Local authorities need to be weaned off their debt addiction

Whether it’s councils dabbling disastrously in derivatives back in the 1980s, or depositing hundreds of millions in Icelandic banks just before the 2008 crash, stories about UK local government and finance rarely have happy endings.

There is generally the same sombre conclusion: that bungling local authorities can’t be trusted with taxpayers’ hard earned cash.

That’s certainly the moral that seems to leap out from the effective bankruptcy of the London borough of Croydon, which this month admitted it could not set a balanced budget as it is legally required to do.

Croydon is one of a number of English councils that piled into the latest local government craze: snapping up commercial assets using cheap government-subsidised debt that was provided with almost no questions asked by an official body, the Public Works Loans Board. Much of this went on property. Local authorities spent £6.6bn on real estate between 2016-19, according to the UK’s National Audit Office — 14 times more than in the previous three-year period. But they also bet on other commercial enterprises, from renewable energy producers to start-up banks.

The idea was to bolster authorities’ incomes with earnings from real investments, helping to sustain austerity-hit public services such as libraries and schools. A sort of pro-social carry trade.

The risks councils are running are eye-watering. Take Spelthorne, a small authority near London, with a core annual budget of around £11m. It borrowed more than £1bn to build a property portfolio mainly outside its own locality. Or Thurrock in Essex, which has similarly borrowed £1bn (almost five times its £220m budget), much of it then invested in unnamed renewable energy schemes.

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Croydon’s financial comeuppance came when the Covid-19 lockdown choked off earnings from investments such as a large shopping centre, a hotel and several housing developers, while leaving it servicing debts of £1.8bn (double what they were three years ago).

It is easy to blame all of this on some virological act of God mixed with good old council ineptitude. But in reality, the crunch reveals something rather different: how unchecked electoral incentives lead councillors to behave recklessly. It’s not that hard to fathom. Faced with a horrible squeeze on their income (central government has cut councils’ spending power by a fifth since 2010), it’s logical for councillors to gamble to preserve services without the electorally unfriendly expedient of hiking council tax.

Against that powerful incentive, prudential rules designed to restrict borrowing to capital investment have proved toothless. Meanwhile, oversight has been minimal. Lenders have been too compliant, while the public has been unsighted.

The government is now trying to switch off the whirring PWLB money printer, raising the interest charge and denying access to local authorities that have borrowed purely to generate financial income. 

But that’s only part of the solution. What is more important is for decisions to face fiercer scrutiny. It is outrageous that local authorities can invest hundreds of millions while refusing to say where on grounds of “commercial confidentiality” as, for instance, Thurrock has done with its energy schemes.

Governments should make it easier to keep tabs on the financial health of local authorities. Very few councils presently have credit ratings. There should be a requirement for those wishing to borrow to publish at least two. Borrowing powers could then be subject to rating constraints. If there are rules, these should be backed by sanctions. In an ill-considered act of deregulation, David Cameron’s government pulled down the old regime that imposed a statutory standards regime, which councillors could be disbarred for breaking. 

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With Boris Johnson pinning his government’s hopes on a “levelling up” agenda to fix regional inequalities, he can’t afford to sideline councils. Whitehall is unable to mastermind everything from the centre. He needs to bolster their financial power to make their areas better places to live. Local authorities need more financial freedoms, including wider tax-raising powers.

Borrowing and councils are a dangerous mixture. The way to limit spills is to let in lots of sunlight. If there’s hope for local devolution, Mr Johnson must pull back the blinds.




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