Local Government 2023-24 Provisional Outturn and 2024-25 Budget Estimates

Capital Expenditure

Capital expenditure is expenditure that creates an asset, extends the life of an asset or increases the value of an asset. It creates the buildings and infrastructure necessary to provide services, such as schools, care homes, flood defences, roads, vehicles, plant and machinery. Capital expenditure also includes grants a local authority provides to a third party to fund capital expenditure of the third party; direct expenditure on a third party’s assets; and loans to third parties to support capital investment of the third party where this is financed from capital resources. Capital POBE figures include amounts relating to a local authority’s direct provision of housing, which is recorded in the Housing Revenue Account (HRA).

It is important to note that the 'lumpy' nature of capital expenditure means that delays or changes to large capital projects at the end of the financial year can have a large impact on final figures compared to provisional outturn and budgets.

For capital expenditure, local authorities have reported total provisional outturn of £3,916 million in 2023-24, and budget estimates of £5,174 million for 2024-25.

Figure 4: Total Capital Expenditure for 2020-21 to 2024-25, £ millions

Source: POBE 2024 Return, LFR CR, CR Final

As shown in Figure 4, capital expenditure has continued to increase from its recent low point of £2,604m in 2020-21. This relatively low amount likely relates to the impacts of the COVID-19 pandemic on the building sector, with the substantial increase expected in 2024-25 reflecting not only the commencement of new capital investment programmes, but also the resumption of capital projects delayed as a consequence of the pandemic.

As shown in Figure 5, most services show increases in capital expenditure in 2023- 24 and 2024-25, compared to 2022-23. The HRA is the service with the largest capital expenditure in each year, and this is provisionally reported to increase to £1,186 million in 2023-24, and then to £1,445 million in 2024-25. Overall, HRA capital expenditure accounts for around 30% of all capital expenditure in 2023-24 and 28% in 2024-25.

HRA capital expenditure is driven by new construction and conversion, which accounts for 44 and 47 per cent of the HRA capital expenditure in 2023-24 and 2024-25 respectively.

Education is expected to have the second highest capital expenditure in both years, accounting for £718 million (18% of all capital expenditure) in 2023-24 and £1,230 million (24%) in 2024-25. A majority of councils (26) are building new schools in 2024-25, and as a result, capital expenditure in Education is expected to increase by 71.4% in 2024-25, compared to 2023-24. This reflects the rollout of the Learning Estate Investment Programme.

Figure 5: Capital Expenditure for 2022-23 to 2024-25 by Service, £ millions

Please note that 'Non-HRA Housing' includes capital expenditure related to Consented and Statutory Borrowing.

Source: POBE 2024 Return, LFR CR, CR Final

Local authorities can finance capital expenditure in a number of ways, including use of grants and contributions; borrowing; credit arrangements; capital receipts and reserves. Figure 6 shows how capital expenditure was financed in 2022-23 and how it is anticipated to be financed in 2023-24 and 2024-25.

Figure 6: Total Capital Financing for 2022-23 to 2024-25, £ millions

Please note that 'Grants & Contributions' and 'Borrowing from Loans Fund' include amounts used to fund grants to third party capital projects which will also be included in the revenue figures.

Source: POBE 2024 Return, LFR CR, CR Final

In-year borrowing is the largest source of capital financing from 2023-24 (£1,859 million), with a substantial increase to £3,109 million expected in 2024-25. This increase in in-year borrowing is seen across most councils (25) in 2024-25. In-year borrowing is anticipated to overtake grants & contributions as the primary source of capital financing in 2023-24 and 2024-25.

In-year grants & contributions (at £1,617 million) is initially slightly higher than borrowing in 2022-23. It is expected to reach £1,672 million in 2023-24 and then fall to £1,482 million in 2024-25. From 2023-24 onwards, in-year grants & contributions becomes the second-largest source of capital financing. This source of capital financing includes grants and contributions received from the Scottish and UK Governments; other government agencies and Non-Departmental Public Bodies (NDPBs); other local authorities; and private developers. Capital grant from the SG includes capital allocations paid to local authorities as part of the Local Government Finance Settlement. Details of these allocations can be found in the relevant Local Government Finance Circular.

The Chartered Institute of Public Finance and Accountancy (CIPFA) Prudential Code sets out a framework for a local authority to demonstrate its capital investment plans are affordable, prudent and sustainable. The Capital Financing Requirement (CFR) is one of the prudential indicators set out in this framework. It represents the amount of capital expenditure a local authority has determined should be met from borrowing or funded from a credit arrangement, with the repayment of debt met from future budgets. That is, it represents an authority’s underlying need to borrow money. Local authorities have reported total provisional CFR of £24,032 million in 2023-24, and total budget estimate for CFR of £26,682 million for 2024-25.

Total External Debt reflects local authorities’ gross external borrowing, finance leases and other long-term liabilities. This may be less than the CFR where an authority has chosen to utilise cash reserves rather than borrow externally; or it may be more than the CFR where an authority has chosen to borrow in advance of capital expenditure being incurred. The Prudential Code limits local authorities’ borrowing in advance to the CFR amount plus up to two years’ planned capital expenditure to be funded from borrowing. Local authorities have reported provisional external debt of £20,587 million in 2023-24, and budgeted for external debt of £23,508 million in 2024-25.

Figure 7: CFR and External Debt for 2020-21 to 2024-25, £ millions

Source: POBE 2024 Return, LFR CR, CR Final

As shown in Figure 7, Total External Debt continues to remain below the CFR. This means local authorities are under-borrowed and indicates their treasury policy is to utilise cash reserves to fund borrowing at this time. Should their cash requirements increase, a local authority can borrow externally to meet that need, utilising their under-borrowed position.