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I ask Elanor Davies to come in on those specific points and provide some additional information.

The regulations are a product of engagement and will help to provide clarity and certainty going forward, as well as the consistency with accounting standards that we want.

Elanor might want to provide some more detail on the process and consideration regarding potential retrospectivity.

Specific roles and responsibilities are exercised by the Accounts Commission, for example, in assessing the performance and financial management of local authorities. We recognise the challenges that local authorities are facing, but we are in a different set of circumstances than certain local authorities in England were in because of some of the decisions that were taken by individual local authorities. However, as I highlighted in my earlier remarks, a contributing factor was the particular approaches around accounting that we are discussing, and the way in which they were taken in England. The United Kingdom Government reacted to that; we are getting ahead of the situation by being proactive. We are ensuring that we are not creating a situation in which, over time, the level of risk increases and starts to present long-term sustainability challenges.

On this particular point, we are taking proactive action to align with the situation in England and Wales. Indeed, the action is prospective—to answer Mr Coffey’s question, there will be no retrospective effect.

Thank you, convener, and good morning, committee. With your permission, convener, I will just take a bit of time to explain what I appreciate is potentially a complex set of regulations.

In 2016, regulations were introduced to provide greater flexibility to local authorities to ensure that both current and future taxpayers are charged for their share of the capital expenditure costs of public assets that are used to deliver services.

Perhaps I can briefly explain the nature of statutory accounting arrangements. Accounting standards require depreciation to be charged against revenue to reflect the cost of the capital expenditure for an asset, such as a school, as it is used over the term that it will be used for—in other words, its useful life. The 2016 regulations replaced the requirements of accounting standards with an annual charge against revenue in the form of loans fund repayments, to recognise the costs of capital expenditure to be financed from borrowing over the term for which the expenditure is expected to provide benefit to the community.

The aim of both accounting standards and statutory arrangements is to accurately and transparently reflect the costs of capital expenditure to acquire an asset over the period during which the asset will be used. The 2016 regulations permit local authorities greater freedom to choose the term over which to charge the costs of capital expenditure against revenue, known as the repayment of loans fund advances, and to vary the period and pattern of such charges. The intention is to allow local authorities to more accurately align the period of loans fund repayment—and therefore recourse to taxpayers—with the period over which the asset will benefit the community.

However, a review of local authority financial data shows that, since 2019, local authorities have been significantly reducing their on-going annual revenue provision to meet long-term borrowing costs, despite increasing external debt, and have been deferring a substantial proportion of capital financing costs to future years. That approach has been taken as a solution to meet affordability challenges and address budget gaps instead of allocating more fairly the cost of the capital expenditure to taxpayers. That is not in keeping with the spirit of the statutory accounting arrangements, which are intended to ensure adequate provision from revenue to meet debt financing costs and an equitable charge to taxpayers for the use of the asset for which the capital expenditure has been incurred.

Furthermore, such an approach creates financial risk, as deferred repayments will have to be met in the future. Rising demand for public services and the prolonged impact of UK Government austerity on the public finances, along with economic and inflationary pressures, increase the risks that local authorities might find it difficult to service their increasing capital financing commitments. Deferring provisions to meet such commitments further exacerbates an already challenging longer-term financial outlook. The committee will not need me to draw its attention to the situation in England and the stark evidence of the outcome of such accounting practices in English councils.

We agree entirely with the evidence that I know you will have heard from local authorities that authorities in Scotland are neither borrowing excessively nor borrowing for the purposes of commercial investment, but the fact is that the practice of reversing debt financing costs and deferring those costs to future years, which has contributed significantly to the financial collapse of a number of local authorities in England, is being adopted in Scotland. I point out for information and context a House of Commons research briefing that was published last month that states that the financial collapse of Thurrock Borough Council stemmed from “two principal causes”: not only the loss of value of its assets, but a failure to make “sufficient ... revenue provision” to meet its debt repayments.

The briefing also states:

“a major cause of Slough’s financial difficulties was its failure to make sufficient ... revenue provision in its accounts to repay”

its debts. Moreover,

“Woking issued a section 114 notice”

in

“June 2023”,

highlighting inadequate minimum revenue provision since 2007-08 as a key contributor to the local authority’s significant financial challenges.

