SDCT calls for balanced budget exemption
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Photo (cropped): CafeCredit.com, Flickr.
Councils should be given an exemption from the current requirement to balance their budgets each year but only in specific and limited circumstances, according to the Society for District Council Treasurers.
In the body’s response to a consultation on business rates reform, it said that the government should consider allowing local authorities to balance budgets over a period of two or three years.
It added that although the majority of councils would not require the power, it could be “critical” for a limited number with specific needs.
The SDCT response said: “Uncertainty over business rates income relating to new premises, whilst having a limited impact on overall funding levels, could make a significant difference to the actions an authority needed to take to balance the budget in a single financial year.
“This approach would enable greater flexibility for councils in a system where they are likely to be almost wholly dependent on income from local sources for their core funding.”
Speaking to Room151, Norma Atlay, president of SDCT, said: “A couple of districts came back to us with suggestions about situations such as where a power station closes.
“A replacement facility might not come online for a year or 18 months, and the council could face major cuts if they lose business rates in the interim.”
She said that greater flexibility could allow such councils to avoid issuing a section 114 notice, which requires a chief finance officer to report to members if there is likely to be an unbalanced budget in a particular year.
Richard Harbord, former chief executive of Boston Borough Council, said that such a system would be difficult to introduce on a general basis.
He said: “Could the section 151 officer guarantee to balance three years’ budgets in year three, given the problems of elections, business rates appeals and other uncertainties?
“I am not sure how the capital markets would respond either. One of the strengths of the current system is that outside organisations know that there is a certified balanced budget each year and that income equals expenditure.
“This would introduce an element of risk which lenders may not be willing to accept.”
Sean Nolan, director of local government at the Chartered Institute of Public Finance and Accountancy, said: “The requirement of a balanced budget is a vital part of the strength of financial governance in local government.
“The existing framework is vital for allowing council members and officers to make the difficult decisions to ensure sustainable services over the medium as well as the short term. CIPFA would not recommend any change to this essential requirement.”
However, Stephen Sheen, managing partner of Ichabod’s Industries, a consultancy providing technical support to local government, said: “The government has grown to trust local authorities to operate a prudential framework in relation to capital expenditure and there is no obvious reason why it could not do the same for revenue expenditure.
“There are all sorts of implications, from manipulating budgets to boost spending before an election year, to increasing the risks of over-optimism when assessed on a longer term than one year
“There would, therefore, need to be clear rules, but these could be provided through a prudential code for revenue expenditure that would mirror the one for capital expenditure.”
