government and Elections (Wales) Act was passed in 2021, creating a framework for a consistent mechanism for regional collaboration between local governments through four newly established Corporate Joint Committees (CJCs). The membership of a CJC will be made up of the leaders of its constituent local authorities. CJCs will be independent corporate bodies which can employ staff, hold assets and budgets, and undertake functions relating to strategic development planning and regional transport planning. They will also be able to voluntarily take on functions for the promotion of economic well-being and improving education. A public consultation process to establish the legislative framework within which the CJCs will operate is ongoing, with the fourth and final stage to take place in Spring 2022.

Finally, parish and community councils are responsible for local services, including looking after community buildings, provision and maintenance of local recreation grounds, and supporting local arts and cultural activities.

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	Regional level (Devolved Nations)	Intermediate/Municipal level
1. General public services (administration)	Internal administration; Local government; Statistical office	Internal administration; Electoral register
2. Public order and safety	Criminal justice; Police; Fire protection	Fire protection; Civil protection
3. Economic affairs / transports	Regional spatial planning; Economic development; Highways, and roads; Transport; Agriculture, forests and fisheries; Trade and industry, Tourism	Urban roads; Cemeteries and crematoria; Trade and industry; Tourism; Local economic development/promotion
4. Environment protection	Sanitation	Waste collection and disposal; Sewerage; Slaughterhouses; Environmental protection
5. Housing and community amenities	Housing; Regional planning; Water	Housing; Town planning
6. Health	Primary care; Hospitals; Health protection; Environmental health	Health protection
7. Culture & Recreation	Culture and arts; Sports	Cultural facilities; Parks and open spaces
8. Education	Education; Higher and adult education; Training	Pre-primary and primary education; Secondary education
9. Social Welfare	Social services; Employment and social security (in Northern Ireland only)	Family welfare services; Social care homes

Scope of fiscal data: Local and parish councils and local government units, grouping all local budgetary organisations, including their regional offices, town councils and regional councils, community schools (i.e. around 28 .000 organisations). Note: Data do not include the three devolved administrations of Scotland, Wales and Norther Ireland, which are included in the central government accounts.

SNA 2008

Availability of fiscal data: High

Quality/reliability of fiscal data: High

GENERAL INTRODUCTION: Fiscal powers in the United Kingdom are quite centralised and as a result the country is below the OECD average regarding the different dimensions of fiscal decentralisation. Wales, Scotland and Northern Ireland, however, have a relatively high degree of autonomy in several governmental areas including fiscal matters; whereas England has a more centralised structure of government, with local councils that have little fiscal power.

Greater devolution of taxing and borrowing power is taking place in the three devolved administrations. The two successive Scotland Acts passed in 2012 and 2016 devolved further fiscal powers to Scotland. A new fiscal framework for Wales was agreed upon between the Welsh and UK governments as of 2016, following the recommendations of the Silk Commission, which devolved tax and borrowing powers to the National Assembly for Wales and the Welsh Government.

Fiscal decentralisation is asymmetric between regions but also within local authorities, depending on where they are located (three devolved nations and England). Asymmetries in fiscal arrangements also exist between cities having signed a devolution deal and those that have not.

In 2016, a Fair Funding Review, formally called the ‘Review of local authorities’ relative needs and resources’, was initiated by the central government for local authorities in England. Once completed and implemented (expected in 2023), it will change how central grants are distributed between local authorities and reset the baselines for determining how much each local authority needs. The last time the baseline was reset was in 2013/14 with considerable demographic shifts occurring since then that have affected local authorities, and their fiscal capacity, in different ways.

Following the UK’s departure from the European Union, the UK government has established several new funds to replace EU funding for local governments in areas related to economic development, infrastructure, cultural activities and sport. Spending in these areas typically falls under the responsibility of the devolved nations. To access these funds, local authorities across the UK will compete via bids which bypasses the Barnett Formula (the transfer system) and the devolved administrations, thereby providing the UK government with enhanced power to directly spend in the devolved nations compared to the old system in which the devolved nations distributed the EU funds themselves. Examples of the new funds include the UK Shared Prosperity Fund, the Levelling-Up Fund, and the Community Ownership Fund.

