Publication - Factsheet

Local government borrowing: factsheet

Published: 24 Mar 2016

Information on how local authorities may borrow money to fund capital expenditure.

Published:
24 Mar 2016
Local government borrowing: factsheet

Borrowing powers

The statutory power which allows a council to borrow is section 69 of the Local Government (Scotland) Act 1973.

The statutory power for the valuation joint boards to borrow is the Valuation Joint Boards (Scotland) Order 1995.

The statutory power for the Regional Transport Partnerships to borrow is Section 3 of the Transport (Scotland) Act 2005.

The Tay Bridge Joint Board may only borrow from the constituent councils, as set out in the Tay Road Bridge Order Confirmation Act 1991.

The new Integration Joint Boards have no powers to borrow.

Section 69 of the Local Government (Scotland) Act 1973 provides councils with the power to borrow money in accordance with legislation made regulating those functions. The Local Authority (Capital Finance and Accounting) (Scotland) Regulations 2016 set out the purposes for which a local authority (defined in the Regulations) may borrow. These include:

  • capital expenditure of the local authority
  • grants to third parties to fund their capital expenditure projects
  • direct expenditure on third party assets if that expenditure is capital expenditure
  • for treasury management activities
  • to lend to other statutory bodies as set out in Part 3 of the Regulations 

A local authority may borrow money for other purposes, but this requires the consent of Scottish Ministers.

Consent to borrow: lending to third parties for capital projects

We support schemes where a local authority borrows money to lend to a third party who supports government or local government initiatives to boost capital investment opportunities.

Schemes supported include the National Housing Trust initiative to increase affordable housing supply.

View all third party capital projects funded via consent to borrow.

Consent to borrow: revenue costs

From time to time, we may set up temporary schemes through which local authorities may borrow money to help them manage revenue costs. This is also known as capitalisation. Previous examples have included borrowing to meet the costs of settling equal pay claims, and of managing the cost of early retirement for teachers.

A consent to borrow for revenue costs is only possible with the agreement of the UK Government. The UK Government set a cap on the amount of borrowing Scottish Ministers were able to offer under the equal pay consent schemes in 2009 to 2010. and 2010 to 2011.

There is currently no agreement from the UK Government for Scottish Ministers to provide any capitalisation (consent to borrow) scheme. In the absence of an agreement, any scheme or individual consent Scottish Ministers allow is likely to have a financial impact on the Scottish Government’s budget as the UK Government has indicated that should Scottish Ministers wish to provide a consent to borrow this would result in a reduction in the Scottish Budget to cover this consent.

Sources of local authority borrowing

The Local Authority (Capital Finance and Accounting) Regulations 2016 do not specify where a local authority can borrow from or the type of borrowing. This is a matter for each local authority.

The majority of local authority borrowing is from the Public Works Loans Board (PWLB), which is a statutory body operating within the United Kingdom Debt Management Office, an Executive Agency of HM Treasury.  PWLB's function is to lend money from the National Loans Fund to local authorities, and to collect the repayments.

Local authorities may also borrow from outside the UK but all borrowing must be in pound sterling.

A local authority may also borrow by way of a credit arrangement such as leases and service concession arrangements such as Public Private Partnerships, Private Finance Initiatives and similar arrangements.

Security for money borrowed

The 2016 Regulations require all money borrowed to be secured on all the revenues of the local authority. This means that a local authority cannot mortgage or charge any of its property as security for money it has borrowed. The regulations make any security granted in beach of the Regulations unenforceable.

All money borrowed by a local authority rank equally without any priority.

Protection for lenders

A person lending money to a local authority does not need to check that the authority has powers to borrow and is not prejudiced by the absence of such power.

Limits on local authority borrowing

We do not place limits on local authority borrowing. The 2016 Regulations require each local authority to set an authorised limit for external debt. 

Local authorities' borrowing impacts on the national levels of the Public Sector Borrowing Requirement, which is the amount of money the UK is borrowing as a whole that is outwith Her Majestry's Treasury (HMT) control. HMT monitor self-financed borrowing levels closely to determine whether to apply a National Limit. A National Limit is a last resort that would effectively cap self-financed borrowing by local authorities.

HM Treasury is able to control borrowing through its management of central government budgets, including those of the devolved administrations. They could decide to use their powers to impose a limit on public sector borrowing as part of public sector debt ‘for national economic reasons’. Such a limit on borrowing would be used to protect the country’s economic interest if local borrowing, albeit prudent locally, were considered to be unaffordable nationally.

We and Scotland's local authorities have agreed on a national limit protocol, which can be downloaded below.

Repayment of Borrowing

Special arrangements for the repayment of local authority borrowing is set out in Part 4 of the 2016 Regulations. Local authorities are required to maintain a loans fund, make advances from the loans fund and make repayments to the loans fund each year.

These arrangements replace the normal accounting provision for depreciation.

Guidance on loans fund accounting is set out in Local Government Finance Circular 7/2016.