‘Invest to save’ and innovation key to easing pressure of debt servicing
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National Audit Office report
Ensuring a proportion of capital spending is aimed at transformation or income-generating projects will help offset increases in the sums of revenue budget devoted to servicing debt, according to the president of the Society of County Treasurers.
Last week, the National Audit Office voiced concerns that a quarter of single-tier and county councils now spend the equivalent of 9.9% or more of their revenue expenditure on debt servicing. The spending watchdog said the sums spent servicing debts were a “fundamental problem”.
But Margaret Lee, executive director for corporate and customer services at Essex County Council, said that an “invest to save” approach should eventually reduce the pressure from debt repayment.
She said: “Councils will be investing in business cases which may require borrowing, but the benefits of those business cases should outweigh the costs.
“In some cases the benefit could be avoided [reduced] demand, rather than actually reducing costs.”
County councils, she said, have continued to spend significant sums on areas such as highways maintenance to maintain infrastructure to provide opportunities for economic growth.
But she said that the benefits resulting from capital spending could take some time to take effect.
She said: “Given the on-going pressure on revenue budgets, it is important that a balance is struck on the capital side between essential maintenance of the asset base, and investing in innovation which will earn income streams, or reduce pressure on revenue budgets in other ways such as through development of alternative service provision, digital and IT development.
“These innovative projects in themselves will serve to reduce expenditure and increase debt payments, driving up the proportional split again.”
Lee added that as overall budgets are squeezed, the proportion of expenditure on debt may well increase without a significant uplift in borrowing.
National Audit Office report
The NAO report found that revenue expenditure fell by 14.7% between 2010 and 2015, making capital costs a relatively larger element of revenue expenditure.
It said that, across the sector as a whole, debt servicing costs fell slightly in 2014-15 as local authorities reduced their minimum revenue provisions.
But it added that metropolitan district councils are particularly exposed, with a quarter spending more than 11.2% of their revenue budgets on debt servicing.
Richard Harbord, former chief executive of Boston Borough Council, said: “Borrowing is a necessity but the proportion of revenue budgets consumed by borrowing costs is not ideal.
“It becomes a fixed cost which means a greater level of savings have to be found from the other 90% of revenue expenditure.”
He added that, due to the current pressures on revenue funding, local authorities are looking for each and every item which can be classed as capital in order to capitalise them.
He said: “This must be especially attractive when interest rates are comparatively low.
“In that way budgets can be maintained and services kept going. As the system makes sure there is a legal budget and capital financing costs are included there is no risk involved in this as long as proper provision is maintained.”
