OREANDA-NEWS. Fitch Ratings says in a special report that the institutional framework (IF) for English local authorities (LAs) is assessed as strong. This is based on vertical equalisation funding, a robust prudential regulatory regime, a stable inter-governmental relationship, relatively good transparency including financial forecasts, sound protection for creditors, and adherence to international accounting standards. The English subnationals operate within a predictable and supportive IF.

LAs are funded by a combination of central government grants, council tax, business rates, and fees and charges from certain services. Only about a quarter of the total amount that LAs spend is raised locally. LAs have no tax-setting powers except to raise council tax rates and are entitled to a share of the increase in business rates. Councils begin with a 50% local share of business rates and retain any new growth in revenue they generate on their share. In October 2015, the Chancellor announced that LAs will be able to retain 100% of business rates proceeds by 2020.

The main services delivered by LAs are primary and secondary education, strategic planning, transport planning, passenger transport, highways, fire, social services, housing, libraries and waste collection and disposal. In London, each of the 32 boroughs is a unitary authority, but the Greater London Authority (GLA) provides London-wide government with responsibility for services such as transport and police. Since 1 April 2013, LAs have also been responsible for public health, previously handled by the National Health Service (NHS).

Devolution to English LAs has increased, and negotiations between the government and LAs, known as 'devolution deals', ultimately seek to transfer budgets and/or financial powers to LAs. By September 2015, the government had received 34 proposals from cities, towns and counties for greater control of public spending. In October 2015, the Chancellor announced plans to devolve new powers to local areas to promote growth and prosperity.

Since 2004, a prudential borrowing system has existed, enabling LAs to borrow without central government approval as long as they maintain certain prudential ratios. Most LAs' borrowing is through the Public Works Loan Board (PWLB). This is a statutory body operating within the UK Debt Management Office, which lends to LAs at preferential rates, and manages the loans and collects the repayments.

LAs have a statutory duty to balance their budgets. The sum of revenues, grants, contingencies and borrowing must equal total operating and capital costs, and debt service costs after adjusting for transfers to/from reserves. LAs have a statutory duty to maintain a level of unallocated reserves that are sufficient to manage financial risks. This framework aims to reduce spending in step with any decline in income, thereby making it difficult for LAs to fail financially.

The financial framework in which English LAs operate is transparent. However, the UK is one of the countries in western Europe where the analysis of the complete financial information from the public accounts of LAs is, in Fitch's view, the most complicated. Therefore, it is difficult to compare the budgetary performance of local and regional governments, as well as their fiscal flexibility across countries.