Havering Council is “likely” to formally request a capitalisation direction from the government in the next financial year if it finds itself in section 114 territory.
According to the authority’s latest forecast, it faces a £31.2m budget gap in 2024/25, which will rise to £77m over the next four years.
At a Cabinet meeting last week, members agreed to recommendations to help bridge Havering’s budget gap, which included delivering £12m in proposed savings, increasing council tax, and formally asking the Department for Levelling Up, Housing and Communities for a capitalisation direction.
A report, which was presented to Cabinet, outlined that Havering’s challenging financial position is due to underfunding from the government.
“Havering is against taking such a loan [capitalisation direction] as it would be costly and would not resolve the underlying funding issues.
“The council will do everything it can to close the budget gap but recognises that it is possible after all other avenues have been exhausted that this will be the only way to balance the budget. The council is therefore likely to request a capitalisation order from the government as approval will be needed prior to inclusion in any budget papers,” the report explained.
It added that: “If a section 114 notice does have to be issued, due to the council’s low unit costs, and other factors set out in the report, it will probably just lead to a capitalisation order anyway.”
A capitalisation direction has been taken out by several authorities in the past, such as Croydon and Peterborough, to help them balance their budgets. However, the directive means that authorities are required to borrow at Public Works Loan Board rates +1%, which are currently around 6.8%, and they must set aside the provision to repay the loan over 20 years.
Havering ‘on the brink’
Commenting on this decision, Ray Morgon, leader of Havering council, said: “The council is on the brink of financial crisis. This is not our fault but rather as a result of a number of factors beyond our control.
“This includes drastic cuts to our government funding, a significant spike in homelessness and housing need, coupled with unprecedented demand for both adults’ and children’s social care.
“This means we are now in a position where we cannot be certain of being able to put forward a balanced budget, which we have to do by law.”
According to Morgon, Havering’s Revenue Support Grant from central government has decreased from £70m in 2010 to just under £2m in 2023. This has resulted in the council making £160m of savings in the past 10 years.
The cabinet report also outlined that Havering’s reserve levels are also “very low” and are likely to be stretched even further unless the current year overspend is mitigated. At the 2022/23-year end, Havering had £8.1m of general reserves and £39.7m of general fund earmarked reserves, according to the report.
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