Council borrowing has come under scrutiny with a call from the Scottish Greens urging the UK government to write off what they describe as "unethical" loans made to councils in Scotland. This is similar to Unite the Union's, 'Scrap the Debt' campaign.
The response from the UK Treasury was a predictable - no chance. That doesn't mean the campaign call isn't justified. After all there is precedent with housing stock transfer, albeit that was to achieve a specific, if flawed, policy objective. It is also important to understand that councils have been borrowing from the Public Works Loans Board at rates well above the cost to the Treasury. In effect this has been a nice little earner for the Treasury.
I understand the campaign reason for the analysis by the Scottish Greens that councils are typically spending about 42% of the money raised by the council tax locally on servicing debts. However, this is misleading as only 15% of council revenues now come from the council tax, largely as a consequence of the regressive council tax freeze.
Commentators often erroneously explain council borrowing by making comparisons with personal finance. It has to be understood that councils are under a legal obligation to produce a balanced budget. They do not borrow money simply to pay for the running costs, this is for capital spending on schools and other services. The exception is PPP schemes, which are funded from revenue, at exorbitant cost.
As the Treasury is going to ignore this call for debt cancellation, we need to look at what else councils and the Scottish Government can do to reduce the debt burden.
Following a call by UNISON Scotland, the Scottish Government has relaxed the rules governing loans funds, giving councils greater flexibility. This could save councils in Scotland as much as £50m.
Councils should also be looking at their borrowing books and refinancing the older debt, in a similar way individuals shop around with their mortgages The interest rates on some of this debt is way above current rates. The primary constraint is that some councils unwisely signed up for punitive repayment penalties. The worst, but not the only, example of high exit fees is the Lender Option Borrower Option (LOBO). As ex Barclays Capital employee Rob Carver put it: “You just need a Bermudan swaption pricer to know the relevant volatility surface, some kind of interest rate model calibrated to the appropriate processes and the full forward and spot curve". Understandably, not skills present in most council finance departments!
The other option for replacement and future loans is using bonds. Something that used to be commonplace, but has gone out of fashion. Around 60 local authorities in England and Wales have joined together in the Municipal Bonds Agency, which has the express aim of reducing council’s capital costs by arranging loans at cheaper rates than the PWLB. The English Local Government Association, which worked to set up the agency, estimates council savings on financing costs over 30 years could be as high as £1.45 billion. They have already forced the Treasury to cut PWLB rates. Scottish councils have sadly been very slow to consider this option, the recent exception being Aberdeen City Council. In our 'Combating Austerity' report we calculated that councils in Scotland could have saved between £270m and £337.5m over 30 years by issuing their own bonds.
Councils and health boards should also be robustly monitoring and restructuring/refinancing their PPP schemes. Refinancing usually requires the approval of the Scottish Government, who have been slow to do this, although the SFT are looking at a few schemes. I suspect part of government's reluctance is that a major use of refinancing requires the cooperation of councils using their prudential borrowing powers. Better progress is being made with monitoring contract performance.
Calls for debt cancellation are justified and would be a much needed boost to council finances slashed by Tory austerity and more than passed on by the Scottish government. However, the Treasury is unlikely to change its mind and therefore we should be actively pursuing practical alternatives to the more expensive borrowing provisions commonly used by councils
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