Given the way that we forecast it, there are two broad potential sources of error for self-financed local authority spending: errors in forecasting the income streams that finance this spending, such as council tax
and retained business rates, and errors in our assumptions about how much authorities will spend relative to their current income by adjusting their current reserves or the amounts they set aside to repay debt. The first source of error does not directly affect net borrowing, since the errors on the income and spending are offsetting, but any errors in our assumptions about movements in current reserves or monies set aside to repay debt will have a direct effect on net borrowing, as they reflect local authorities spending a higher or lower proportion of their income.
Our earlier forecasts assumed that local authorities would ease the downward pressure on their spending from tighter financial settlements by drawing down reserves. This was consistent with plans shown in local authorities’ own budgets. But they repeatedly surprised us by underspending against their budgets and adding to reserves, meaning from our March 2013 forecast, we began to include an assumption for how much local authorities would add to (rather than running down) their stock of reserves. More recently, they have stopped adding to reserves, leading to higher spending than expected: English local authorities drew down from their stocks of reserves by £0.4 billion in 2015-16 and £1.3 billion in 2016-17. Our latest forecast assumes local authorities will draw down from their stocks of reserves in each year up to and including 2020-21.
Current LASFE has also been subject to significant classification changes – notably the introduction of 50 per cent business rates retention in England in 2013-14 – which also explain why our forecasts since December 2012 have been higher than our earlier forecasts. Forecasts from March 2017 onwards also include the pilots for full business rates retention, which boost current LASFE spending for the two-year period from 2017-18 to 2018-19.
There have also been a number of upward revisions to our recent council tax forecasts as a result of government policy changes. These changes relate to the government permitting larger council tax increases for upper-tier authorities (those that are required to fund social care services via the adult social care precept). This policy was originally announced in the 2015 Spending Review, but there have been further changes at subsequent fiscal events. Our March 2018 forecast also incorporated changes to council tax referenda limits (the maximum amount authorities can increase council tax on the previous year with triggering a local referendum), as per the levels announced in the 2018-19 local government finance settlement.
On the capital side, errors in forecasts tend to arise as a result of the nature of capital projects, where spending is often uneven across years, with history suggesting that the level and timing of expenditure is subject to considerable uncertainty. There is also considerable uncertainty over the source of finance for local authority capital spending, with spending possibly being financed by central government grants, local authority income or borrowing. Again, forecasts of capital LASFE spending from March 2017 onwards include the effect of business rates retention pilots in 2017-18 and 2018-19. The significantly higher forecast for capital LASFE in November 2017 reflects recent outturn data, which showed markedly higher capital spending financed by borrowing in 2016-17 than we had forecast in March 2017. While we assume that the most recent high levels of spending will not be sustained across the full forecast period, spending is assumed to remain higher across the forecast period than we assumed in March 2017. Our forecast for English local authorities’ use of prudential borrowing was further increased in March 2018.