The Local Government Act 2001, as amended by the Local Government Reform Act 2014, provides the legislative basis for the local authority budget process. It is a matter for each local authority to determine its own spending priorities in the context of the annual budgetary process having regard to both locally identified needs and available resources. The elected members of a local authority have direct responsibility in law for all reserved functions of the authority, which includes adopting the annual budget, and are democratically accountable for all expenditure by the local authority.
Local authorities are required to adopt budgets which are sufficient to meet the expenditure arising in the year in accordance with the terms of section 10A of the City and County Management Act 1955, as inserted in that Act by section 113 of the Local Government Act 2001. Local Authority budgets must be balanced, sufficient to defray the expenditure necessary to maintain a reasonable standard of public services and must provide for payment of any sums which the local authority is bound to pay. The adoption of a balanced budget is probably the single most important duty that the elected members are called upon to carry out each year. To achieve that balance, the members must make informed and necessary choices to balance the level of service provision with the available income. Note 16 in the Annual Financial Statements of local authorities shows the difference between the adopted budgets and the actual outturn in respect of both expenditure and income.
In the context of the budget process, similar to any organisation, local authorities' levels of expenditure and income are forecast based on informed judgments, assumptions and decisions. Section 104 of the Local Government Act 2001 sets out the requirements on local authorities governing additional expenditure, which means the spending of money or the incurring of a liability not provided for in a local authority budget. Section 104 (2) states that "at any time after it has adopted a budget a local authority may, following a proposal under subsection (3) or otherwise, by resolution authorise the incurring of additional expenditure".
The Local Government Audit Service provides a professional, independent audit service to local authorities. In the annual audit reports of local authorities there is a report on any spending in excess of the amount budgeted, along with confirmation that the overspend has been approved by resolution of the members in line with Section 104 (2).
In order to enhance the financial management and audit control systems in local authorities, an audit committee, with both councillor and expert external membership, is now in place in each authority. The functions of an audit committee are to review financial and budgetary reporting practices and procedures within a local authority, foster the development of best practice in the internal audit function, review auditors’ reports and special reports and assess follow-up action by management, assess and promote efficiency and value for money, review risk management systems and make such recommendations to the authority as the committee considers appropriate in respect of such matters.