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CODE IGNORES COST OF LONG-TERM BORROWING

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Think-tank fears 'serious errors' ...
Think-tank fears 'serious errors'

By Kerry Lorimer, finance editor

The prudential code encourages councils to ignore the long-term consequences of their borrowing, an influential think-tank has claimed.

The right-leaning Policy Exchange said the code, which frees councils to set their own borrowing limits as long as they show these are affordable, could lead to 'serious errors' in decision making.

'The code does not require them to think beyond what will in many cases be one electoral term for the councillors making the decision,' it said. 'A three-year appraisal period will inevitably mean the longer-term impacts of any expenditure are ignored.'

The relaxation of central control over local borrowing levels is also 'more notional than real', the think-tank added.

'Central government may also re-introduce at any time overall limits on the borrowing of an authority. As such, central control has only been loosened slightly and the threat of central government approval being required in the future remains.'

The Policy Exchange was also critical of the role of the Public Works Loans Board, which it said continued to crowd out other types of capital finance by offering cheap loans.

'It should be the lender of last resort,' it said.

Keith Beaumont, programme manager at the Local Government Association, said in reality councils would appraise projects funded by prudential borrowing well beyond the three-year minimum.

'I can't believe councils would look at the first three years of the scheme and then not bother about what the implications are for later years,' he said. Most would look even more closely at the revenue repercussions of prudential borrowing because they had to meet the debt charges themselves, he added.

Although the threat of national limits remained, the freedom offered by the prudential regime was real.

'We hope government won't exercise that threat, as it would remove the whole purpose of why prudential borrowing was introduced,' he said.

kerry.lorimer@emap.co.uk

Prudential code - key weaknesses

>> Discourages long-term thinking

>> Biased against forms of funding which involve upfront costs, as only first three years must be appraised

>> Central government retains control of capital financing

>> Public Works Loans Board funding continues to dominate.

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