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Prudential borrowing

A brief overview of how local authorities may be able to raise additional finance for capital expenditure. This 'prudential borrowing' may help local authorities achieve and maintain the Welsh Housing Quality Standard.

The Local Government Act 2003 sets the legal framework within which local government may undertake capital expenditure. The Act also empowers the National Assembly for Wales to further regulate capital finance matters as appropriate.

Section 3 of the Act requires all borrowing to be subject to an affordability assessment by a Local Authority. Section 12 also provides for a general power that allows an authority to invest resources in support of their services or for sensible treasury management activities.

Local authorities will be free to raise additional finance for capital expenditure - without specific Assembly Government consent - over and above that already provided by the National Assembly (ie prudential borrowing), where they can afford to service the debt within their own resources. There are however, reserve powers for the National Assembly for Wales to set limits on borrowing and credit arrangements of all or individual local authorities for National economic reasons. It is however envisaged that these would be used only in very exceptional circumstances. The emphasis therefore is on the ability of the local authority to repay any additional projected borrowing without looking to the Welsh Assembly Government for extra support.

The Welsh Assembly Government Guide to the Prudential Framework has previously been issued by the Welsh Assembly Government with the express objective of explaining the greater flexibility and local discretion available whilst preserving necessary safeguards on levels of public sector borrowing. Legislation imposes a strict separation (or ‘ring fencing’) between Housing Revenue Account (council housing) activities and other non council housing activities. This is to ensure that there is no cross subsidisation of council housing activities via the general Council Tax payer.

In considering raising additional borrowing, the revenue resources required to service this debt will be an important consideration. An authority may propose to increase its revenue income stream by raising rent levels for its tenants. Any such proposal to levy rent increases over and above the Welsh Assembly Government determined rent subsidy guidelines would result in subsidy claw backs on a sliding scale from the authority. Broadly, in practice this could mean that an increase in rent of £1 above the guideline might only raise an additional 50p to be used for housing account activities (including additional borrowing for housing purposes). Exact figures would vary per individual authority depending on a range of other specific factors related to the Housing Revenue Account position. As a consequence such rent increase proposals may soon become unaffordable for many, if not all, tenants.

Similarly an authority may seek to reduce its council housing expenditure to provide an income surplus to fund additional (prudential) borrowing repayment costs. An outcome from this may be a reduction in operational service delivery and defeat the objective of extra borrowing. Alternatively, if genuine efficiencies can be found within Housing department activities, the savings generated could be used for borrowing without directly impacting service delivery levels.

Where an authority is able to demonstrate through a robust and achievable 30 year Business Plan that it can achieve and maintain Welsh Housing Quality Standards through its own available resources (which may include assumptions about prudential borrowing) then the Assembly Government is prepared to endorse its proposals and has done so in several instances.