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Local Government Act 2003

Section 3: Duty to determine affordable borrowing limit

13.This provision forms the heart of the new ‘prudential’ borrowing system. It first imposes a broad duty for authorities to determine and keep under review the amount they can afford to borrow. The section then empowers the Secretary of State or the National Assembly for Wales to define that duty in more detail in regulations, which may in turn require authorities to have regard to specified codes of practice. The latter power will be used primarily to specify the Prudential Code being produced by the Chartered Institute of Public Finance and Accountancy (CIPFA), which will lay down the practical rules for deciding whether borrowing is affordable.

14.It will be for each authority to set its own ‘prudential’ limit in accordance with these rules, subject only to the scrutiny of its external auditor (special arrangements apply to the Greater London Authority and its functional bodies). The authority will then be free to borrow up to that limit without Government consent. The authority will be free to vary the limit during the year, if there is good reason. Subsection (8) ensures that the consent of the full Council is needed for the setting of the limit and any subsequent variation. Breach of the limit is prohibited by section 2(1)(a).

15.Requirements in existing legislation for authorities to balance their revenue budgets prevent the long-term financing of revenue expenditure by borrowing. However, the new system, like the present one, will confer limited capacity to borrow short-term for revenue needs in the interests of cash-flow management (see note on section 5 below).

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