It is important to note that figures presented below are under-estimated as fiscal data regarding the devolved administrations in Scotland, Wales and Northern Ireland are not included in the subnational government sector but rather in the central government sector. Therefore, data presented in the tables relate to local authorities and their related organisations only.

Subnational government expenditure by economic classification
2020	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure	4 874	10.6%	20.7%	100.0%
Inc. current expenditure	4 432	9.7%	21.0%	90.9%
Compensation of employees	1 442	3.2%	31.2%	29.6%
Intermediate consumption	1 291	2.8%	28.7%	26.5%
Social expenditure	1 195	2.6%	15.6%	24.5%
Subsidies and current transfers	395	0.9%	11.5%	8.1%
Financial charges	80	0.2%	9.3%	1.6%
Others	30	0.1%	98.4%	0.6%
Incl. capital expenditure	442	1.0%	18.3%	9.1%
Capital transfers	46	0.1%	4.4%	1.0%
Direct investment (or GFCF)	396	0.9%	29.3%	8.1%

EXPENDITURE: Local government expenditure accounted for 10.6% of GDP and 20.7% of total public expenditure in 2020, which is considerably lower than the OECD average (17.1% and 36.6%, respectively), highlighting the lack of decentralised spending in the UK. Among OECD unitary countries, however, the UK is closer to the average (12.7% of GDP and 27.5% of public expenditure in 2020). Even though local authorities are key public employers in several large sectors (education, social care, police force), the share of local staff spending in total public staff spending is lower than other OECD countries, 31.2% vs 61.2% in the OECD.

DIRECT INVESTMENT: Local governments in the UK play a much more limited role as public investors than the OECD average (29.3% of total public investment and 0.9% of GDP versus 54.6% and1.9%, respectively, in the OECD). Even among OECD unitary countries, the UK SNG sector play a much smaller role in public investment (29.3% vs 48.9%). Local authority direct investment as a share of total public investment has decreased by 5.5 percentage points between 2016 and 2020.

Since 2012, City Deals or City Regional Deals have developed long-term investment plans for cities where the UK and Devolved Governments give back locally-raised tax receipts to promote medium-term investment. The Belfast Region City Deal, the first Northern Ireland City Deal, was signed in December 2021 and unlocks GBP 1 billion of co-investment in the region. In England, local enterprise partnerships (LEPs) are voluntary non statutory partnerships between local authorities and businesses set up in 2011 to help determine local economic priorities and lead economic growth and job creation within the local area. LEPs are funded via “Growth Deals” between the central government and the LEP. In 2019, Growth Deals were expanded to Northern Ireland, Scotland, and Wales, however, these deals do not use LEPs. There are currently 38 LEPs covering the whole of England. Over GBP 9 billion of the Government’s Local Growth Fund has been committed to LEPs since 2015-16 to help them deliver on their investment priorities and create new economic opportunities for local businesses and communities. The Local Growth Fund ended in 2021. The UK Government’s Levelling Up White Paper (2022) indicated that future regional development resources, such as the Towns Fund and the Levelling Up Fund, will not be channelled through LEPs but through local authorities instead.

Operational as of spring 2021, the newly established UK Infrastructure Bank offers financial and advisory support to local authorities for infrastructure projects that drive regional or local economic development or support tackling climate change. The bank has an explicit focus on crowding in private sector finance to finance local government projects.

