Local authorities spent an estimated £6.6 billion of taxpayers’ money acquiring commercial property in the three years to 2018–19. This is over 14 times more than in the previous three-year period, and is primarily a response to a sustained period of funding reductions. Local authorities spent a further £1bn in the first half of 2019-2020 authorities have predominantly acquired these potentially risky commercial investments in order to secure yield from rental income. Up to 91% of commercial property spending in the three years to 2018–19 has been financed by prudential borrowing. By ‘borrowing for yield’ to offset their financial pressures, some authorities have built up substantial long-term debts that need to be serviced by rental incomes that are far from guaranteed. This risky approach is not within the spirit of the framework within which local authority borrowing and investment takes place, and which is overseen by the Ministry of Housing, Communities & Local Government (the Department).
In 2016 this Committee warned that the Department, “appears complacent about the risks to local authority finances, council tax payers and local service users resulting from local authorities increasingly acting as […] commercial landlords with the primary aim of generating income”. It is therefore deeply disappointing to see huge increases in this activity since 2016. We are concerned that the Department is blind to the level of exposure of the local government sector to sectoral commercial risks. If a commercial sector collapses or underperforms it is vital that the Department has a better grasp on the likely impact on council finances. This is important because an individual council investment may pass muster with the auditors, but cumulatively the risk could be great and the impact falls on local council tax payers and service users. COVID-19 has just served to underline the Committee’s concerns.
The Department’s attempts to improve its data and to strengthen guidance to the sector have not been sufficiently urgent and have failed. The Government data was so limited that the NAO had to purchase outside commercial data in order to complete their report. Recent proposals from HM Treasury to prevent borrowing for yield may prove to be more effective. However, the imposition of such hard controls is the result of the Department’s failure to prevent or publicly confront behaviour that breaches the spirit of the prudential framework, and should not have been necessary. This is also a clear case of reactive, rather than proactive, policy making. The Department must learn from this experience and take steps that are robust enough to cope with future challenges in the sector. A key challenge will be striking a better balance between supporting localism and ensuring that authorities act within the frameworks that underpin local freedoms.
Published: 13 July 2020