Consultation on Local Government capital risk mitigation measures in the Levelling Up and Regeneration Bill: capital risk metrics

Overview

The Department for Levelling Up, Housing and Communities (“the Department”) has policy responsibility for the Prudential Framework (“the Framework”) under which local authorities borrow and invest, and stewardship responsibility to ensure that the system is operating effectively. The objective of the Framework is to ensure that borrowing and investment practices are prudent, sustainable and affordable, while providing authorities the freedom to set their own capital strategies. The government carefully monitors sector risk and regularly reviews whether the Framework remains fit for purpose.

The Framework has been in place since 2004 and has worked well in the main. However, it is evident that a minority of authorities have taken on excessive risk through their capital strategies, which in some cases has led to severe and pervasive financial failure requiring the government’s intervention and support. The government has made changes to strengthen the capital system, and evidence indicates this has had a positive impact in reducing risk but recent financial failures have reiterated the importance of appropriate powers to address excessive risk in specific cases.

In May 2022, the government introduced The Levelling Up and Regeneration Bill (“the LUR Bill”), which includes new provisions with respect to council borrowing and investing. These expand the government’s statutory powers to directly tackle excessive risk within the local government capital system. This seeks to safeguard the Framework and its principle of local decision making and accountability, by providing the means to address directly instances of problematic practices rather than using systemic reform that affects all authorities. Authorities operating without taking excessive risk will be unaffected, but risk to the overall system should be reduced, allowing authorities to deliver the capital investment needed in a way that is financially sustainable both now and in the future.

A local authority comes into scope of the new powers where a ‘trigger point’ is breached with respect to risk metrics, set out as part of the proposed measures in the LUR Bill. It has, however, always been government’s intent that the specific methods of calculation of these metrics will be set out in regulations. This is to ensure that the metrics can be amended in a timely way to respond to changes in local government risk, incorporate new/more appropriate data or otherwise be adapted as needed to remain optimally effective.  The government has been clear that it considers it important to engage with local authorities on the calculation methods and in making the regulations.

The Office for Local Government (OfLoG) Data Explorer includes a set of contextual financial metrics. These are separate to the metrics being considered in this consultation. Once determined, OfLoG will consider whether the metrics in the consultation should be incorporated into the Data Explorer for transparency purposes.

Why your views matter

The government is now carefully considering the available options for the calculation methods for each of the metrics. It is the aim of this consultation to collect the views of authorities, sector representatives and relevant stakeholders with respect to the calculations of the metrics. This consultation is one part of the government’s planned engagement.  There will also be a series of sector roundtables and other opportunities for stakeholders to engage.

Please note, there is a pdf copy linked at the bottom of this page for ease of reference, which you can access at any stage. For those wishing to respond to the consultation, however, please follow the link below to the online survey.