Source · Select Committees · Housing, Communities and Local Government Committee
Recommendation 7
7
Deferred
Paragraph: 50
Using capital funding for revenue is unsustainable, risking asset sales and delaying reforms.
Conclusion
However, local authorities’ use of capital funding for revenue expenditure is not sustainable and at best it can only be a temporary solution to short-term financial pressures. We have concerns that the Government, if it does grant these additional flexibilities, may delay its engagement with the more fundamental reforms to the Financial distress in local authorities 43 funding system which we believe are urgently required. There is a risk that local authorities, in using these flexibilities, are drawn into fire sales of local assets, or unsustainable borrowing, in attempts to bridge their chronic budget gaps. This could drive poor value for money for local authorities and their communities, and exacerbate existing financial distress.
Government Response Summary
The government has launched a call for views on options for capital resource flexibility and will publish a response before summer recess, while affirming that existing exceptional financial support via capitalisation directions is only for specific local issues.
Paragraph Reference:
50
Government Response
Deferred
HM Government
Deferred
9. On 18 December, the Department launched a call for views to identify and develop options for the use of capital resources and borrowing to support and encourage invest-to-save activity and more flexibilities to use capitalisation without the requirement to approach Government. The options could be used to encourage and enable local authorities to invest in ways that reduce the cost of service delivery and provide more local levers to manage financial resources. In addition to the options proposed, the Department sought other ideas to be put forward, to ensure we have adequately considered all viable options. 10. The Government takes its position as the guardian of public funds seriously and there is a clear balance between providing greater freedoms to use capital resources, reserves and assets to alleviate local revenue pressures and incentivise efficiency, while avoiding creating unsustainable financial practices through misuse of flexibilities. The Department made clear that any additional flexibilities must have safeguards that are proportionate and effective at preventing misuse, while still placing decision-making at a local level. The Department is considering responses, following the close of the call for views on 31 January and will publish a response before the summer recess. 11. On 29 February, the Government published details of financial flexibilities agreed with a small number of councils that requested financial support on an exceptional basis – due to specific local issues that they are unable to manage themselves. This support is usually via a capitalisation direction, allowing revenue costs to be met through borrowing or through capital receipts, funded through asset sales. Using capital resource for revenue purposes is outside the normal rules of local authority accounting and, as such, ministers will only consider agreeing to this in exceptional circumstances. As a result of this action by Government, we anticipate that all councils will be able to set a balanced budget and continue to deliver vital services for their communities.