Local authorities’ investments fell by £4bn in the third quarter of the 2022/23 financial year, which could be due to “financial stress” experienced by councils amid high inflation, closer scrutiny and backdated pay.
According to the latest statistics from the Department for Levelling Up, Housing and Communities (DLUHC), councils’ total investment of cash balances fell from £62bn at the end of September 2022 to £58bn at the end of December 2022.
This is not a trend seen in previous years, in the third quarter of the 2021/22 financial year local authorities’ total investment balances increased from £60bn in September to £61bn in December. Also, in the third quarter of the 2020/21 financial year, there was a slight rise in investment balances from £51.4bn in September to £51.8bn in December.
Room151 Conferences – Treasury, Pensions, Housing, Strategic Finance
Paul Dossett, partner and head of local government at Grant Thornton, told Room151 that during the period of this data (September 2022-December 2022), the 2022/23 pay settlement was agreed and therefore all authorities would have backdated pay to all staff, which will have reduced their cash balances.
“The trend for reducing balances in 2022/23 could be the financial stress being seen across the sector rather than related to capital investment as reserves are being used,” he said.
The most significant factors are likely to be the cost of borrowing and the wider inflation cost of capital projects. As well as increased scrutiny of local authorities’ investments by a range of stakeholders including DLUHC, local politicians, CIPFA and the audit community.
Local government investment ‘under pressure’
However, Dossett did highlight that local government investment is “under pressure”.
“The most significant factors are likely to be the cost of borrowing and the wider inflation cost of capital projects.”
“As well as increased scrutiny of local authorities’ investments by a range of stakeholders including DLUHC, local politicians, CIPFA and the audit community, alongside the ongoing impact of regulatory changes including those relating to out of borough commercial investments, and not borrowing solely for yield,” he added.
Dossett’s point was echoed by Michael Hudson, president of the Society of County Treasurers, who told Room151 that councils’ investments may have decreased because of high inflation and cost of borrowing.
He said: “I suspect with uncertainty over budget setting and grant awards, alongside the rise in costs has meant we saw less borrowing. Also, I suspect with the additional grants still in the system from Covid-19 there is still scope for more internal borrowing rather than the market.”
£4bn is a significant fall in investment balances and there will likely be a further fall in March as council tax receipts dry up and unspent Covid-19 grants are repaid.
A ‘two-fold’ problem
Hudson, who is also chief finance officer at Worcestershire County Council, went on to suggest that the issue around local authorities’ investments is “two-fold”.
“We (s151’s) have been needing to draw on reserves to fund the impact of inflation. Also, the uncertainty of capital schemes and future funding meant we are borrowing less and drawing down internal resources, whilst borrowing remains high.”
According to the data from DLUHC, councils’ long-term borrowing at the end of December 2022 was £132bn, which is an increase from £131.5bn at the end of September 2022.
David Green, strategic director at Arlingclose Limited, added that councils’ investment balances could fall even further in March 2023.
He told Room151: “£4bn is a significant fall in investment balances and there will likely be a further fall in March as council tax receipts dry up and unspent Covid-19 grants are repaid.”
—————
FREE weekly newsletters
Subscribe to Room151 Newsletters
Room151 LinkedIn Community
Join here
Monthly Online Treasury Briefing
Sign up here with a .gov.uk email address
Room151 Webinars
Visit the Room151 channel
