Communities and Local Government CommitteeFurther supplementary written evidence from the Department for Communities and Local Government

Local Government Guarantees

When a local authority gives a guarantee it will normally have two effects on the accounts:

(a)a charge will be made in the accounts equal to the “fair value” of the guarantee (ie a market value based on the size and profile of the risk). No payment is involved in this charge, but the amount is held on the authority’s balance sheet until the guarantee comes to an end, when it is released back into their accounts as income.

(b)a disclosure is made in the notes to the accounts of the guarantee as a contingent liability. The disclosure will describe its nature and the amounts involved.

If at any stage it becomes more likely than not that the guarantee will be called upon, an immediate provision for the likely amount has to be made by the authority. The establishment of the provision is treated as expenditure even if at that stage no payment has had to be made. If a payment does have to be made it is made from the provision, rather than by being charged to the authority’s revenue account (but any difference between the provision and the payment is taken from the revenue account). If a provision is made but in the event the guarantee is not called upon, the provision is credited back to the authority’s revenue account once a final position has become clear.

The amount of the guarantee is set by its terms and all the relevant information available at the time. As the above hopefully makes clear, the amount of the guarantee itself isn’t an item in the authority’s accounts—only any fair value charge for it and any provision that has to be made. As such, a guarantee is not in itself a part of the authority’s debt, and is not a part of government debt.

General Controls

There are no general controls on the size or number of guarantees an authority can grant, assuming it has the legal power to do so (either a specific power or under the well-being power or general power of competence). But as part of the prudential system for capital expenditure an authority intending to borrow has to be satisfied that the borrowing is affordable. One of the (many) items an authority would need to consider in assessing affordability would be the risk it runs of having to honour any guarantees it has granted. This is just to state a general consideration in financial management that an authority would need to consider the risk of a guarantee being called upon and its ability to find the necessary funds if it were.

NewBuy

The under writing for this scheme counts as a Contingent Liability; DCLG has made provision to cover expected losses within this Spending Review period in its Departmental Expenditure Limit. This does not therefore score as government debt; there is no accounting entry as a result of a contingent liability being recognised. During the life of the scheme provisions and charges may be made in line with the potential and actual defaults against mortgages supported by the scheme. Any costs incurred in this way could be said to be adding to government debt, in the same way as any public spending would.

February 2012