Croydon is one of six local authorities who have been forced to go cap-in-hand to the government to ask them to ease the rules on council borrowing, the Local Government Chronicle has reported today.
The city councils in Peterborough, Birmingham and Oxford, as well as Woking Borough Council are also lobbying for more borrowing freedom to cope with the financial pressures created by the covid-19 pandemic.
The council in Luton has already been granted the “capitalisation direction” to use funds – usually capital receipts – for day-to-day running costs, in this case, £60million to lend to Luton Airport, which it owns and which has also been hard-hit by the economic impact of coronavirus.
That another local authority has been able to make a successful case for capitalisation direction to the Ministry of Housing, Communities and Local Government will offer some hope for Croydon, where an emergency budget was passed by cabinet on Monday night where it proposed to borrow another £22million to deal with the immediate covid-sized hole in the borough’s budgets.
As the LGC explains, “Normally councils are not permitted to borrow for revenue purposes, but there are exceptions to this rule provided councils first gain permission from the Ministry of Housing, Communities and Local Government…
“In the past, MHCLG deployed the measure on the rare occasions that councils were in urgent need of short-term funding for specific issues such as an equal pay claim or a transformation. They were then granted flexibilities to borrow in the short term until they got a capital receipt to repay the loan taken out.”
The LGC reports that Peterborough was permitted to use £7million of capital receipts in March this year to help balance its in-year revenue budget.
“The Ministry told LGC that capitalisation can only be used where exceptional or unforecastable specific pressures are incurred, which the local authority cannot fund from its available resources. ‘The financial situation of Peterborough City Council justified this specific and exceptional measure,’ they said.”
The Ministry is seen to be using this measure as an increasing number of councils are struggling to deliver a balanced budget, as they are required to do so by law. Capitalisation directions have an added advantage that they can be used without parliamentary approval.
“The real answer is for the government to properly fund councils for their losses in the medium- to long-term basis. In the absence of that, people are being creative about what they can do while waiting for the spending review,” the LGC quoted an unnamed source as saying.
As Inside Croydon reported in July, the MHCLG has relaxed its rules on Section 114 notices – which councils have to issue if they are unable to balance their budget – because of the covid-19 cash crisis. This is not some magnanimous gesture, but a form of enlightened self-interest for the government in the middle of a crisis for local government.
As a source said at that time, the MHCLG “…could cope with one or two S114 notices, but they wouldn’t be able to deal with 20 or 30”.
In the past 20 years, only one local authority, Tory-run Northamptonshire County Council, has had to resort to a S114.
Ultimately, using the capitalisation direction means that the councils are using their own resources to fund covid losses, without MHCLG having to seek additional cash from the Treasury.
MHCLG’s permanent secretary Jeremy Pocklington, told the Public Accounts Committee on Monday that his department is holding “conversations with a broad range of local authorities about a range of issues” and “discussions with a small number of local authorities about which support we could offer”.
He admitted that “a very small number are under severe financial pressure”. That is understood to include Croydon.
The LGC report suggests that the other councils asking for permission for a capitalisation directive are, like Croydon, seeking to spread the burden of the covid emergency spend over the course of two to three years, in some cases even longer.
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