Latest Public Sector News

15.06.16

Tight budgets mean long-term council investment no longer a priority

Financial strategies across councils have started to shift from managing assets to generating savings, meaning schemes that do not fall under an ‘invest to save’ criteria are being written off as low priority – even if they are needed to maintain existing assets.

In a scathing report on local government finance, the National Audit Office (NAO) determined that, amongst other trends, councils are increasingly unable to focus on long-term investment in their existing assets if that does not deliver direct savings.

While total spending by councils has remained stable, capital activities are increasingly moving towards growth schemes that cover their own costs or have the potential to deliver a revenue return.

“A variety of decisions by authorities, including changing minimum revenue provision charges and reducing long-term maintenance spending, have prioritised the short term over the long term in their judgement of what is prudent,” the report said.

“In particular, authorities told us they are delaying long-term investment in capital works on existing assets. This raises concerns about the possible degradation of authorities’ assets and pushes the costs of the maintenance backlog into the future.”

Since 2010-11, councils’ spending power, including central grants and council tax, fell by over 25% in real terms. And although capital spending has increased by over 5%, this is uneven across local authorities: almost half of them have actually reduced capital spending in real terms.

The most hard-hit areas of spend were culture and leisure, with 33% less spent on open spaces and 60% less on libraries.

Local authorities have also seen their debt servicing costs grow proportionately to their shrinking revenue resources. They have thus turned to a range of revenue areas to repay debt, including government grants, capital receipts and prudential borrowing.

One-quarter of single-tier and county councils, for example, now spend 10% or more of their revenue expenditure just on debt servicing, with metropolitan district councils being “particularly exposed”.

But the County Councils Network (CCN) seemed hopeful about counties’ performance in “a difficult era of dwindling resources and markedly less funding”, with its member councils having shown “ambition to continue capital investment programmes” and having the “vision and innovation to drive growth”. Indeed, the NAO report showed counties increased their capital spending over the last five years compared to other authority types.

But a CCN spokesman also acknowledged that many members “say they are facing substantial gaps in funding for infrastructure over the coming years”, which “severely” hampers planned growth.

Amyas Morse, head of the NAO, also noted that local authorities as a whole have “acted prudently and maintained overall capital spending levels”, but said the cost of servicing debts currently accounts for a “significant share of revenue spending” – a trend likely to increase.

“The Department [DCLG] therefore needs a deeper understanding of the capital issues local authorities’ face,” he added. “Without an understanding of broader trends it will not be well-placed to anticipate risks to value for money as authorities come under greater financial pressure.”

The NAO recommended that the DCLG work with CIPFA to analyse issues around its understanding of capital expenditure and resourcing based on existing data, as well as look at how the data it publishes could be “made more relevant” to councils. CIPFA should also consider the long-term impact of decision-making in its planned review of the Prudential Code – a recommendation it has accepted.

The department should also engage with the Treasury and councils to investigate “the causes of and any possible systemic risks resulting from the build-up of investment cash held on deposit by local authorities”, the NAO said.

Amongst a series of other recommendations, the auditors said the DCLG must investigate to what extent councils are reducing their asset management programmes, looking at what impact this can have in the long term.

 

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