Responding to COVID-19: insight, support and guidance
This week’s budget was a confident debut for Chancellor Rishi Sunak. A diverse package of fiscal changes were announced to support and strengthen communities and businesses. While these changes are certainly understandable in the current uncertain climate, the Chancellor’s pledges did little to provide support or clarity to local authorities and their over-stretched budgets. However, one key action announced as part of the Chancellor’s Budget has had direct implications for local authorities and is something we welcome here at CIPFA – HM Treasury’s consultation on revising the terms of borrowing from the Public Work Loans Board (PWLB).
In recent years, the PWLB has been an increasingly important lender of funds for local authorities. But concerns around the way councils use borrowed PWLB funds have come to the forefront of the public finance conversation, with a particular concern around the use of borrowing to invest in commercial property. Local authorities across the UK invest billions of pounds each year within their respective communities, and the PWLB is available to help councils invest locally. The problems that have arisen concern a small number of local authorities that have taken out substantial sums of PWLB loans to invest in commercial property. We’ve seen this concerning trend gaining momentum of late – prompting HM Treasury to take action.
The trend we’ve seen of councils borrowing to invest in commercial property, in many ways, makes sense. Public budgets are stretched to the limit after a decade of austerity, most authorities have increased council tax to their maximum annual limits (without triggering a referendum), central government grant has been inconsistent and the business rates system is arguably no longer fit for purpose. Commercial property means rental income, which can offer an appealing stream of supplemental revenue for councils struggling to fund public services. The catch is the risk associated with commercial ventures. Property values can fall, commercial businesses can go under and macroeconomic factors can mean the demand for property declines. These potential risks leave councils exposed to market shocks, and can jeopardise the overall financial resilience of an authority.
The opening of this consultation underlines the idea that borrowed funds should first prioritise public services and local regeneration. We welcome this decision by the government. This rationale follows the guidance included in the Prudential Code and is in-line with councils’ legislative responsibility to ‘have regard’ to the code. CIPFA encourages all CFOs to follow proposals set out by HM Treasury, and to do so immediately. We anticipate that any new post-consultation regulations will apply to both financing and refinancing. Therefore, councils should work to avoid potential risks if PWLB borrowing was used during the transition for commercial purposes. The Treasury has also indicated that PWLB lending rates will likely be lowered once the financing system has been reevaluated to correct for this activity.
CIPFA’s recent guidance on prudential property investment is designed to support local authorities with decision making on borrowing and investment in commercial matters. Intervention from the government has the potential to result in a strict, prescriptive borrowing framework for the public sector. We at CIPFA think all stakeholders have a vested interest in that not happening, to allow for a continuation of prudent flexibility of decision making. To avoid an overhaul of the existing framework, councils should follow the principles laid out in the Prudential Code.
It’s safe to say that the Chancellor’s fiscal announcements didn’t match what we in the sector had hoped for. Local authorities will be looking to this summer’s spending review for further clarity and support that failed to make it into the recent budget. However, the opening of this consultation is a welcome step from the Treasury, one that is needed to address some of the current risks present in local government finance. At CIPFA, we look forward to submitting a response, and encourage councils to do the same.
This article first appeared in the MJ.