Financial sustainability of local authorities Contents

2Departmental oversight

The Department’s approach to oversight

18.The Department for Communities and Local Government (the Department) described the way it oversaw local authority capital spending as “a principles-based approach”, as opposed to one that was overly rigid and prescriptive.33 This devolves accountability, giving authorities a great deal of freedom to make their own decisions about capital spending and borrowing. The National Audit Office reported that this local accountability system for capital, centred around the prudential code for capital finance in local authorities overseen by the Chartered Institute of Public Finance and Accountancy, provided assurance at the level of individual authorities but did not identify issues across the sector.34

19. The Department takes a high degree of assurance from the intelligence it derives from “speaking to local authorities and being out there with the sector, and doing that with the LGA”.35 It told us that it uses this intelligence to guide its analysis and help it understand potential systemic risks. However, this approach had not resulted in the Department monitoring several significant trends identified by the National Audit Office.36 The Department did not monitor the risks of capital assets being allowed to deteriorate due to revenue pressures, despite evidence provided to the National Audit Office and to us of the risks.37 Similarly, the Department does not monitor “internal borrowing” despite this being a significant source of finance for capital spending in recent years and potentially exposing authorities to re-financing risk were interest rates to rise.38 Overall we were not reassured that the Department had a sufficient level of independent understanding of the issues and risks it is responsible for.

20.The Department accepts that it needs “to be monitoring the trends and ensuring that over time [it is] aware of the developments in the sector so that [its] risk analysis is as full as it can be” and recognises that there are “a number of points where [it] can and will improve [its] monitoring”.39 The Department also accepts that it does not use data “as actively as [it] could. All of the analysis in the NAO Report used DCLG data, but not all of it was put together in ways that [it has] done before. [Its] challenge is to make better use of the data and to be more intelligent in the way [it is] pulling out the trends”.40

Departmental data

21.The Department collects data on local government finance, including on capital spending and borrowing.41 The Department analyses this data to inform its work with the rest of the Government as part of Spending Reviews, and to inform its ongoing monitoring of the risk of failure in individual local authorities.42

22.However the Department uses a single category called “New construction, conversion and renovation” that covers three-quarters of local authority capital spending. This category is so broad that it captures revenue generating activities, other invest to save schemes and long-term asset management. Accordingly, users of the data are not able to identify the important changes in capital spending made by authorities, which the National Audit Office identified.43 Also, the National Audit Office identified some double-counting of capital spending within the Department’s data. This related to Local Enterprise Partnership (LEP) funding that was recorded twice by different local authorities: once by the LEP accountable authority and once by the authority that ultimately spent the money.44

23.HM Treasury supported the need for data improvements, saying that the category containing three-quarters of capital spending appears to represent “a block of continuity [ … ] in how local government is operating. Getting under the skin of that would be very helpful for us to understand.” The Department stated that it was happy to review the way it categorises capital spending within its data and was willing “to look at how [it] can improve that and improve both the usefulness and quality of [its] data for the sector itself to use and for it, the NAO and others to use in analysis”. The Department also committed to examining the issues raised by the National Audit Office in relation to double counting of LEP expenditure.45

The Department’s capital framework for local authorities

24.The Department is responsible for the statutory and policy framework governing local authority capital. This responsibility includes ensuring that the framework is fit for purpose in the current environment.46

25.There have been significant shifts in the nature and purpose of local authority capital spending in response to continued revenue funding reductions. We received written evidence highlighting the potential impact of changes to the New Homes Bonus that are under consideration.47 The Department is currently developing policy arrangements for the 100% localisation of business rates, which it accepts will require consideration of capital issues.48 The Department told us that it was currently discussing with local authorities “their concerns, their questions and their priorities around Brexit” and will ensure that analysis is available to feed into Government decision making.49 The Government has yet to make some key decisions that will influence borrowing and capital spending by Combined Authorities and the transparency and accountability issues that arise have yet to be dealt with to our satisfaction.50

26.The Department has confidence in the devolved framework for capital and argued that National Audit Office report provides evidence that the framework is robust. The report did indeed indicate that there was no evidence of widespread problems with the prudential framework. However, it also highlighted a range of areas where improvements could be made, for instance in relation to the clarity and value of certain prudential indicators, the level of departmental expectation placed on external audit, and the availability and value of Departmental data to support local decision making. The report also indicated that, given the range of financial pressures acting on local authorities, there were grounds for reviewing the capital framework to ensure that it appropriately considers the various financial pressures facing local authorities.51

27. The Department acknowledges that the Chartered Institute for Public Finance and Accountancy (CIPFA) is a key partner in relation to capital, as both a source of information and as the author of two Codes that the Department has chosen to designate as statutory guidance.52 CIPFA recognises the need to ensure that the Prudential Code, a significant part of the overall capital framework, remains current and has committed to reviewing it.53

33 Qq 12, 29

34 C&AG’s report, paragraphs 3.7, 3.20 and 3.21, and figure 16

35 Q28

36 Q31; C&AG’s report, paragraph 3.6

37 Q 44; C&AG’s report, paragraphs 2.13–2.15 and 2.26–2.27; South Norfolk Council, (FLA0002)

38 C&AG’s report, paragraph 3.6; The Chartered Institute of Public Finance and Accountancy (CIPFA), (FLA0006)