There’s No Free Lunch?

“Our Labour Council is currently running a loss making Develpment Company which should be wound down as Croydon are doing with theirs and was also all set to embark on large commercial property investments until the problems of some councils came to light. There’s no “free lunch” writes Cllr Owens in our comments on Croydon Council.

Just a week ago we learned “Councils across Britain should tell voters about investments made with taxpayers’ money after the Bureau won a year-long battle for the public’s right to know. The tribunal ruling, hailed by a senior politician as a “victory for taxpayers”, ordered Thurrock council in Essex to disclose how it invested huge sums borrowed from hundreds of other local authorities. The council’s controversial investment plan, which involved borrowing £1bn from the public purse for secretive deals in green energy, was first revealed by the Bureau last year”.

The Bureau of Investigative Journalism wrote “Some of the smallest councils in England have built up huge debts by buying supermarkets, business parks and offices, tying the future of their public services to the uncertainty of the property market. Councils across England have borrowed massive sums – in some cases the equivalent of ten times their annual budgets – to finance the purchase of real estate, our investigation has found”.

“In the last two years, the number of councils investing in property has doubled. In the past financial year alone, councils spent a total of £1.8 billion on investment properties, a six-fold increase from 2013-14. Of biggest concern is the scale of debts accrued by four of the smallest local authorities in England – including Spelthorne Borough Council in Surrey, which says it is “heavily reliant on investment income” to fund the services it provides”.

“Spelthorne has so far borrowed £1 billion despite having a net annual budget of just £22 million – this equates to 46 times its spending power. Three other councils, Woking, Runnymede and Eastleigh, have borrowed more than ten times their budget.

“The Bureau has obtained details of the property investments made by more than 100 local authorities. Today we have providing unprecedented insight into how councils are becoming property speculators, with additional details on the millions paid to property and finance consultants”.

“Properties bought by councils include a BP business park in Sunbury purchased by Spelthorne for £392 million; a Tesco Extra bought for £38.8 million by East Hampshire District Council; branches of Waitrose and Travelodge acquired by Runnymede District Council for £21.7 million and a B&Q store that is now owned by Dover District Council. Other acquisitions range from farmland and gyms to a Royal Mail depot and a solar farm”.

The spending spree has been made possible by councils’ easy access to low interest loans from the Public Works Loans Board (PWLB), a national government body. There are no limits to how much councils can borrow and they do not have to prove they can afford it – the PWLB leaves this up to councillors to decide.

Biggest Debt By Smallest Council Budget

As stated, Spelthorne’s £1 billion debt with the PWLB is one of the biggest in the country despite it having one of the smallest council budgets in England. The only councils to have larger outstanding loans with the government lender are Birmingham and Leeds, two of the biggest local authorities in the country.

Councils like Spelthorne that have become increasingly reliant on this income to balance their books may have left services exposed to changes in the economy. In the event of a crash in the property market, a prospect raised by the Bank of England’s governor in the event of a no-deal Brexit, these councils may struggle to meet their obligations, with potentially major implications for services.

In April, the government implemented new guidelines aimed at discouraging councils from borrowing money to profit from investments. The Bureau has found that over 40 councils have invested hundreds of millions of pounds since then, despite the warning.

“Collective corporate blindness to both the seriousness of the financial position and the urgency with which actions needed to be taken…the Council’s fragile financial position and weak underlying arrangements have been ruthlessly exposed by the impact of the Covid-19 pandemic…  some of the problems experienced by councils…sharp falls in revenue, heightened demand for services like social care, and substantial increases in the costs of providing those services…are also faced by many others in England”. And from the Institute for Government

They may not get pushed into issuing Section 114 notice, but many face the prospect of cutting services during the pandemic. The UK government needs to provide clarity about how much it will cover councils’ lost revenues and higher spending needs”.

Ah, here we go, government, ie income tax payers, to cover councils’ losses and spending needs? And there’s me thinking that’s what we do already? It’s called “council tax”!

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