In 2020, the UK Government took steps to amend equivalent statutory arrangements for England and Wales to prohibit exactly those accounting practices that continue to be adopted in Scotland—namely to prevent local authorities from reversing costs incurred in previous years as a means of increasing reserves, and to prevent the deferral of debt repayments to future years as an affordability measure.

Although our situation and the situation in England are not identical, the amendment regulations simply align Scotland with the improvements that have been made to the statutory framework for England and Wales. Contrary to the suggestion that the regulations have been rushed through in some way, the need for a review of statutory capital financing and accounting was identified in 2019 and confirmed in the resource spending review in 2022. Despite that, local government has resisted any such review and has requested successive delays over the past two years. The committee might be aware that we consulted on a number of other reforms in late 2023, but in the light of the valid feedback from respondents, we wish to take more time to consider the implications of those reforms before bringing them forward.

No specific concerns were raised over the amendments that are being taken forward at this time, and although the UK Government intervened reactively, we are intervening proactively to protect Scotland’s public finances from risks such as the outcomes that we have seen in England. I therefore consider it to be important to deliver that alignment as soon as possible.

In summary, the amendment regulations will more clearly articulate the policy intent of the 2016 regulations and will harmonise statutory arrangements not only with accounting standards but with England and Wales, to better ensure an equitable charge to current and future taxpayers over a period that is commensurate with the benefit that an asset provides to the community.

With that, convener, I conclude. Thank you.

I have two points to make on that. The first, which goes back to my previous answer and my introductory remarks, is about the timelines and the signalling of our intent. Secondly, on the consultation, a consultation that is just with local government will typically be around two weeks. My officials will correct me if I am wrong, but I think that the consultation in this case was four weeks, so it was more than the normal time.

We have consulted in a way that is consistent with how we normally engage with local government. More generally, the context in which the consultation was undertaken was that there had been extended engagement over a period in which we had indicated our concerns.

We will continue to engage constructively with local government on those matters but, as I touched on earlier, we in the Government have an obligation in the broader stewardship of the public finances and in assuring that there is an appropriate regulatory environment.

Elanor Davies may be able to provide more detail on the other elements that were consulted on and the work that is on-going.

As I said, if local authorities want to work with the Government on particular points in addressing any of their potential concerns, or other issues that could arise, we want that to happen.

I touched on the areas that we consulted on that we are not taking forward. We have taken a constructive approach to that with the establishment of a joint working group and the deferring of any further changes to 2027 at the earliest. That demonstrates the Government’s balanced and proportionate approach. It is very much in the spirit of constructive partnership.

For the reasons that we have set out, we believe that we have to take forward these regulations at this time, given the significant risks that could ensue if we did not do so.

If local authorities would welcome clarification on specific areas of, or any matter in, the broader regulatory environment, we would want to engage on that constructively. I ask Elanor Davies whether she has a response to any specific points in that area.

I do not want to pre-empt the outcome of the discussions. Clearly, they cover a range of portfolio and ministerial interests.

In general terms, I would say that you have touched on a very important point. With any programme of public service reform, any spend-to-save approach or any investment, what the constraining of budgets will mean for any Government—and it is one of the effects that we are still reeling from after the austerity that we have had at various points over the past 14 years—is that it will have to focus day to day on key, mission-critical tasks. Often the challenge that we have with reform is that we need to identify parallel funding to support change and transformation. That is just a general point, but all Governments have to contend with such things.

What we are seeing feeding through to next year’s budget, particularly around capital, are the consequences of decisions taken by the UK Government, which predominantly impact the discretionary fund that we have available. We are trying to manage that impact in a way that is consistent with the principles and values that the Government has articulated, in recognition of the key and central role that the NHS plays, not just in delivering public services, but as a key economic actor within the wider Scottish economy, too, and in recognition, too, of the key expectations that Parliament and indeed the public have that it be resourced adequately. That, again, has been reflected in the decisions that we have taken.