Government “blind” to “extreme risks” of investment by cash-strapped councils
13 July 2020
In a report published today, Monday 13 July 2020, the Commons Public Accounts Committee says that some councils have exposed themselves to commercial investments which risk cuts in local services and a big bill for local taxpayers.
Financial pressure on local authorities' budgets, combined with encouragement to invest in commercial enterprises to bring in income, has seen risky investments in commercial property “balloon” 14-fold in three years, mostly funded by new debt.
In this period local authorities spent an estimated £6.6 billion of taxpayers' money acquiring commercial property – over 14 times more than in the previous three-year period – with a further £1bn in the first half of 2019-20.
Up to 91% of this commercial property spending was financed by borrowing – meaning some authorities have built up substantial long-term debts much of which will depend on rental incomes to repay. The impact of Covid-19 on income across the board is significant and adding to the strain on council budgets.
While an individual council investment may pass muster with auditors, the cumulative risk could be great and will fall on local council taxpayers and service users.
The Ministry of Housing, Communities and Local Government has been blind to the overexposure of local councils to certain sectors, risking a repeat of the impact of the overexposure of local authorities to loans from Icelandic banks in 2008.
'Borrowing for yield'
Some councils have borrowed multiple times their annual spending power. The Committee says MHCLG must “develop and rapidly deploy interventions that target” this kind of “extreme risk taking”.
The Committee warned about this risky “borrowing for yield” in 2016, and now says it is “extremely disappointed” that far from heeding that warning, the “complacent” department has sat back and watched that spending “balloon 14-fold” since then.
The actions taken by the Department to address risky and non-compliant financial behaviour have been “too little and too late”. Recent Treasury moves to formally clamp down on local authorities' room for manoeuvre in finance decisions show that that the 'soft' approach of guidance changes has failed” and it is time for a comprehensive review of the prudential framework for local authority borrowing and finance.
Meg Hillier MP, Chair of the Committee, said:
“In just three years some councils' external borrowing has exploded – and all on MHCLG's sleepy watch.
“Councils are locally led and must make their own decisions. But it is hugely disappointing that the Department does not have a clear view of potential risk of over exposure despite the Committee warning about this four years ago.
“If local authorities were counting on rents to repay that debt they are now, with the hit from Covid-19, in a very risky position – which means taxpayers and local services are in a very risky position. Add to this recent reports that large numbers of English councils are now at risk of technical insolvency because of Covid pressures and the picture is serious.
“The Department did not even bother to keep track of the underlying numbers or likely risk but at the end of the day, central Government will have to step in if a council fails. Taxpayers and service users need to know that the Government has their back and can see and help prevent serious problems with risky commercial investments.”
Deputy Chair of the Committee Sir Geoffrey Clifton-Brown said:
“The fact that the Public Loan Board has been brought in house by the Treasury shows the level of concern about this. The Treasury is consulting on banning loans purely for yield entirely: they will be able to provide the Department with the timely information needed.
“If the Department toughen up the Prudential Code as we recommend and make the whole system much more transparent to the public, these measures taken as whole should bring about the behavioural change that is needed by local authorities in this area.”