Blog 14th September 2021

Blog 14th September 2021

In this blog I consider the government’s proposals for ‘improvements’ to the capital finance system in English local government and conclude that if they are implemented it will be a dark day for local government. I also consider the remarks of Therese Coffey about Universal Credit.

When I was a Finance Director there was a system called ‘credit approvals’ under which local authorities were not allowed to borrow money for any capital purposes unless they had the specific permission of central government. This approach prevented councils from investing in their services and communities leading, among other things, to a £19billion backlog of major repairs to council housing; and to a perverse approach to evaluating capital projects that prioritised political projects at the expense of projects that could pay for themselves through securing efficiencies or savings.

As Conrad Hall, Director of Finance at Newham Borough Council told the ‘Public Finance’ magazine:

“During the capital control era, you saw a lot of potentially sub-optimal arrangements – for example, sale and leaseback arrangements – because it avoided the council counting that spend against their capital controls.”

The Local Government Act of 2003 recognised the problems that had been created by ‘credit approvals’ and introduced the ‘Prudential Borrowing’ system from 2004. This puts councils in the same position as anyone else – able to borrow as much money as they wish if they can afford it. It has enabled councils to invest in schemes that produce a financial return such as maintenance of buildings, replacement of obsolete vehicles and equipment and new information technology. The new system has been welcomed and used across the political spectrum. Apart from the return to the ‘borrowing cap’ in the housing revenue account between 2012 and 2018, prudential borrowing has also been supported in central government.

Until now!

China Walk Estate in Lambeth. Before 2004 capital controls led to a massive backlog of major repairs in council houses.

On 28th July 2021, the Ministry of Housing, Communities & Local Government published a policy paper called ‘Local authority capital finance framework: planned improvements’. This paper states that:

“The evidence is clear that the system is failing in some places and this document sets out planned actions to address this. The government will continue to monitor the sector for signs of significant improvement and will make further changes to how the Prudential System works if problematic behaviour continues…. We are reviewing the statutory powers for capping borrowing and considering how and when we will apply these to protect local financial sustainability.”

The Local Government Act 2003 contains a clause allowing the secretary of state to impose caps on councils ‘for the purpose of ensuring that the authority does not borrow more than it can afford’. Controls could therefore be introduced without the need for any primary legislation.

The policy paper appears to be in response to the lack of financial resilience in many councils, the extent of borrowing to fund commercial investments by some councils, and criticism of the Ministry of Housing, Communities & Local Government by Parliamentary committees that feel that the Ministry has too little control over local authorities.

The policy paper outlines a model with “three lines of control”, via which it proposes to strengthen the capital system:

• Detect and monitor - Data provided by local authorities – as well as that from audits and reporting – is to be monitored by government and other bodies with regulatory functions. Greater transparency would allow authorities to be held to account locally.
• Manage - Support and regulation from central government will help to improve local authority decision-making as well as processes, capability, and governance. Government actions would directly address local mismanagement, through either direct engagement or strengthening of local authority controls and capabilities.
• Prevent - The prudential framework will be used to prevent risk by stopping certain activities and driving good practice. Central control through legislation and guidance will change the bounds of what is permitted.

Terry Collier, Director of Finance at Spelthorne Borough Council told the ‘Public Finance’ magazine that the government’s proposals:

“Would effectively mean that central government would be making decisions about how much they feel councils should be allowed to borrow, which is how the system used to be.”

The Houses of Parliament. Who is best placed to take decisions in Northumberland or Cornwall? Those in the Westminster / Whitehall bubble or those who are on the ground in Northumberland or Cornwall?

The Prudential system already requires councils to calculate each year how much they can afford to borrow so it is not clear to me what would be gained by imposing this extra layer of bureaucracy on local government. It would clearly be contrary to the principles of ‘localism’ that we are told informs the government’s approach to local government. In my view it is symptomatic of the culture of Westminster and Whitehall that assumes that anyone outside their bubble is stupid and needs detailed and bureaucratic supervision. This approach stifles innovation, provides perverse incentives and depresses performance. If the government goes ahead with these proposals it will be a dark day for local government.

The government’s policy paper can be viewed by clicking here: https://www.gov.uk/government/publications/local-authority-capital-finance-framework-planned-improvements/local-authority-capital-finance-framework-planned-improvements

My briefing paper on how capital finance works in local authorities in England can be viewed or downloaded by clicking here.

The latest briefing papers that I have published are on Local Government Finance, and Local Housing Companies and Development. To download your copies, please click the links below:

• Introduction to Local Government Finance (revenue)
• Introduction to Local Government Finance (capital)
• Introduction to Local Government Finance (technical)
• Local Housing Companies and Development

This week, Therese Coffey, the Secretary of State for Work & Pensions, has been in the headlines because of her remarks about Universal Credit. At the start of the coronavirus pandemic, the UK government introduced a £20 a week uplift to Universal Credit that they are now proposing to remove, despite criticism that Universal Credit claimants still need the cash.

Therese Coffey’s controversial remark was that:

"I'm conscious that £20 a week is about two hours' extra work every week.”

This remark seems to suggest that Universal Credit claimants would find it easy to find and carry out some additional work. However, I don’t think this is the case because:

• Many claimants are already working considerable hours in multiple jobs. In these cases, the problem is not a lack of work but work that offers not enough pay.
• Many claimants would like to work more hours but cannot find enough work.
• Many claimants are unable to work because of their own disabilities, their responsibilities as unpaid carers or for other reasons.

According to the BBC there are 5.9million people claiming Universal Credit compared with 3million before the pandemic and that 40% are in work.

And the Resolution Foundation calculates that a Universal Credit claimant would have to work an additional nine hours to make up for the loss of £20 because of low levels of pay and the interaction of the tax and benefits systems.

We have a wide programme of webinars on subjects of interest to those who care about public services including local government and housing. For further information or to make a booking, please click here.