Subnational government expenditure by functional classification
2019	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure by economic function	4 527	9.2%	-	100.0%
1. General public services	355	0.7%	14.4%	7.8%
2. Defence	1	0.0%	0.2%	0.0%
3. Security and public order	407	0.8%	35.1%	9.0%
4. Economic affairs/transports	443	0.9%	24.0%	9.8%
5. Environmental protection	180	0.4%	56.0%	4.0%
6. Housing and community amenities	327	0.7%	30.1%	7.2%
7. Health	84	0.2%	2.2%	1.9%
8. Recreation, culture and religion	98	0.2%	34.4%	2.2%
9. Education	1092	2.2%	34.8%	24.1%
10. Social protection	1539	3.1%	20.2%	34.0%

Local government expenditure in the UK is primarily targeted towards education (24.1%) and social protection (34%). Local government expenditure on social protection in the UK is considerably higher than the OECD average (15%), reflecting the key role of local governments in administering social care in the UK. Education expenditure has remained stable since 2016 but is still considerably lower than it has been in past, when in 2010 education expenditure accounted for 33% of total local expenditure. This decrease can be attributed to a change in status of local authority schools to central government-funded academies. Economic affairs/transport and security and public order are the next largest expenditure items for local governments, at 9.8% and 9.0% of total local expenditure, respectively, in 2019.

Subnational government revenue by category
2020	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total revenue	4 952	10.8%	28.2%	100.0%
Tax revenue	830	1.8%	7.0%	16.8%
Grants and subsidies	3 350	7.3%	-	67.7%
Tariffs and fees	662	1.4%	-	13.4%
Income from assets	40	0.1%	-	0.8%
Other revenues	70	0.2%	-	1.4%

OVERALL DESCRIPTION: As was noted for expenditure data, subnational revenue data for the UK does not include data on the four devolved nations which are instead included in central government data. However, it is important to note that the devolved nations rely heavily on transfers and grants from the UK government for their revenues.

Local governments in the UK depend on grants and subsidies from the UK government and devolved administrations for the large majority of their revenue (67.7% vs 41.2% in the OECD and 53.3% in OECD unitary countries). Consequently, the share of taxes in local revenues is small in the UK (16.8% vs 42.4% in the OECD and 35.4% in OECD unitary countries) while the share of tariffs and fees is in line with the OECD average. Local councils’ fiscal framework varies from one country to another but, in general, local governments are highly dependent on central/devolved government transfers.

Recent reforms in England have reinforced local taxation autonomy through the localisation of local council tax support and business rates retention schemes (BRRS). Despite new measures designed to strengthen local fiscal autonomy, most local governments face funding gaps for the financing of local service provision. The situation has been exacerbated by the COVID-19 pandemic generating additional financial pressures and increases in „cost of living“ affecting both citizens and local governments.

TAX REVENUE: The vast majority of taxes in the UK are set by the central government. However, in recent years, there has been an increase in the devolution of taxing powers to the three devolved assemblies, in particular to Scotland and Wales to improve the financial accountability of devolved administrations.

In Scotland, the two successive Scotland Acts passed in 2012 and 2016 devolved further fiscal powers to Scotland, including the ability: to set a Scottish Rate of Income Tax (10% of income tax from April 2016 onwards); to set rates and thresholds for income tax for non-savings and non-dividend income (from 2018); to vote on and administer new taxes to replace the UK Stamp Duty Land Tax (SDLT), the UK Landfill Tax and the Air Passenger Duty. The Scottish parliament will also be devolved half of VAT receipts collected in Scotland by 2019 (with homogenous rates within the UK), and the air passenger duty (still on hold). Following the Wales Act 2014 and Wales Act 2017, Wales’ own-source taxes (devolved) include the Land Transaction Tax (LTT), Landfill Disposals Tax (LDT) and Welsh Rates of Income Tax (WRIT). The WRIT is a surtax on existing PIT. In 2019, tax revenues represented roughly 17.5% of the Welsh Government’s total annual revenues. At present, Northern Ireland has no devolved taxation powers.

The taxing powers of local authorities have also been increased in recent decades. Overall, local tax revenues amounted to 1.8% of GDP and 7.0% of public tax revenues, well below the OECD average (7.2% of GDP and 32.3% of public tax revenues) and the OECD average for unitary countries (respectively 4.5% and 18.7%), but still a slight increase from 2016.

