The Treasury and DCLG produce the majority of the LASFE forecasts using assumptions and judgements that we supply. These forecasts are then scrutinised by OBR staff and the Budget Responsibility Committee. We make judgements about the spending choices of local authorities (LAs) using the latest information from LAs’ annual budgets and other in-year spending returns, which we adjust in light of how outturns have compared with previous in-year returns. We also incorporate updated projections from Scotland and Wales on local taxes (e.g. non-domestic rates), which are used to finance spending that is covered in our LASFE forecast.
Some of the main components of current LASFE are also included in our receipts forecast, most notably council tax and business rates. (Current LASFE includes the 50 per cent of business rates that have been retained by English local authorities since 2013-14, all Scottish business rates and all Welsh business rates from 2015-16 onwards. The Government has announced that local authorities in England will be able to retain all business rates in the future, but that this will be accompanied by further changes to ensure that the policy does not add to borrowing. These have not yet been specified, so we have not included the effects of the full policy in our forecast yet. Some pilot schemes are under way, the effects of which have been factored into our forecast.)
We forecast LASFE by generating a forecast for total local authority income – from grants, council tax, business rates and so on – and then making a judgement about whether LAs in aggregate will spend more or less than that amount. A number of different forecasting models are used in producing each element of our current and capital LASFE forecasts. These are typically owned by the Treasury or DCLG, with the models and outputs quality assured by the OBR. Two of the main sources of financing for LASFE are council tax and business rates. As with all forecast models, it is important to remember that the forecast itself reflects the assumptions and judgements fed into the model – the responsibility of the BRC – rather than model itself.
Main forecast determinants
The main economic determinants driving the forecast are:
- our residential property forecast (including house prices and property transactions), which are used to forecast growth rates for local authority housing sales;
- our commercial property forecast, which is used as a proxy to inform our forecast for non-housing asset sales;
- our forecast for dwellings growth, which is factored into our council tax base forecast; and
- inflation, affecting business rates uprating (with the uprating factor switching from RPI inflation to CPI inflation in 2020, in line with the Government’s policy change, announced in March 2016).
The latest local government settlement (within DELs) is also a key driver, determining how much LAs need to self-finance their spending.
Main forecast judgements
There are 353 principal local authorities in England alone, so forecasting LASFE bottom-up by aggregating forecasts for each authority is not feasible. Our forecast requires significant amounts of judgement to be applied in light of the information available in annual LA budgets, in-year quarterly outturns and historical trends. These information sources can be revised substantially over time.
Our main judgements include:
- council tax: this involves judgements about growth in the council tax base (i.e. the number of taxable properties) and the rate at which council tax will rise over time. That in turn is based on judgements about the effects of central government policy – e.g. the referendum cap or social care precept in England in recent years – and historical trends. Since we assume that virtually all LA income is spent, these judgements are important for the level of receipts and spending, but are neutral for borrowing;
- local authority reserves: the financial position of each LA is different, and while some LAs will regularly run a large surplus and add to reserves each year, others will draw down some reserves to finance spending. Our LASFE forecast uses an aggregated estimate for the change in the level of LA reserves, based on the latest in-year data for the current year, and our judgement about spending pressures for future years; and
- interest receipts: while some information is available about the stock of LA investments, there is little detail on LAs’ rates of return or the maturity of investments. We therefore have to apply judgement to generate a forecast, drawing on recent interest rates available to LAs, our own interest rate assumptions and outturn trends.
- borrowing: some indication of the level of LA borrowing, and plans to spend it, is available in annual budgets for the year ahead. However, this can prove inaccurate, both about the size and the timing of the borrowing and spending. Again, some judgement is required to mitigate the risk of over- or under-estimating the level of spending financed by borrowing in each year; and
- capital expenditure financed from the revenue account (CERA): while the impact of CERA on the overall LASFE forecast is neutral (higher capital expenditure offset by lower revenue expenditure) it does impact on the split between current and capital and there is significant year on year variation. This was important when the Government’s fiscal targets were set in terms of the current budget balance (i.e. under the Coalition from 2010 to 2015).