Explaining the difference between capital and revenue

05 August 2015

Capital and revenue are words to which we in local government do not give a second thought when discussing current and future budget issues. 

To the public, however, it is not always clear why a council might have money to undertake a major and expensive road improvement scheme (that may also cause frustrating congestion) while at the same time not being able to provide day to day services in libraries, social services and highway maintenance to the same level as back in 2010. 

This is certainly something that is at the front of our minds at Oxfordshire CC. 

Post-summer we will be focusing afresh on how to make what could potentially prove to be up to £60m of cuts that we believe may have to be made as a result of the Treasury’s forthcoming round of new savings in public expenditure.

We at Oxfordshire are already in the process of saving around £290m up to 2018. 

Yet, at the same time, we are undertaking major road improvements in and around Oxford and at the Milton Interchange on the A34 – at the cost of millions of pounds.

There’ve been plenty of other roadworks schemes completed over the last 18 months.

All have made predictable local newspaper headlines of the traffic gridlock variety.

We’ve also recently unveiled an ambitious Local Transport Plan covering the period up to 2031, which is reliant on capital expenditure and on successfully bidding for government grants. 

I can already guarantee that when we consult with the public on budget cuts up to 2020 they’ll challenge us as regards our expenditure on the roadworks that are causing them to sit in traffic jams during their daily commute. 

Why, they’ll ask, can’t we spend that money on children’s centres or household waste recycling centres instead of clogging up the roads?

Our answer will be that we’re not bad at bidding for government capital grants and that we need to plan for the future of Oxfordshire’s transport infrastructure – not least because our economy, housing and population are all forecast to grow quickly over the next two decades.

From past experience that answer will be heard but not always clearly understood - and we’ll have to be very persistent and stubborn in giving that explanation. 

We’ve often resorted to bringing the situation down to a household level – your revenue budget is the food and drink you put in to the fridge and the electricity to pay for its running, your capital budget is the one-off chunk of cash you use if your fridge breaks down or you want to upgrade it.

As local government practitioners we should never assume that the difference between capital and revenue is understood. 

It’s so easy for us to make such an assumption given that we are steeped in these matters day in and day out. 

As long as the Government’s overall thrust is to seek to balance the nation’s books through cuts to public expenditure while at the same time investing in infrastructure this potential misunderstanding is going to exist. 

Hopefully we can all be successful in explaining the difference. 

It is critically important that we do – otherwise our residents and electors may labour under the misapprehension that we are making bad choices on their behalf.

Lorna Baxter is chief finance officer at Oxfordshire CC

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