Councils shouldn't have to spend scarce resources repaying unfair loans

Recently I wrote how disappointed many people would be at the timid tweaks to council tax agreed by parliament. Local services deserve a firmer financial footing. To add to that, this week I published a report detailing Scotland’s 32 local authorities’ huge amounts of unethical and unsustainable long-term debt, which currently totals £11.5bn. The crisis facing local authority finances, the unsustainable, unethical and potentially illegal nature of the debt that is precipitating this, and the significant negative impacts that this is already having across Scotland, justifies a cancellation of local authority debt.

This debt is made up of loans from HM Treasury’s Public Works Loan Board (PWLB) and Lender Option, Borrower Option (LOBOs) loans from banks. Scotland has the highest proportion of PFI/PPP debt per capita in the world, and three of the top 10 LOBO loan borrowers are Scottish local authorities.

Many local authorities spend a significant percentage of their council tax income on servicing their long-term debt: Glasgow City Council spends 55 per cent, whilst Comhairle nan Eilean Siar spends 103 per cent.

Council tax accounts for between 12 and 15 per cent of local authorities’ budgets, and is one of the only significant sources of their resources over which local authorities have control. Spending an average of 42 per cent of council tax revenue on servicing debt is not a productive use of this money, and jeopardises the ability of councils to allocate money to services which their local communities value.

The UK Government has a significant role to play in this mess. In 2010, George Osborne increased the interest rate on fixed-rate PWLB loans – this encouraged local authorities to take on high-risk LOBOs from banks, and removed large amounts of local authority debt from the central government balance sheet. Some councils are facing seven to nine per cent interest rates on LOBOs, more than twice the current rate of lending at the PWLB, and these loans can last from 40 to 70 years. Many local authorities have been unable to take advantage of recent record low interest rates, as exiting LOBOs would incur large fees – twice as much as the exit fees for a government loan. In 2015, it was estimated that banks “earned more than £1 billion in upfront profits from LOBOs, while the cost to councils to exit the contracts today could be more than £8 billion”. In 2015-16, Scottish local authorities spent £933 million on repayments to the PWLB – they continue to owe £8,970 million, and that’s before interest repayments.

Last year, Scottish local government revenue grant was cut by between five and seven per cent in real terms, and this remains an area of unprotected spend. Job losses and cuts in service provision have negatively impacted on some of the poorest and most vulnerable populations, and particularly on women, in Scotland. The level of debt repayments local authorities make on PWLB and LOBO loans is clearly unsustainable, and especially so in a context of austerity.

So what can we do about this? There is precedent for local authority debt cancellations. In 2001, billions of pounds of local authority housing debt were written off by the UK Government – albeit in return for transferring housing stock to community ownership. In 2008, the UK Government bailed out a range of financial institutions with approximately £500bn of cash and liabilities. The austerity-induced gaps in revenue which councils are now facing were caused by the reckless behaviour of many of the same banks which are now lending to local authorities at exorbitant rates.

In terms of PWLB loans, this is mostly money borrowed from ourselves – there would be no “cost” to HM Treasury in writing off this debt. As a use of derivatives by local authorities, LOBOs are potentially unlawful and could be voided on that basis – local authorities should not be expected to spend their scarce resources repaying loans that are extremely profitable for unscrupulous lenders.

There are options available to the Scottish Government as well. Unison have argued that recent changes to local government regulations offer the opportunity to relax the repayment of PWLB loans fund regulations, and provide “flexibility in new borrowing or refinancing/restructuring existing borrowing which could potentially free up significant sums at a time of austerity cuts”.

Improved governance, benchmarking and oversight of financial decision making within councils are also required. If these scrutiny issues are properly addressed, a Scottish Government controlled Public Works Loan Board, and the control of lending rates which would accompany this, could offer greater stability and better value to local authority finances. If this took place in the context of a Local Government Fiscal Framework, offering local authorities a clear and mutually agreed process for the allocation of resources and devolved powers from the Scottish Government, local democracy founded in public participation could begin to be realised.

This article first appeared in the National