In England, Scotland and Wales, local council tax revenue mainly comes from the council tax and a share of the business rates. The council tax is a property tax based on the rental value of individual property and is paid by the resident, based on his or her situation, income level, and the property value. The business rates are levied on non-residential properties. The receipts of business rates are pooled and then redistributed by the UK government, in England, or the devolved nations on a per capita basis. Taken together, recurrent property taxes represented 1.8% of GDP (versus 1.0% on average in the OECD) and 16.8% of total subnational revenue.

Until 2013, the structure of local funding in England, Scotland, Wales and Northern Ireland was relatively similar but has become more divergent ever since then. In England, the Localism Act 2011 abolished central government capping of council tax increases instead setting an annual limit (3%) beyond which local authorities need approval by local referendum to increase the tax further. The subsequent Local Government Finance Act 2012 also introduced major changes in the English system. Local government taxing power increased in 2013 through the localisation of the council tax support scheme and of the business rates retention scheme (BRRS). The 2012 financial reform also abolished the national council tax benefit scheme, and introduced a local council tax support scheme (LCTS). Local councils in England were then responsible for designing their own tax support schemes for the active population - though they are obliged to provide a centrally determined (and largely protected) level of support for pensioners. Thereby, in 2016, 152 local authorities with responsibilities for providing social care services could, for the first time, raise additional funding through the council tax precept. When the BRRS was introduced in 2013–14, the proportion of the real-terms change in business rates revenues kept by the councils was up to 50%. However, since April 2017, the government has been piloting 100% retention of real-terms changes in business rates revenues in a number of areas of England. Although local authorities in England have increased their tax revenues, a 2021 report from the National Audit Office found that their overall revenue has decreased by 26% in real terms between 2010 and 2020 due to a reduction in central government grants.

In 2017, the Scottish Government introduced a series of Council tax reforms to make the tax more equitable. The reforms changed the way the tax rate was calculated for properties in the highest valuation bands and established a relief system for low and middle-income households.

In Northern Ireland, councils are legally required to set domestic and non-domestic district rates, which are a property tax similar to the Council tax. Due to the creation of new councils in 2015, following a local government reform, a District Rate Subsidy has been introduced for a four-year period for those ratepayers most affected by significant rises in their rates bill. In March 2021, an Independent Fiscal Commission for Northern Ireland was established by the Northern Irish Finance Minister and tasked with carrying out a comprehensive review (expected in spring 2022) of the case for increasing fiscal powers available to the Northern Ireland Assembly.

GRANTS AND SUBSIDIES: The devolved administrations of Scotland, Wales and Northern Ireland are all mainly funded by block grants from the UK government based on the Barnett formula established in 1978. Under this formula, the block grant in any given financial year is equal to the block grant in the previous year plus a population-based share (105% of its population-based share in the case of Wales) of changes in planned expenditure in England. It may also vary based on changes in the UK department expenditure limit, and takes into account a comparability factor. Changes in spending devolution and taxing power may lead to amendments to the Barnett formula. For instance, the formula for Wales has been amended in recent years in order to temporarily include a funding floor as well as to add a new needs-based factor (115% of equivalent funding per head in England) to the formula. In 2018, block grants from the UK government accounted for nearly 80% of the Welsh Government’s revenue. For the 2021-2022 fiscal year, the devolved administrations received an additional GBP 16.8 billion in block grants as part of the UK’s Covid-19 pandemic response.

