Announcement

Capitalisation guidance published to help councils deliver early savings

This news article was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

To help councils deliver efficiency savings early through organisational restructuring, the Government is providing £300 million of flexibility…

To help councils deliver efficiency savings early through organisational restructuring, the Government is providing £300 million of flexibility - through capitalisation - in the next financial year, Local Government Minister Bob Neill announced today.

Capitalisation is where the Government permits councils, in special circumstances, to treat revenue costs as capital costs. This increases their flexibility, because they can then meet those costs using their existing  borrowing powers or capital receipts, for example, from asset sales.

While capitalisation will provide important support, it will be for councils to assess how they best manage costs overall from their own resources, including prudent and appropriate use of their £10bn of reserves.

The nation faces an unprecedented financial situation and every part of the public sector, including local government - which accounts for a quarter of all public expenditure - has a part to play in cutting the deficit.

In order to provide authorities with clarity early in the financial year, the timetable for capitalisation is being brought forward. Decisions can be expected in July, nearly six months earlier than in previous years.

Guidance for how councils should apply has been issued today. The deadline for applications is 12 May.

Mr 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.

Prudent use of their £10bn of reserves can help councils to manage transformational change whilst protecting frontline services.

Notes for editors

1. Capitalisation is the means by which the Government, exceptionally, permits authorities to treat revenue costs as capital costs. The costs can then be funded from borrowing or capital receipts, thereby increasing an authority’s financial flexibility. Since capitalisation is a relaxation of normal accounting requirements, it has always been subject to an application process, with applications assessed against strict criteria.

2. Regardless of whether the capitalised expenditure is funded through borrowing or the use of receipts (e.g from asset sales), capitalisation scores as revenue expenditure in the national accounts. It therefore impacts directly on the deficit reduction programme, and is important that capitalisation is strictly controlled.

3. The Spending Review announced that £200m of capitalisation would be available in 2011-12. Following representations from authorities, 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.

4. The main application deadline is being brought forward. While there will be a limited second process later in the financial year, the main deadline is 12 May 2011. All authorities applying to capitalise statutory redundancy costs should apply by that deadline. The majority of the capitalisation limit will be allocated in the main process. The guidance is on the DCLG website at: www.communities.gov.uk/localgovernment/localgovernmentfinance/capitalfinance/capitalisation/

5. The capitalisation categories and criteria have been revised since 2010-11. This is set out in Section 2 of the guidance. Consideration of the level of reserves will be a key part of the assessment process. As has been the case in previous years, the Government will look at the total reserves for each authority (excluding schools reserves), including both ‘earmarked’ and unallocated reserves, since earmarking of reserves in itself does not exclude use for other purposes.

6. The guidance does not cover equal pay capitalisation. Decisions have not yet been taken on equal pay capitalisation policy for 2011-12.

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