The government is considering more flexibilities around the use of local authorities’ capital receipts to help councils meet general budget pressures.
On the same day as the publication of the provisional local government finance settlement, the Department for Levelling Up, Housing and Communities (DLUHC) released a “call for views” on new local authority flexibilities to use capitalisation without the requirement to approach the government.
The engagement with councils outlined three new options: to provide greater flexibilities on the use of capital receipts, including the scope to meet general budget pressures; to increase flexibility to use capital receipts and borrowing to finance the costs of transformation and efficiency projects; and potential additional flexibilities where the proceeds relate to the sale of investment properties.
Under the previous rules, councils were restricted from using money received from asset sales or borrowing to fund revenue costs. This is due to capital receipts being considered a “one-off”, while borrowing creates a liability.
However, the proposed first option means that local authorities would be allowed to capitalise general cost pressures and meet these with capital receipts. This would support local authorities with immediate financial pressures and provide a period in which the authority could put in place measures to reduce costs.
This comes as many local authorities have called on the government to provide additional funding for the upcoming financial year to deal with the rising demand for council services and inflationary costs.
DLUHC’s “call for views” stated that it has set out these options to “encourage and enable local authorities to invest in ways that reduce the cost of delivery and provide more local levers to manage financial resources”.
The department stated that the additional flexibilities are not intended to replace the Exceptional Financial Support process for local authorities. However, DLUHC explained that where councils face cost pressures that are not a consequence of local failure, further freedoms to use capital resources allows local management of budget pressures and facilitates investment that reduces future costs.
Avoiding more s114s
David Green, director at advisor Arlingclose, told Room151 that the “call for views” is looking to “widen the scope of one-off expenditure”.
“Through this ‘call for views’ the department is recognising that there are other one-off costs that aren’t capital expenditure, but there is still the idea of restricting capital receipts for one-off costs,” he said.
Green suggested that many authorities are struggling to balance their revenue budget but have capital receipts or assets that they can sell. Hence, he stated that these potential flexibilities are “undoubtedly a good thing for councils” as they give local authorities more “options” when setting their budget.
“The department doesn’t want any more section 114 notices to be issued. To some extent, all the notices that have been issued so far have been to do with particular local issues, however, Nottingham’s recent issuance is probably a bit borderline on that.
“So, I think the government is worrying that the next ones will be genuine cost pressures.”
If the department follows through on these additional flexibilities it is a move signalling an increased “trust” in local authorities from the government, Green explained.
Selling investment assets and PWLB discount rate
The second option outlined in the “call for views” is an extension of the current direction [implemented in 2016 to continue to 2024/25] to allow authorities to borrow to finance the revenue costs of eligible transformation projects, as well as use capital receipts.
Under the third option, local authorities would be allowed additional flexibilities for the use of the proceeds of selling investment assets. This would allow local authorities to use the assets to fund financial pressures but also give them access to greater flexibilities, which could include increasing reserves where they are demonstrably low and repaying debt.
In addition, in the “call for views”, DLUHC stated that it is “interested in understanding whether a reduced interest rate for borrowing from the Public Works Loan Board for invest-to-save projects would further enable invest-to-save projects”.
However, the document highlighted that the discount offered would not be more than 40 basis points on prevailing rates, which is currently offered for Housing Revenue Account borrowing.
DLUHC is inviting local authorities, sector representatives and other stakeholders to provide their views on these proposed options until 31 January 2024.
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