Use of capital receipts to fund redundancies a “necessary evil” say councils
Councils have defended their use of capital receipts to fund redundancy packages, in the face of criticism from an article published on the Huffington Post website.
In 2015, the then chancellor George Osborne introduced new flexibilities allowing councils to spend capital receipts on transformation projects.
Earlier this week, HuffPost published the results of an investigation carried out with the Bureau for Investigative Journalism, which found that councils have spent £115m on redundancy payments since the power was introduced.
The article said: “The local government funding crisis has become so dire that councils are being forced to sell thousands of public spaces, such as libraries, community centres and playgrounds.
“In a double blow to communities, some local authorities are using the money raised from selling off buildings and land to pay for hundreds of redundancies, including in vital frontline services.”
Through a series of Freedom of Information requests, the bureau discovered 64 councils in England have spent a total of £381m through the capital receipt flexibilities, with, £115 million spent on redundancy payments.
This means though that just 1.2% of councils’ total of £9.3m of capital receipts were spent on making redundancies over the period.
At £23m, Birmingham City Council was cited in the report as the council spending the highest amount of capital receipts on redundancies.
In a statement to Room151, the authority said that due to austerity it has been forced to reduce its workforce by 12,000 people, “with the use of compulsory redundancies always a last resort”.
It said: “The redundancies help meet the financial challenge in the long term – and the council has used the capital powers available across local government to it to ensure it can fund this course of action and deliver the necessary ongoing savings.”
Another council, London Borough of Haringey, spent £8m of capital receipts on redundancy payments, according to the report.
A spokesperson for the council said “The council has utilised allocated capital receipts to meet the costs associated with these redundancies, in order to make possible ongoing revenue savings.
“This is unfortunately a necessary part of the council’s business and financial planning.”
Commenting on the HuffPost investigation, local government finance consultant Stephen Sheen, said: “The flexible use of capital receipts initiative is a temporary opportunity to cross over the revenue/capital divide, so that capital receipts can be used to finance revenue expenditure.
“However, this is only possible where the revenue expenditure is intended to generate more than commensurate future savings.
“As redundancies are unfortunately one of the key mechanisms for generating future savings in staff costs but involve incurring upfront expenses, they are a clear candidate for the flexible application of capital receipts.
“The theory is therefore sound.
“However, as with all things Prudential Framework, the freedoms to act effectively also bring the opportunity for authorities to act ineffectively (whether accidentally or deliberately).”
He said that if the framework was allowed to operate freely, the split between revenue and capital expenditure would not be required, “as affordability assessments of all projects would all be made equally in relation to their lifetime impact on revenue”.
Government data shows that English local authorities gained £3.3bn in capital receipts during 2017/18.
However, this is still lower than levels in the years before the financial crisis – with £4.0bn recorded in 2007/08.