Local authorities could face further intervention by central government if new changes to investment and treasury codes fail to dampen council borrowing levels, according to a senior Whitehall official.
Gareth Caller, head of the local government finance unit at the Ministry of Housing, Communities and Local Government (MHCLG), raised the prospect of more action while speaking at Room151’s LATIF North conference in Manchester last week.
He said that concerns from ministers and Parliament over the investment risks being taken by local authorities had prompted the recent revision to the department’s investment code.
“Interest by ministers in local authority commercialisation is not going to go away, and we are going to be expected to monitor the impact of the updated codes — both the MHCLG code and the CIPFA codes,” Caller said.
“I can’t say what will happen if local authority borrowing continues to increase at the current rate.
“I am sure, even though there is no intention to go there, that ministers will ask for additional things to be done.
“What we have tried to do is use the codes to signpost the behaviours that ministers expect to see and leave local authorities to implement them in the way that best suits their local circumstances.”
Caller said that the department had revised the investment code — requiring greater transparency on investment decisions — partly because local authority borrowing impacts on public sector net debt.
He said: “When last year local authorities borrowed an additional £3.8bn, that was a £3.8bn increase in net debt.
“That was £3.8bn less that the chancellor had available to distribute as funding across the board at the last budget.
“So, local authority borrowing does have a real world impact in the overall quantum of funding that is available to government.”
In addition, he said that concerns have been raised that councils investing in particular asset classes can drive prices up, creating a bubble.
“Now, I don’t think we have seen any evidence of this — and we have looked — but it is something that we always need to be mindful of and ministers will always ask central government to look at,” he said.
However, Caller said that the code revisions had been framed in a way to allow councils as much freedom as possible to use their own judgement on investment and borrowing decisions.
“We were very clear that we did not want to go back to a pre-2004 framework where central government tightly controlled borrowing. We firmly believe that is poor value for money, it is hugely inefficient and doesn’t protect local authorities from risk.
“But, at the same time, we do believe that it is really important that local authorities demonstrate how they are assessing risk, and demonstrate in a way that is understandable to those who sit outside the local authority sector and don’t really understand the framework or the options that local authorities have.”
New principles on proportionality included in the code were triggered by some smaller authorities taking on huge sums of debt relative to their size, Caller added.
“We had concerns that those authorities who were doing that were effectively assuming that government stood behind their risk.
“That is not the statutory position, and it is not a position we want to encourage.
“What the legislation says is that effectively it is council tax payers that have to make good any deficit in those assumptions, not central government. We want people to remember that.”
Also speaking during the session, David Chefneux, associate director at treasury adviser Link Asset Services, said: “Proportionality is without doubt the key consideration. That is a question of judgement.
“Different authorities will have different views. That is leading back to risk appetite. Due diligence: When you are considering these opportunities, you need do the due diligence, get security and collateral put in place, make sure members are aware, and go ahead if it ticks all those boxes.”
