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<p>Local authorities borrow and invest under the Prudential Framework (the Framework)
which is designed to ensure that the capital plans of local authorities are affordable,
prudent and sustainable, while giving councils the freedom to set their own capital
strategies. Government is responsible for ensuring the Framework remains effective
in driving sound decision making, and collects appropriate data to monitor trends
and identify risks, including from commercial investment activity. Government does
not routinely undertake any assessment of the effectiveness of local decisions to
borrow and invest; local authorities remain accountable to their electorate for managing
their own investment strategies and meeting their best value duty. However, councils
have to appropriately comply with the Framework’s statutory guidance, including the
requirement to report performance against a set of metrics designed to demonstrate
the objectives of the Framework are being met, and to publish an investment strategy.</p><p>Government
is aware of recent trends where some local authorities are taking on high levels of
debt to invest for commercial income, rather than for providing the functions of a
council. We are clear that borrowing to invest for yield is not in keeping with the
intent of the Framework and exposes councils and taxpayers to undue financial risk.
We have already tightened our statutory guidance on investments to improve decision
making, and we are now carefully considering the recommendations of the Public Accounts
Committee’s report on local authority investment in commercial property (July 2020)
and what further interventions are needed.</p>
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