At the local level, grants and subsidies are the main source of revenues, totalling 63% of total local revenue in 2020. The amount and type of grants received by local governments differs between the four constituent countries. In England, central government grants accounted for 23% of local authority revenue in the 2019/2020 fiscal year. The main grants received by local authorities in England are referred to collectively as Aggregate External Finance (AEF). AEF includes the Revenue Support Grant (distribution is based on the main resources available to councils) and certain specific grants (distributed by individual government departments, such as the Dedicated Schools Grant, Pupil Premium Grant, Local Council Tax Support Grant and Public Health Grant). In the past two decades, the central government has reduced the number of earmarked (or ringfenced) grants and replaced it with more general funding. The Public Health Grant makes up a large portion of remaining earmarked funding for local authorities, following the transfer of Public Health responsibilities to local authorities in 2013. A 2021 National Audit Office publication found that local authorities’ grant revenue has decreased by 52% in real terms between 2010 and 2020, due to cuts in the size and number of grants to local authorities from the UK government, which was partially compensated by the increase in local tax revenue.

In Wales, similarly to the other devolved administrations, the Local Government Finance Settlement determines how much of the funding provided for Wales will be given to local authorities annually. The Settlement consists of the Revenue Support Grant (non-earmarked) and non-domestic rates is allocated to councils by the Welsh Government according to a population-based formula. A joint Welsh Government and local authority working group, called the Distribution Sub Group is responsible for ensuring the formula is reviewed regularly. In 2017, grants from the Welsh Government via the Local Government Finance Settlement accounted for nearly 70% of local authorities’ revenues.

The Scottish Government provides a block grant to councils that makes up approximately 86% of their revenue. The grant is broken down into three constituent parts: General Revenue Grant (previously known as Revenue Support Grant), Non-Domestic Rates Income and Specific Grants to be used for specific services such as Pupil Equity Fund, early learning and childcare, and criminal justice support. This arrangement was updated in 2011 and gave councils greater control over their budgets. However, while in Scotland the Devolved Government ended ringfencing of local budgets (agreed with Local Authorities in 2007), the Scottish Government subsequently provided additional grants that were conditional on certain indicators (e.g. class sizes). Ringfencing is therefore gradually creeping back as national policy priorities are introduced to local government.

In Northern Ireland, transfers to councils through the Department for Communities include the “de-rating” grant (compensating for the loss of income from de-rated properties), the rates support grant (for councils with greater expenditure needs than revenues), and the transferred functions grant, which supports the functions that were transferred as part of local government reform to district councils.

OTHER REVENUE: Other revenues include fees and charges, especially in the education, transport, social care and cultural sectors (13.4% of local government revenue). Local governments can also levy congestion charges and possibly parking charges. They also raise revenues from the rent and sales of properties.

Subnational government fiscal rules and debt
2020	Dollars PPP / inh.	% GDP	% general government debt	% SNG debt	% SNG financial debt
Total outstanding debt (consolidated?)	4 469	9.8%	6.6%	100%	-
Financial debt	2 428	5.3%	3.8%	54.3%	100%
Currency and deposits	0	-	-	0.0%	0.0%
Bonds / debt securities	94	-	-	2.1%	3.9%
Loans	2 335	-	-	52.2%	96.1%
Insurance pensions	684	-	-	15.3%	-
Other accounts payable	1 357	-	-	30.4%	-

FISCAL RULES: Fiscal rules were first adopted in the UK in 1997 and later formalised in the Finance Act 1998 and the Code for Fiscal Stability. An independent Office for Budget Responsibility was also set up as the UK Fiscal Council, to address gaps in the national fiscal framework and also to scrutinize the on-going operations and spending of the devolved governments, in collaboration with country-specific fiscal commissions. Under the supervision of the Auditor General, the Scottish government is required to operate a balanced budget on a yearly basis. In England, best value performance indicators are developed annually to assess local governments’ performance, which is just one of the measures taken to increase spending efficiency and performance budgeting. In Wales, local authorities are required by law to have a balanced budget but they can borrow for capital projects.

