Councils, commercialisation, and flexible borrowing


By Rob Whiteman, CIPFA Chief Executive 

The major news for local government during the Budget was the response to the current social care pressures, which came in the form of an extra £2bn over three years – although more details are needed to clarify how this injection of funding will be accessed and distributed.

Other than that, no news was good news. Local government has taken significant cuts over the past years and besides, the government had already committed to honouring the four-year spending review. Nevertheless, the legacy of several years of austerity and the chancellor’s promise that it will need to continue means that if they haven’t already, council leaders and CFOs must start thinking about short, medium and long-term strategies for generating their own income.

One opportunity that is attracting the interest of some councils is the purchasing of commercial properties for investment purposes – but, of course, as with any commercial activity, assessing a its appetite for risk will be a vital part of a councils planning process.   

Councils have traditionally held commercial property assets through their pension funds, but increasingly councils are directly using their borrowing powers to fund capital investment in order to make a commercial return. Of course, councils invest in assets, such as libraries or schools, through which to provide services; but should they be using taxpayer’s money to make income generating investments? Public Accounts Committee under Meg Hillier MP raised similar questions last year.

In fairness to councils, this increased focus on entrepreneurship has been a means of mitigating the loss of government grant, which has seen their spending cut by as much as 40% since 2010. Services are under tremendous stress, particularly from the provision of social care, and so without the returns being made from their new investment portfolios, service reductions would have been even higher.

And providing councils are following the rules that dictate making sound and affordable investment decisions, and using specialist internal and external advisers to identify and mitigate any investment risks, these activities should be a win for councils and taxpayers. 

There is a dilemma, however, that councils can afford to borrow for commercial purposes but cannot borrow to provide services. The government allows them to borrow to buy retail parks in other parts of the country, but will not allow them to freedom to build the many more council homes needed in their own areas to tackle homelessness.

Given the massive changes taking place in the funding of local government, it is arguably more important than ever that councils receive more freedoms and powers to borrow, rather than being restrained in their efforts to sustain their beleaguered finances.

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