Scottish Local Government Finance Statistics 2021-22

3. Capital Expenditure and Financing

Capital expenditure is expenditure that creates an asset, it includes the initial costs of acquisition and construction, and costs incurred subsequently to add to, replace part of, or service the asset. Subsequent costs arising from day-to-day services of an asset, known as repairs and maintenance, is not capital expenditure. Capital expenditure purchases or constructs the buildings and infrastructure necessary to provide services, such as schools, care homes, flood defences, roads, vehicles, plant and machinery. Due to the nature of capital expenditure, it can fluctuate substantially between years.

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 parties' assets; and loans to third parties to support capital investment of a third party.

Capital expenditure can be financed by one or more of the following:

• capital grants and contributions;
• borrowing or credit arrangements;
• contributions from capital or revenue reserve funds;
• capital receipts from the sale of assets.

Chapter 4.1 provides more information on local authorities' capital reserve funds.

3.1 Capital Expenditure

In 2021-22, total capital expenditure was £3,341 million, an increase of 28.3 per cent, or £738 million, from 2020-21.

Chart 3.1 shows the split of capital expenditure into these six categories in 2021-22. The majority of capital expenditure, £2,623 million or 78 per cent, related to new construction, conversions & enhancements to existing buildings.

Please note, 'Third party capital projects funded from capital grant' and 'Revenue expenditure funded from borrowing' are also included in authorities' revenue figures.

Source: LFR CR

Table 3.1 shows a breakdown of capital expenditure between 2017-18 and 2021-22. New construction, conversions and enhancements to existing building has consistently accounted for the majority of capital expenditure over this period. This type of capital expenditure has increased by 30.3 per cent, or £610 million, between 2020-21 and 2021-22.

Capital expenditure on acquisition of land, existing buildings or works has also increased between 2020-21 and 2021-22.

Please note, 'Revenue expenditure funded from capital grant and borrowing' is also included in authorities' revenue figures.

Source: LFR CR for 2019-20, 2020-21 and 2021-22, and CR Final for all other years

3.1.1 Capital Expenditure by Service

Chart 3.2 shows capital expenditure in 2021-22 by service. HRA had the largest share of expenditure at £950 million, followed by Education with £670 million.

Please note, 'Other' includes Social Work, Central Services and Trading Services.

Source: LFR CR

Chart 3.3 shows capital expenditure for 2017-18 to 2021-22 for the six services with the highest capital expenditure in 2021-22. Capital expenditure has increased for all services except Trading Services between 2020-21 and 2021-22, reflecting the overall increase in capital expenditure in 2021-22.

This chart excludes expenditure for Culture & Related Services; Social Work; Trading Services; and Other, including Central Services which, combined, accounted for less than 15% of total capital expenditure in 2020-21.

Source: CR Final for 2017-18 and 2018-19, and LFR CR from 2019-20 onwards

3.1.2 General Fund Capital Expenditure by Council

In any given year, capital expenditure per person varies substantially between local authority areas. This will in part reflect the different priorities of local authorities, however it also reflects differences in the timing of capital projects. Expenditure on capital projects can be highly variable as some projects can be high-value and infrequent, and expenditure per head in local authority areas will move, possibly substantially, from year to year as projects begin or wind down.

Chart 3.4 shows capital expenditure on General Fund services per person by council. In 2021-22, the average capital expenditure per person across all councils was £432, an increase from £347 per person in 2020-21. Spend per person ranged from £191 per person in South Lanarkshire to £1,072 per person in Na h-Eileanan Siar.

Source: LFR CR, Mid-Year Population Estimates

3.2 Capital Financing

Chart 3.5 shows how local authorities financed their capital expenditure in 2021-22. The two main sources of financing were borrowing from the Loans Fund, £1,441 million, and grants & contributions, £1,402 million, and which together accounted for over four-fifths (85 per cent) of all capital financing in 2021-22.

Capital grants and contributions are provided to local authorities to fund capital investment. This 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. The Scottish Government provides two types of capital grant funding to local authorities – a General Capital Grant (GCG) and a number of specific capital grants. The General Capital Grant accounted for just over a third (36 per cent) of grants and contributions in 2021-22.

More information on borrowing is provided in Chapter 3.2.1 and more information on the Loans Fund is provided in Chapter 5.1.1.

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

Source: LFR CR

Chart 3.6 shows capital financing by type from 2017-18 to 2021-22. Except for credit arrangements, all types of financing have increased between 2020-21 and 2021-22, reflecting the overall increase in capital expenditure incurred in 2021-22. Grants & contributions and Borrowing from the Loans Fund continue to be the main sources of capital financing.

The fluctuations in borrowing reflect the nature of capital and can be influenced by the type of expenditure being undertaken in each year. In particular, the decrease in borrowing between 2019-20 and 2020-21 will reflect the overall reduction in capital expenditure incurred in 2020-21 due to the impacts of the Covid-19 pandemic.

Financing from credit arrangements was notably high in 2019-20 compared to other years, this was due to significant one-off sale and leaseback transactions for Culture and Related Services by Glasgow City Council. However, financing from credit arrangements in 2020-21 is at the lowest level in the five year period shown.

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: CR Final for 2017-18 and 2018-19, and LFR CR from 2019-20 onwards

3.3 Borrowing and Credit Arrangements

Local authorities can borrow to fund capital expenditure, either through the borrowing of money or by way of a credit arrangement, such as a lease. The cost of repaying debt, including the interest costs, is expenditure to the revenue accounts. The costs of servicing debt in 2021-22 are provided in Table 2.5, which shows the cost of repayments and interest payable.

The Local Government (Scotland) Act 1973 provides councils with a general power to borrow money. Other local authorities' powers are set out in legislation specific to that authority. The Local Authority (Capital Finance and Accounting) (Scotland) Regulations 2016 sets out the purposes for which a local authority may borrow.

Table 3.2 provides a summary of borrowing and credit arrangements in 2021-22. Local authorities financed £1,441 million of capital expenditure from borrowing in 2021-22, this was an increase of 72.8 per cent, £607 million, compared to the value of borrowing to finance capital expenditure in 2020-21.

In 2021-22, local authorities also entered into credit arrangements, recognising debt of £59 million, a decrease of 39.0 per cent, or £38 million, from 2020-21.

Please note that 'Advances for Capital Expenditure' includes borrowing from the Loans Fund used to fund grants to third party capital projects which will also be included in the revenue figures.

Source: LFR CR

Trends for borrowing from the Loans Fund and credit arrangements between 2017-18 and 2021-22 are shown in Chart 3.6 and discussed in Chapter 3.2.

3.4 Capital Receipts

Capital receipts is the term used to recognise income from the sale or disposal of an asset, such as land or council housing. As shown in Table 3.3, local authorities generated £67 million in capital receipts in 2021-22. This is a decrease of £27 million compared to 2020-21.

Source: LFR CR

Capital receipts may only be used to fund capital expenditure or for a purpose specified by statute, or statutory guidance. Local authorities can also hold capital receipts in a capital reserve for future use. This means the value of capital receipts raised in year may not equal the amount used in year. Table 3.4 sets out how capital receipts were used in 2021-22.

Source: LFR CR

Local authorities used a total of £78 million capital receipts in 2021-22. The majority of these were used to fund capital expenditure and repayment of debt, which accounted for 65 and 27 per cent of capital receipts used respectively.