DEBT: Each devolved administration has the power to borrow money to meet cyclical fluctuations in income and to fund capital expenditure. As with other aspects of devolved finance the extent and type of borrowing available varies between the devolved governments. The borrowing powers of Scotland, Wales and Northern Ireland have grown as devolution has progressed. From 2016, the Scottish Parliament has been granted new borrowing powers, including by issuing bonds. The Wales Acts 2014 and 2017 devolved greater borrowing powers to the Welsh Government and National Assembly for Wales. Currently, the Welsh Government can borrow up to GBP 150 million per year for capital expenditures and carry up to a total of GBP 1 billion in capital expenditure debt at any given time. It can also borrow up to GBP 200 million annually for current expenditures, with a limit of GBP 500 million indebtedness at any given time. Northern Ireland already enjoyed more borrowing powers than the other two devolved governments.

In England, Scotland and Wales, local governments are able to issue long-term debt to finance capital investments only (golden rule). Local government must follow the CIFPA Prudential Code, which sets indicators to be respected regarding affordability, sustainability and prudential rules. In Northern Ireland, borrowing is subject to approval by the Ministry of the Environment, and must aim at financing capital projects only. All local authorities in the UK, including some parishes in England and Wales, can apply for loans from the Public Works Loan Board (PWLB) to fund capital projects only. The PWLB is operated by the UK Debt Management Office and draws its resources from the National Loans Fund.

Overall, local government debt remains well below the OECD average (45.5% of GDP and 20.2% of public debt) as well as below the OECD average for unitary countries (14.5% of GDP and 10.5% of public debt). It is made up of financial debt (54% of financial debt stock), pension liabilities (15%) and other accounts payable (30%). Bond financing is very limited, 96% of the financial debt being made up of loans. However, in 2014, the Local Government Association set up a municipal bond agency (the UK Municipal Bonds Agency) aimed at reducing long-term capital costs for councils and increasing competition in the marketplace, and at giving councils more control over the interest rates they pay. In 2022, the Agency is set to issue its first sustainable bonds on behalf of local authorities.

TERRITORIAL MANAGEMENT OF THE CRISIS: Since the start of the COVID-19 pandemic, the devolved administrations have been responsible for much of the public health response – including the scope and duration of social restrictions, contact tracing and testing, and vaccination rollout – as well as the design and administration of grant-based financial support packages and property tax exemptions for businesses and third sector organisations. The central UK government has jurisdiction over these areas in England as well as broader responsibilities covering all of the UK related to PPE and vaccine procurement, travel restrictions, and furlough schemes.

Coordination between the UK government and the devolved nations in response to the COVID-19 crisis is widely seen as starting out well during the first wave (March-May 2020) but diverging and becoming more fragmented beginning in the reopening phase (May-August 2020) as restrictions were eased earlier in England than the rest of the UK.

Coordination between the UK government and the devolved nations has relied on both existing and newly established mechanisms. For example, the First Ministers attended Civil Contingencies Committee meetings (a pre-existing mechanism for coordinating responses to terrorism and natural disasters) while other Ministers from the devolved nations attended newly established ministerial implementation groups set up to respond to different aspects of the crisis. Local governments did not participate in national-level advisory bodies. In Scotland, three regional Resilience Partnerships were “activated”, bringing together representatives of police, fire, ambulance, local authorities, health boards, and other key stakeholders to coordinate, collaborate, and share information as part of Scotland’s pandemic response. This system is part of Scotland’s broader emergency response policy and existed pre-COVID.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: The devolved administrations have played a key role in the design and administration emergency measures to cope with the crisis. These measures have mainly taken the form of grant-based financial support packages and property tax exemptions for businesses and third sector organisations; local authorities have played a role in administering this support to households and SMEs in their jurisdiction. In Wales, for example, local authorities have been responsible for administering funds from the Economic Resilience Fund, which was established by the Welsh Government to provide financial support to SMEs impacted by the various lockdown measures. Local authorities across the UK also provided council tax and non-domestic rate holidays (deferrals) to households and businesses.

