CHAPTER 5
Assets and liabilities
5.0.1 This chapter sets out the assets and liabilities of local authorities. It is divided into the following sections:
- 5.1 Local authority fixed assets
- 5.2 Outstanding debt and holding of investments
- 5.3 Borrowing and investment transactions
- 5.4 Prudential System
5.1 Local authority fixed assets
5.1.1 The following tables provide the value of local authority fixed assets at 31 March 2005 and 2006 in total and by type, and:
- by class of authority;
- by region.
5.2 Outstanding debt and holdings of investments
5.2.1 Outstanding debt includes temporary borrowing for management of cash flow, and longer-term borrowing taken out to finance capital projects.
- The vast majority of outstanding debt is longer-term borrowing (98%) and the largest proportion of that is owed to the Public Works Loan Board (79%).
5.2.2 The stock of local authority investments is the financial representation of local authorities’ reserves, unused capital receipts and cash flow surpluses, though authorities that are net borrowers may use such resources to reduce their borrowing rather than holding them as investments. The ‘other’ section includes investments with public corporations, other financial institutions and British Government securities.
- About three quarters of local authority investments are deposits with banks or building societies.
5.3 Borrowing and investment transactions
5.3.1 New borrowing and drawing down of investments are ways of accessing funds. New borrowing is a major way of financing capital spending. Funds that are received as income or capital receipts, but are not going to be spent immediately, may be invested in financial assets or used to redeem debt.
5.3.2 Local Government Net Cash Requirement summarises changes in local authority borrowing less change in investments. When Net Cash Requirement is positive, local authorities are increasing their borrowing and/or reducing their investments. When Net Cash Requirement is negative, local authorities are reducing their borrowing and/or increasing their investments.
- In 2004-05 and 2005-06 the Local Government Net Cash Requirement was positive, reversing the trend since 2000-01, because longer-term borrowing increased faster than net investments.
- A significant factor in this increase was the introduction of the Prudential system in 2004-05 and the additional self-financed borrowing that this allowed local authorities for financing capital expenditure (see Chapter 4).
- Total outstanding debt at 31 March 2006 for England was just over £46 billion.
- New borrowing was more than repayments in 2004-05 and 2005-06.
- From 1999-00 to 2000-01, repayments exceeded new longer-term borrowing from banks, but were less than new borrowing from 2001-02 to 2005-06.
- Longer-term borrowing from the Public Works Loan Board substantially increased its share of all longer-term borrowing in 2005-06 owing to particularly favourable long-term rates.
- During 2005-06 outstanding investments for England increased by £2.4 billion to £23.6 billion at 31 March 2006.
- Local authority investments have increased each year from 1999-00 until 2005-06.
- Since 2002-03 the amount held in externally managed funds has decreased each year.
5.4.1 The Prudential System (Part 1 of the Local Government Act 2003), which took effect from 1 April 2004, allows local authorities to raise finance for capital expenditure – without Government consent – where they can afford to service the debt without extra Government support.
5.4.2 In particular, the Prudential system has not maintained the artificial incentives to acquire debt-free status that were in place before 1 April 2004. The new system seeks to facilitate the use of borrowing for worthwhile capital projects, provided it is affordable, and debt-free status is not seen as having any intrinsic merit. Authorities must manage their debt responsibly, but decisions about debt repayment should be dictated solely by consideration of prudent treasury management practice.
5.4.3 The new prudential system therefore provides a new method of financing capital expenditure from 2004-05 onwards.
5.4.4 Final figures for 2004-05 and 2005-06, the first two years of the system, are now available and these are given in Table 5.4a.
5.4.5 In planning what level of capital expenditure is affordable, local authorities now follow procedures for setting and revising prudential indicators as set out in the Prudential Code. These include:
- estimates of capital expenditure (see Chapter 4);
- estimates of the capital financing requirement that is the underlying need to borrow for a capital purpose. It relates to all capital expenditure (that is including relevant expenditure incurred in previous years) and is calculated directly from the balance sheet;
- actual external debt that is gross borrowing and other long-term liabilities;
- operational boundary for external debt – based on an authority’s working estimate of most likely (that is prudent), but not worst case scenario;
- authorised limit for external debt – the intended absolute limit that has to be set by the full Council.
5.4.6 Table 5.4c sets out the aggregate England figures for these indicators as well as the level of investments.
- About 37% of authorities used the new powers to finance capital expenditure through self-financed borrowing in 2005-06.
- The extent to which the new powers were used varied considerably by class of authority. While 86% of metropolitan districts used the new powers, only 30% of shire districts did so in 2005-06.
- Local authorities’ final figures for 2005-06 show 48% using the new powers in the second year of the system, with almost all classes of authority increasing their use.
