Accounting rules for councils will be relaxed by allowing additional capital receipts to be used for running costs. They will also be allowed to use borrowing powers in a similar way to meet current costs. This will be achieved through the capitalisation process by which the Government permits councils, in special circumstances, to treat revenue costs as capital costs.
The Spending Review announced that £200m of capitalisation would be available in 2011-12. Following representations from councils, the Government has decided to increase the amount to £300m. The Government is not providing authorities with extra funding for this purpose, but simply allowing a managed and affordable extension of existing flexibilities.
Local Government Minister Bob Neill said: ” Every council knew they would have tough decisions to make to play their part in cutting the deficit because councils account for around a quarter of all public expenditure. The majority of councils are planning sensibly for leaner budgets and this round of capitalisation will give councils more flexibility in the coming year, whilst keeping costs within wider public spending plans.”
Ministers are concerned that some councils are choosing to make service cuts rather then use their reserves. Because a prime consideration in the approval of captialisation applications will be the extent to which a councils has used its reserves, this measure will be an incentive to limit service cuts by dipping into the reserve. It is estimated that the total reserves of councils amount to £10b.
Baroness Margaret Eaton, Chairman of the LGA, said: “We warmly welcome this announcement. It is very encouraging that the Government has listened to our concerns and agreed with the LGA’s request to increase the amount that councils can spend from their own capital resources to help pay for redundancy costs. It means they will not have to dip so far into their revenue budgets to pay for redundancy costs, potentially saving jobs and limiting the impact on frontline services.”