Between March 2020 and June 2021, the UK central government allocated an additional GBP 28.1 billion (GBP 16.8 billion in 2020-21 and GBP 11.3 billion in 2021-22) to the devolved nations via the Barnett Formula to help cover expenditure increases, particularly related to public health, public transportation, and local government support. Local authorities in England, received GBP 300 million in funding in 2020 to assist them in developing tailored outbreak control plans in collaboration with the NHS and other local stakeholders.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: Note that data for subnational finance in the UK does not include the devolved administrations, which are included under the central government sector.

Local government total expenditure increased by 7%, in real terms, in 2020 compared to 2019, reflecting the increased public health and social care spending at the local level in response to the pandemic. Within total expenditure, overall current expenditure increased by 10% in real terms while total capital expenditure declined sharply, by 18%, during the same time period. In response to the sudden and sharp expenditure increases generated by the health crisis, many local governments adjusted their capital budgets to transfer resources to their revenue (day-to-day spending) budgets in 2020. For example, 44% of local authorities in England reported using capital money intended for highway improvements to fund regular maintenance work on existing roads instead. Within capital expenditure, capital transfers from local governments declined by more than twice as much as local government direct investment (a 37% vs 15% decline) in 2020. The majority of additional local government expenditure in 2020 was directed towards social care and public health, particularly after June 2020 when the central government began providing funding to local authorities via the Test and Trace Support Service grant. Subsidies and current transfers from local governments were 415% higher in 2020 compared to 2019, highlighting the key role local governments played in distributing social and economic support to businesses and households as part of emergency response measures developed at higher levels of government but administered by local governments.

Local government revenue increased by 13% in real terms between 2019 and 2020, while general government revenue decreased by 8% during the same period. Out of all local government revenue sources, grants and subsidies increased the most (19%) followed by tariffs and fees (12%). These increases are reflective of the UK government and devolved administrations’ pandemic response policy which included considerable current transfers to local authorities to cover increased public health and social care expenditures. Local government tax revenue, mainly coming from Council tax, non-domestic rate, and District Rate (Northern Ireland) receipts, declined by 3% in real terms. Strict debt rules limit the ability of local governments in the UK to borrow only for capital projects and as a result increases to local government debt were minimal (1%) in 2020 compared to the previous year.

In July 2020, to assist the devolved administrations in responding to the crisis, the central government deviated from the Barnett Formula normally used to calculate annual block grants and instead opted for “guaranteed minimum funding” for the 2020/2021 fiscal year. This measure was taken to provide the devolved nations with more clarity and flexibility in terms of funding, enable them to respond quickly to changing circumstances, and to mitigate the usual time lag associated with allocating funding under the Barnett Formula. Furthermore, the devolved nations were allowed to spend this funding into the 2021/2022 financial year and the central government stated that no funding clawbacks would occur even if final allocations to local authorities in England were lower than anticipated, resulting in the devolved nations receiving more funding in 2020/21 than they would have normally received under the Barnett Formula.

ECONOMIC AND SOCIAL STIMULUS PLANS: As of march 2022, the UK economic recovery policy consists of two plans, one focused on economic growth (Build Back Better: Our Plan for Growth) and one focused on health and social care (Build Back Better: Our Plan for Health and Social Care). The economic growth plan is centred on reducing regional disparities through levelling-up and has three main pillars: infrastructure, innovation, and skills. Local authorities figure prominently throughout the plan, particularly within the infrastructure pillar where they are expected to play an important public investment role using proceeds from the Levelling Up Fund, the UK Shared Prosperity Fund, the Towns Fund and more. Additionally, the growth plan established the UK Infrastructure Bank to serve a key investor and lender to local authorities, particularly for large-scale climate-aligned infrastructure projects.

Local authorities, as the level of government with responsibility for administering public health and social care in the UK, are implicated in the health and social care plan but their role remains the same as prior to the crisis. The key features of the plan include a new UK-wide 1.25% Health and Social Care Levy earmarked for adult social care and based on National Insurance (pension) contributions, a cap on life-time individual contributions to social care, and an increase in the threshold below which individuals do not have to make social care contributions. The plan also calls for the creation of a white paper on health care reform, to be drafted with inputs from local governments.