Osborne’s capital receipts measure poses tough questions

New freedoms allowing local authorities to spend capital receipts from asset sales on revenue projects may not be a problem-free offer to local authorities, according to a sector expert.

In this week’s spending review, chancellor George Osborne announced that councils will no longer be prevented from using capital receipts to fund services, provided they are applied to the revenue costs of reform projects.

But local government adviser Stephen Sheen, managing director of Ichabod’s Industries, said councils taking up the offer will need to appreciate the full implications of applying capital resources to revenue.

“The Government has traditionally segregated revenue and capital income, preventing capital receipts being spent on services because much of the original capital investment would have been funded from grants intended to grow the national asset base.

“Capital receipts, though, have an effect on revenue because their application to capital expenditure reduces the need to meet the expenditure through revenue contributions (Minimum Revenue Provision (MRP) and to borrow, saving interest costs.”

“Currently, if a council sells a property for £1m then that amount will be set aside to reduce the council’s capital financing requirement (CFR – the measure of the underlying need to borrow for capital purposes).  If instead the council shifts the capital receipts to the revenue pot, then the CFR will not be reduced and MRP will be higher.  Borrowing costs will also be higher until MRP has been made to fill the £1m gap.”

 He added: “In theory, you get revenue now but you may have a problem in later years.  The savings generated by the reform expenditure will need to cover not just the £1m investment but also the less obvious deemed increases in MRP and interest.”

 Sheen added: “Some of the supporters of this change argue that it will bring councils into line with the private sector.

“However, the analogy is not perfect because when the private sector makes a property sale, it books the profit it has made and only spends that proportion of the sale price.

“Allowing authorities to spend the full sales proceeds is very generous and authorities will need to decide for themselves whether it is too generous for their circumstances.

“The policy is likely to be particularly attractive to authorities that have capital receipts in excess of their capital expenditure needs.

“A more effective and universally helpful solution for reform projects would be to allow authorities some freedom to carry revenue deficits forward into the periods that savings will accrue instead of requiring budgets to be balanced every time council tax is set.”

 The Treasury said it would set out more details of the change, along with conditions that councils will have to meet, in the local government settlement next month.

 The Spending Review also extended the One Public Estate programme, aimed at persuading public bodies to share property, pledging an extra £31m to support local authorities.

 The government will also strengthen Right to Contest legislation which allows local communities to force authorities to bring empty land back into use.