The Ministry for Housing, Communities and Local Government (MHCLG) is under fire for letting local authorities pursue risky commercial ventures with borrowed money to make ends meet. In its damning report on Local Authority Investment in Commercial Property on July 13th, the Public Accounts Committee (PAC) report referred to local authorities, like teenagers, as displaying ‘challenging behaviours’, rather than as autonomous parties responsible for their actions. The report reads as a scare story for what happens if MHCLG takes its eye of local government activity. But a better reading of the episode highlights the limits of Whitehall’s command and control approach and the need for new accountability structures
The timing of this report is somewhat jarring. Local authorities are teetering on the financial brink as a result of their lost incomes and increased spend to help their communities during Covid-19. At a time when they are looking to MHCLG to make clear what financial respite there might be, MHCLG is having its knuckles wrapped for not having policed their income generating investments better.
To understand how we got to a place where local authorities are making risky debt-fuelled investments to balance the books we need to look backwards. Over the last decade the revenue base for local government has shifted extensively, with a reduction in grants from central government and far heavier reliance on locally generated taxes (council tax and business rates). But with the demand for (and therefore cost of) statutory services like social care rising rapidly, local authorities have had to develop other revenue generation strategies to fill the funding gap. New ventures have included providing traded services, establishing wholly or partly owned trading companies, investment in financial opportunities, joint ventures and under scrutiny here, commercial property acquisition.
There is no doubt that shifts in central government funding have been the driver of this new enterprise. Both Richard Watts, chair of the Local Government Association Resources Board and Rob Whiteman, Chief Executive of CIPFA, argued to the PAC that shrinking budgets had led local government to seek other sources of revenue. Actively encouraged by central government to ‘commercialise’, this represents one route through which local government has sought to do that.
The scale and rate of growth of these investment activities has been striking, making them somewhat impressive. In February, a report from the NAO revealed that in the period 2016/17 to 2018/19 an estimated £6.6bn had been spent by local authorities on commercial property acquisitions. This spend was more than 14 times the preceding three-year period. The PAC adds a further £1bn to that from the first half of 2019/20. Although the majority of investment comes from a smaller group of 49 authorities, in total 179 authorities purchased commercial property in the three years to 2018–19, 105 of them spending more than £10 million. The PAC asserts that the ‘extreme’ behaviour of a small number of authorities has normalised others also borrowing solely to generate profit.
In some cases these ventures have been well judged. But in others, authorities have stretched the spirit of the code governing local government borrowing to breaking point in two ways. Firstly, some areas appear to have exceeded what constitutes an affordable amount of debt. Spelthorne is the standout case here, having borrowed £1.1bn against a core spending power of £11 million. Secondly local authorities are supposed to borrow only to undertake ‘investment in your community’ rather than investment solely for generating a financial return. Whilst local retail parks and cinemas are debatable, out-of-area investments (of which there have been many) clearly cross this line. As the PAC documents, in some cases the assessment of this risk is well outside of the comfort zone of decision makers.
In this context, the PAC’s intervention demonstrates a much bigger point. One reading is that it demonstrates that local government can’t be trusted and needs to be on an even shorter leash from Whitehall. But a more nuanced reading is that these problems that require central government oversight are a direct result of the dysfunctional financial relationship between central and local government. Rather than tightening the leash, Whitehall needs to reset the relationship. That must include a focus on how revenue-raising and accountability sit together at the different tiers of government.
MHCLG are responsible for the broader framework of local government finance and should be held to account for that, but shifts where finance is localised, accountability must be too.
Central government should be held to account by parliament, through bodies such as the PAC, in relation to the finance that it directs to local government and the robustness of the overall framework.
A stronger audit framework is needed to monitor local government’s revenue raising activities. The Redmond Review will be instrumental in setting the stage for this.
Local government should be held to account by its residents on local taxation. This is not feasible in the context of a local taxation system almost entirely prescribed by central government.
That MHCLG is cast in the role of parent, getting a ticking off for the ‘challenging behaviours’ of its council teenagers, is all too telling about the disempowered state of local government today. In reality, those behaviours are a sign of the sector seeking to forge its own path. The PAC is following its remit of holding MHCLG accountable, but on an issue where local authorities should be the accountable party, this drives exactly the wrong sort of micromanagement behaviours in Westminster. It misses the point that if local government is to achieve greater financial independence from Whitehall, then appropriate financial accountability also needs to be localised. Specific local authority risk taking needs scrutiny, but that should come from a local level, rather than committees at Westminster.