Capex spending no indicator of sound financial health

Capital expenditure may be up among councils but it doesn’t mean that local authority finances are in good health, according to former council chief executives.

Stephen Hughes was speaking after figures from the Department for Communities and Local Government revealed that capital expenditure had increased by 12.5% last year, while capital receipts rose 7.4%. That means capital spending went from from £19.6bn in 2013-14 to £22.1bn in 2014-15. Receipts rose from £2.7bn to £2.9bn over the period.

“I don’t think the increase in capital spending means the state of council finances are not as bad as we might think.  I note that £1.2bn of the increase is due to the Greater London Authority in respect of transport and housing,” said Hughes.

Public finance consultant Richard Harbord, a former chief executive at Boston Borough Council, said: “When revenue monies are tight local authorities, tend to capitalise everything they can and therefore at the year end they go through the revenue accounts and see what meets the definition of capital. This will then decrease the revenue deficit and enhance reserves.

“That will account for some of the increase on 13/14, while some will be caused by government direction such as funds given for pot holes and an increase in major transportation projects.”

Highways and transport showed the largest increase in capital expenditure – up £1.6bn to £8.3bn.

Environmental services saw the biggest percentage increase – up 32.2% from £581m to £767m.

And Harbord said that the rise in capital receipts was probably a sign of the hard times councils are facing.

“Capital receipt increases reflect the necessity for local authorities to sell off surplus assets or the family silver,” he said.

Government grants also rose 17% from £7.5bn to £8.8bn, which Harbord said most likely reflected money paid to local enterprise partnerships.

Capital expenditure paid for by borrowing not supported by central government rose from £4.4bn to £4.7bn over the period, the figures showed.

The bulletin also showed that councils are predicting a rise in capital expenditure of 4.5% to £25.9bn in 2015-16, with receipts forecast to increase to £3.3bn.

The expenditure forecast figures have been reduced by 8% to take account of the historic pattern of over-forecasting of expenditure, the department said.

Harbord said he expected the total to fall further: “In my view, capital expenditure in 2015/16 will fall back considerably when there is an actual figure.

“Local authorities are always optimistic about start dates for large schemes and the speed of completion. Once in a capital programme directors are reluctant to reschedule in case it gets removed.”