Councils spending more on servicing debt, NAO highlights

15 Jun 16

Debt servicing costs are increasing across local government, and now account for at least 9.9% of revenue expenditure in a quarter of single-tier and county councils, according to the National Audit Office.

In an examination of local government capital expenditure and resourcing, auditors found that councils in England have maintained their overall capital spending levels since 2010-11, despite the government’s austerity drive.

This was because there had been less pressure on funds to support capital expenditure, as well as the use of prudential borrowing powers.

Revenue spending power – including government grant and council tax – fell by 25.2% in real terms from 2010-11 to 2015-16, but capital grants to authorities increased by 0.2% over the same period, according to the Financial sustainability of local authorities: capital expenditure and resourcing report.

Overall capital spending by authorities rose by 5.3% in real terms between 2010-11 and 2014-15, but this increase was not spread evenly, as almost half (49%) reduced their capital spending.

Auditors said funding cuts mean debt-servicing costs are increasing as a proportion of revenue spending, presenting a challenge to long-term investment. Mandatory capital costs to revenue fell by 4.3%  in real terms from 2010-11 to 2014-15. However, over the same period revenue expenditure fell by 14.7%. As a result, capital costs to revenue are now a more significant element.

Average debt servicing costs across all authorities was 7.5% of revenue spending in 2014-15, but this rises to 9.9% or more for the quarter of councils who are paying the most. This is up from the 6.8% median average in 2009-10 and 2010-11 for single tier and county councils, and 8.3% for the upper quartile.

Costs for the top quartile of metropolitan districts rise to 11.2%, which the NAO said were “particularly exposed”.

Auditor general Amyas Morse said local authorities had acted prudently and maintained overall capital spending levels, but debt servicing accounts for a significant share of revenue, which was likely to increase.

He called on the Department for Communities and Local Government to develop a deeper understanding of the capital issues local authorities face, as its current assurance, based on financial sustainability at authority level, did not identify trends and issues across the sector.

“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,” he added.

The report also called for a review of the current capital framework to ensure it is likely to lead to decision-making that appropriately considers the long term given expected financial pressures, with CIPFA urged to consider the long-term implications of decision-making in its planned review of the prudential code.

A CIPFA spokesman said the institute had been working closely with the NAO on this topic and would be considering its recommendations during the review.

“The NAO report provides valuable insight into the current state of capital spending, particularly during this time of austerity. It demonstrates the real need for affordable, prudent and sustainable medium term financial planning,” he said.

The Local Government Association said the NAO recognised the good work that councils have been doing to manage their capital investment programmes.

“Councils can only borrow money to fund capital expenditure and have been working hard to try and minimise the cost of paying interest on outstanding debts,” he said.

“However, the cost to local authorities of paying off debts early has increased after rule changes by the government’s Public Works Loans Board and this has made it harder for them to benefit from low interest rates.”

Public Accounts Committee chair Meg Hillier said there was a risk that the cost of servicing borrowing put pressure on funding for vital services. “Another risk is councils’ focus on investment to bring in income may skew their investment plans away from maintaining current assets or that important capital work is not carried out elsewhere,” she added.

According to the NAO, most service areas saw an increase in capital spend from 2010-11 to 2015-16 with the exception of culture and leisure, where spending fell by more than one fifth (22%). This included spending reductions of one third (33%) on open spaces and over half (60%) on libraries.

A Department for Communities and Local Government spokesman said the NAO recognises the system is working and capital spending increased by 5.3% in real terms over the last five years.

“This shows that councils are continuing to support infrastructure projects whilst at the same time finding savings and maintaining high public satisfaction with services,” he added.

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