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Moves to restrict borrowing for investment do not feel proportionate

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LGC’s essential daily briefing.

Local government finance folk have been braced for the announcement of restrictions on borrowing to fund income-generating property investments in this week’s Budget. So the pre-empting of the chancellor with a Department for Communities & Local Government consultation on the issue, slipped out quietly on 10 November, came as a bit of a surprise.

As LGC research found recently, councils have spent £2.4bn on property investments specifically to generate an income since 2010 making the sector a significant player in the market.

Much of the controversy, inside the sector and out, has focused on whether it is appropriate for councils to be purchasing property outside of their own areas.

On the face of it, the guidance has nothing to say about the geography of council investments. However, as LGC reports today, the impact of proposed changes to the Local Authority Investment Code is likely to be a ban on borrowing solely to generate income. The consultation defines this as “borrowing in advance of need” - a practice already banned under local government finance rules.

While a council investing in its area would likely be able to justify such borrowing on the grounds it will bring additional benefits, such as economic regeneration or job creation, an authority looking to purchase property hundreds of miles away - a Travelodge in Edinburgh as Mansfield DC has done, or a supermarket in south Wales in the case of Mole Valley DC - would find it difficult to make a convincing case.

Restrictions on borrowing in advance of need were originally designed to prevent councils taking out loans before the cash was required and playing the stock market for a profit. Responses to the DCLG’s consultation will no doubt debate whether investing in bricks and mortar is equivalent to gambling on the FTSE, while the notion of “advance of need” may take some explaining to politicians faced with the prospect of making very immediate cuts to services without an additional source of income.

The government may also find the innovation and creativity fostered in the local government finance profession by seven years of austerity produces some compelling arguments for why borrowing to generate a secure, ongoing income from an asset most likely to appreciate value should not fall into this category.

Given the drive towards council self-sufficiency in past years from the very top of government some of the language in the consultation sticks in the throat a little. Implicit in the reminder that councils’ “prime duty is to deliver statutory services for local residents” is the suggestion that some are driven by other, less noble, motivations. A Guardian story this weekend, highlighting how many council homes could be built for the £758m Savills has calculated councils have spent buying up property in the first eight months of 2017 feeds into a similar narrative.

LGC’s recent research found no evidence of this and plenty of warnings that services would have to be cut without this increasingly important source of income.

The DCLG is also proposing the introduction of a “concept of proportionality” which would require councils to declare how dependent they are on commercial income to deliver statutory services, as well as how much they have borrowed to generate that income. This is designed to respond to suggestions councils are taking on too much risk with these investments.

However, the councils making the biggest plays in this area have faced intense scrutiny this year and their actions have stood up to it. There are mutterings about one or two authorities whose investment decisions may not be so robust but LGC’s research suggests if they exist these are likely to be smaller scale investments.

Perhaps the government would do well to consider whether it’s response to this issue is proportionate, or even better still, provide funding that is proportionate to what it is asking councils to deliver.

Sarah Calkin, deputy editor

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