In a new Report, the Committee warns the Department for Communities and Local Government "appears complacent about the risks to local authority finances, council tax payers and local service users arising from the increasing scale and changing character of commercial activities across the sector".
There are 353 local authorities in England, which use capital spending to invest in assets such as roads, leisure centres, libraries and the offices they use to deliver services.
However, there is growing activity among councils aimed at generating revenue income from capital investment in properties and businesses, such as developing houses and commercial units for rent or sale.
"Authorities might lack the necessary commercial skills"
The Committee is concerned about risks arising from this and warns that authorities might lack the necessary commercial skills and experience among members and officers.
The Report states: "If commercial decisions go wrong, council taxpayers will end up footing the bill and other services will be under threat."
The Committee urges the Department to work with partners in the sector to review the level of commercial skills in different types of authorities.
Brexit adds uncertainty to local funding
By summer next year it should update the Committee on how it is strengthening its understanding of the scale and nature of authorities' commercial activities, "focusing in particular on the scale of risk across the sector and the types of authorities placing themselves at greatest risk".
This update should also address other concerns raised by the Committee, including how future spending reviews by central government will consider "the interactions between revenue spending, capital spending and borrowing, and the resulting pressures on local authority capital programmes".
The Report identifies the uncertainty surrounding Brexit and "new questions about transparency and accountability" raised by further devolution as complicating factors, and urges the Department to work with the Chartered Institute of Public Finance and Accountancy to ensure the local government capital finance framework "remains current and continues to reflect developments".
Meg Hillier MP, Chair of the PAC, said:
"Funding cuts have led local councils to rethink the way they use public money.
In recent years they have increasingly sought to invest capital in projects to generate revenue while reducing spending on assets such as museums and parks.
Central government wants local authorities to become largely self-financing and against this backdrop councils are exploring new ways to raise cash.
It is therefore alarming that the Department for Communities and Local Government does not have a firm grasp of the changes happening locally and their implications for taxpayers.
Our Committee has previously highlighted gaps in the commercial skill of the civil service as a factor in the failure of some projects and we have similar concerns about local government.
Poor investment decisions cost money—money that might otherwise be spent on public services.
Local authorities need the skill-set to invest wisely and the Department must bear its share of responsibility for ensuring these skills are in place.
But more fundamentally, the information central government uses is inadequate for understanding trends and associated risks in local government finance.
This is a serious flaw in its ability to plan properly for the future and ensure councils are following a sustainable path, which includes ensuring the local capital finance framework remains fit for purpose.
Add in the uncertainty around Brexit, as well as the new roles and responsibilities being created through elected mayors and further devolution, and it is clear the landscape is changing significantly.
Local authorities must have confidence central government has got their backs."
While local authority revenue spending power has decreased significantly over recent years, authorities have, taken as a whole, maintained capital spending levels.
However, revenue pressures have led to changes in the nature of capital spending, with authorities focusing more on schemes intended to generate future revenues.
Many are investing less in physical assets such as libraries, museums and parks, and spending more on commercial investments, often involving investing in property.
Department expects authorities to become more 'entrepreneurial'
The Department for Communities and Local Government (the Department) has overall responsibility in government for the local government finance system. The Department expects authorities to become more 'entrepreneurial' as it encourages local government to become largely self-financing.
But we are concerned that the Department appears complacent about the risks to local authority finances, council tax payers and local service users arising from the increasing scale and changing character of commercial activities across the sector.
Not enough information on scale of commercial activities
The Department does not have good enough information to understand the scale and nature of authorities' commercial activities or which authorities are placing themselves at greatest risk, and it does not use the information it does have to give it a cumulative picture of risks and pressures across the sector.
Unless the Department strengthens its understanding of the capital issues faced by local authorities, it will not be well placed to anticipate risks to financial and service sustainability.