The Prudential Code

Jan 19, 2017 Add a comment

Independent statistician and economist, Jim Cuthbert, warns the Prudential Code provides Scottish local government with no protection in the coming storm.

After the Scottish Government’s tight local government funding settlement in its December 2016 budget, and ahead of the local elections in May next year, independent statistician and economist, Dr Jim Cuthbert, sheds light on a little known but now critically important rule, the statutory Prudential Code in a new policy paper for the Jimmy Reid Foundation. The paper is entitled ‘The Prudential Code: flimsy fig leaf in the coming storm’.

The Prudential Code for Capital Finance in Local Authorities was introduced in Scotland in April 2004. Since then, local authorities have discretion to determine their own levels of capital expenditure and borrowing, provided they abided by the code which is designed to ensure that authorities act prudently and sustainably.

Since its introduction, the code has operated without attracting much comment. But now that we are in an era of much greater uncertainty, with the Scottish Government in control of much more of its own budget after the fiscal settlement, with economic growth remaining weak, and with the implications of Brexit continuing to be unclear, Jim Cuthbert questions whether the code remains fit for purpose over a decade later.

He concludes that the kind of disaggregated system represented by the operation of the code is unlikely to be able to cope with the challenges it will face. There is a manifest danger that local authorities will find themselves over-committed, both in terms of traditional borrowing, and in terms of the contractual commitments they are undertaking through various forms of Public-Private Partnership, (like the Scottish Future’s Trust NPD (Non-Profit Distributing) schemes.) And, there is also the danger that, if times turn hard, authorities may be exposed to various forms of ‘off balance sheet’ debt, (arising, for example, from Arm’s Length External Organisations (ALEOs)), which are not adequately captured in the current operation of the code.

Read the paper in full JRFJCPrudentialcode

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