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LGA: New property borrowing rules will have 'serious consequences'

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Proposed government guidance on council borrowing could have “serious negative consequences to council finances and ultimately services” if implemented in its current form, the Local Government Association has warned.

Responding to the Department for Communities & Local Government’s consultation on revisions to the Local Authority Investment Code, the LGA says concern over the impact of the guidance is already causing councils problems with setting their budgets for 2018-19.

LGC reported last month how the proposed guidance would effectively ban councils from borrowing to invest solely to generate an income, a practice that has become increasingly common as authorities look to replace cash lost in cuts to central government funding.

A recent LGC investigation found more than a third of councils had invested in commercial property specifically to generate an income since 2010. However, more than 95% of the 265 councils that responded to LGC’s freedom of information request had a commercial property portfolio.

The LGA response said: “Local authorities have invested in property in different ways for many years; if this is to be restricted it could have a major impact on their ability to fund and deliver services to their residents.”

It added that applying the change retrospectively could be “disastrous” for some councils if they were forced to sell off existing investments.

“We oppose any restriction that will reduce funding for councils to benefit their local areas and under no circumstances should this be applied retrospectively.”

The draft guidance stipulates that “borrowing solely to invest in a yield bearing opportunity is borrowing in advance of need”. The practice of borrowing in advance of need is already banned under local government finance regulations.

However, the LGA says in the past this has only applied to investing in financial instruments while commercial property investment has counted as a capital expenditure.

The LGA says although the government had not specifically asked for views on the impact of expanding the definition in this way: “We would like to… highlight the potentially serious negative consequences to council finances and ultimately services. The final guidance should be drafted to avoid these negative consequences.”

The consultation runs until 22 December.

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