Government admits it 'must improve understanding of capital issues'

 

The Government has admitted it needs to improve its understanding of the capital resourcing issues facing English councils, the National Audit Office (NAO) has said.

In a new report, the NAO says the Department for Communities and Local Government (DCLG) ‘has limited insight into broad changes in authorities’ capital resourcing and spending as well as associated risks’.

”Local
Communities secretary Greg Clark

It says DCLG recognises ‘there is room for improvement in relation to its understanding of capital in future spending reviews’.

The issue has come to the fore recently due to Treasury plans for the 100% local retention of business rates by 2020, which has thrown up concerns over capital revenue divisions in the local government sector.

The NAO observed that since 2010-11, councils have faced less pressure on resources to support capital expenditure, compared to revenue. Their revenue spending power fell by 25.2% in real terms from 2010-11 to 2015-16, while capital grants to councils (excluding education) increased by 0.2% from 2010-11 to 2014-15. 

Councils’ overall capital spending increased by 5.3% in real terms overall between 2010-11 and 2014-15, although nearly half (49%) of authorities reduced their capital spending.

NAO head Sir Amyas Morse said: ‘Local authorities have acted prudently and maintained overall capital spending levels, but the cost of servicing debts accounts for a significant share of revenue spending and this is likely to increase.

‘The Department therefore needs a deeper understanding of the capital issues local authorities face. 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 difference in transport spending was stark, with revenue spending on transport falling by 21.5%, while capital spending increased by 13.8% from 2010-11 to 2014-15.

According to the report, councils’ overall capital spending increased from 2012-13 ‘because of a rise in spending on transport, planning and development, and housing’, coinciding with increases in capital grants for transport and highways, and for local growth.

Transport and housing were the two areas of council spending where capital expenditure exceeded revenue, with £3.6bn capital spending on transport and £2.6 revenue spending in 2014-15.

The report says authorities face a growing challenge to continue long-term investment in their existing assets as capital activities are increasingly focused on ‘invest to save’ and growth schemes that cover their costs or have potential to deliver a revenue return.

The NAO says many areas of authorities' asset management programmes do not meet these criteria and are seen as a lower priority.

In 2014-15 English councils had a gross external debt of £58.7bn.

The report says councils’ debt servicing costs have grown as a proportion of revenue spending, with a quarter of single-tier and county councils spending the equivalent of 9.9% or more of their revenue expenditure on debt servicing.

 

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