CIPFA responds to the Chancellor’s comments on prudential borrowing in the comprehensive spending review

21-10-2010

Changes announced by the Chancellor yesterday to Public Works Loan Board (PWLB) lending will have a real impact on local authority borrowing costs at a time when local authority funding will be cut by 7.1% per annum. The warning comes from the Chartered Institute of Public Finance and Accountancy (CIPFA). 

Properly planned capital spending is crucial to councils’ achieving major savings. CIPFA welcomes the announcement that freedoms for local authorities under the Prudential Code will remain. However imposing additional borrowing costs at this time could severely hamper local authorities’ ability to reshape services, stifle self-financing schemes and place savings at risk.

The addition of a one percent premium to current gilt rates means that PWLB interest rates increase on average by 0.87%. In 2009/10 new loans were £5,080m (England, Wales and Scotland). The additional interest rate cost would have added £44m to local authority budgets, CIPFA finds.

This addition of a one percent premium to current gilt rates will also impact on the cost of ending the housing subsidy system, CIPFA says. The plans for the end of the housing subsidy system assume local authorities taking on additional debt to ‘buy’ their way out of the subsidy system. The current ‘national housing debt’ is £21,485bn and based on this figure the additional ongoing costs of subsidy buy-out as a result of the change would be £187m per annum, CIPFA calculations show.

CIPFA suggests that when the new self-financing arrangements come into effect, Local Authorities should be allowed to retain all their Right To Buy income so that they will be better able to afford to repay housing debt after their housing subsidy payments from Government have been removed.

Alison Scott, CIPFA’s Assistant Director, Local Government said:

‘The rise in PWLB rates needs to be balanced by an equal increase in the housing subsidy reform settlement discount rate otherwise there is an inconsistency in the financial assumptions.

These changes will have a real impact both on local authorities ability to invest in new capital projects and their ability to achieve the saving required by the CSR whilst protecting front line services’.

Ends

Contact: Guy Roberts/ Lindsay Machin / Chloe Forbes
CIPFA Press Office
t 020 7543 5712/5645/5787
e guy.roberts@cipfa.org.uk / lindsay.machin@cipfa.org.uk / chloe.forbes@cipfa.org.uk

Notes to Editors:

1. As at the end of 2009/10 in total PWLB principal o/s was £51,218m, of which £507m was variable rate.

2. In 2009/10 new loans to local authorities were £5,080m (England, Wales and Scotland).

3. The current ‘national housing debt’ on which subsidy is paid comprises two elements. The SCFR for each council and, for those councils in the early rounds of ALMO funding, the debts incurred under the ALMO programme which are held separately from the SCFR. In the 2010/11 housing subsidy determination the combined mid-year SCFR of all councils totals £19.201 billion. The total (rounds 1 and 2) ALMO debt is calculated as £1.855 billion, giving a total debt of £21.056 billion. The estimated total debt in the subsidy calculation at the end of 2010/11 is £21.485 billion

4. About CIPFA

CIPFA, the Chartered Institute of Public Finance and Accountancy, is the professional body for people in public finance. Our 14,000 members work throughout the public services, in national audit agencies, in major accountancy firms, and in other bodies where public money needs to be effectively and efficiently managed. As the world’s only professional accountancy body to specialise in public services, CIPFA’s portfolio of qualifications are the foundation for a career in public finance. They include the benchmark professional qualification for public sector accountants as well as a postgraduate diploma for people already working in leadership positions. They are taught by our in-house CIPFA Education and Training Centre as well as other places of learning around the world. We also champion high performance in public services, translating our experience and insight into clear advice and practical services. They include information and guidance, courses and conferences, property and asset management solutions, consultancy and interim people for a range of public sector clients. Globally, CIPFA shows the way in public finance by standing up for sound public financial management and good governance. We work with donors, partner governments, accountancy bodies and the public sector around the world to advance public finance and support better public services.