Kirklees Together

Why we can’t use the capital budget to ease pressures on the revenue budget

UK local authorities are generally not allowed to use capital funding for revenue costs for legal and financial reasons.

Here’s why:

1. Legal Restrictions: Capital funding and revenue funding have different legal purposes and rules. Capital funding is intended for long-term investments in physical assets and infrastructure, while revenue funding is meant for ongoing operational expenses, such as salaries, supplies, and maintenance. Mixing these funds could lead to misallocation and misuse of resources, which could have legal consequences and make financial reporting less transparent.
2. Financial Prudence (being sensible with money): Using capital funding for revenue costs can lead to financial problems further down the line. Local authorities are allowed to borrow to fund capital projects as long as the level of borrowing is affordable and sustainable. Using these borrowed funds for short-term operational expenses could create a financial burden in the future when the borrowed money needs to be repaid. This practice could also impact the local authority’s creditworthiness and ability to secure funding for necessary capital projects.
3. Accountability and Reporting: Separating capital and revenue funding allows for clearer financial reporting and accountability. Local authorities are required to maintain accurate records of their expenditures and demonstrate responsible financial management. Keeping capital and revenue funds separate ensures that both types of expenditures are appropriately tracked and reported to stakeholders and oversight bodies.
4. Long-Term Planning: Capital funding is crucial for addressing infrastructure needs and promoting the long-term development of a community.
5. Grant and Funding Agreements: Many capital funding sources, such as grants from central government or specific earmarked funds, come with restrictions and conditions that are strict about how the money can be used. Not following these rules could lead to the loss of funding or penalties.

Mixing these funds could jeopardise the financial stability and future prospects of the local authority and the communities it serves.

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1. Our main funding sources
2. The difference between ‘capital’ and ‘revenue’ budgets
3. Why we can’t use the capital budget to ease pressures on the revenue budget
4. Can the council reallocate grant funding to cover costs?
5. How is the council still spending money on regeneration projects if there is a budget problem?