By Claire West

Limiting the power of councils to borrow risks wasting millions of pounds by driving up the cost of vital road and building projects, council finance chiefs have warned.

The Local Government Association, which represents more than 350 councils in England and Wales, and the Charted Institute of Public Finance and Accountancy (CIPFA), which represents public sector finance experts, warn Chancellor George Osborne that reform of borrowing rules would be a false economy and impose huge costs on taxpayers.

Rules which allow councils to borrow prudently against their assets have driven down the costs of equipment and major building and maintenance projects by allowing town halls to replace costly leasing deals, according to a report published today.

Town halls were given freedom to borrow against their assets in 2004. Council borrowing has been modest and focussed on delivering savings or improving services to give better value for money.

Council borrowing is governed by tough rules, known as the Prudential Code, which ensure that borrowing is affordable and pays for major projects and initiatives. Since 2004 councils have borrowed the equivalent of no more than 4.5 per cent of their total assets.

John Ransford, Chief Executive of the Local Government Association, said:

“Councils are determined to give taxpayers the very best possible value for money. We know the government wants to cut the deficit, but prudent borrowing by councils is a proven way of saving money.

“Town halls are careful to borrow money only when there is a rock-solid case that it is prudent and affordable. Ministers want the public sector to use their purchasing power and get the best value for every pound. These powers give councils the ability to do just that.”

CIPFA Chief Executive Steve Freer said:

“The Prudential Code has worked very well indeed for councils over six years. It is important that the government retain the full flexibilities of these arrangements in the Comprehensive Spending Review.”