Local Authority Expenditure Reactions to Losses in Grant Aid: The Case of the Metropolitan District Councils

Abstract

This paper presents the results of an initial investigation into the expenditure responses of a group of local authorities in England to a loss in grant income. The Government has restricted grant aid to local authorities in an attempt to secure restraint in the expenditure of these authorities, but (until recently) local authorities have had the opportunity to make good any loss in grant income by increasing local taxes. A central issue is, then, how much restraint in local authority expenditure is secured by a given reduction in grant aid. Reduction in grant aid is measured in this paper in terms of its impact on the local tax rate (and the average local domestic tax bill) if a local authority is to maintain the real value of its spending. An incremental budgeting type model is developed and the empirical work is concerned with the financial years 1982–1983 and 1984–1985. It is found that in the later year local authorities have been less willing to reduce their expenditure in the face of loss of grant aid. It is also found that the response of the local authorities has become more political in the sense that a statistically significant difference has developed between the responses of Labour and those of non-Labour controlled councils.