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Revealed: the £80bn hole in council finances

A new analysis suggests 23 local authorities are on the brink of insolvency.

By Will Dunn

Local authorities have lost £80bn in net worth since the Bank of England began raising interest rates in 2021, according to a new analysis by the National Institute of Economic and Social Research (NIESR). This is the largest fall in council assets since records began in 1986. As voters in England and Wales go to the polls today to decide thousands of council seats, the findings suggest those elected will grapple with an unprecedented lack of funds.

Max Mosley, senior economist at NIESR, told the New Statesman that 23 councils are now spending over 40 per cent of their annual budget on debt costs. These councils face a high risk of insolvency if they have to refinance a significant portion of their loans at current levels.

The collapse in the net worth of local government (which NIESR defines as the total of all local authorities’ assets minus their liabilities) has been caused by the rising cost of the debts taken on by councils during the austerity programmes of the previous decade. In real terms, councils lost 60 per cent of their central government funding between 2010 and 2020. At the time, the Bank of England’s monetary policy made debt extremely cheap, and councils took out tens of billions of pounds in new loans from the Public Works Loan Board. They hoped to use this money to develop new forms of income from investments such as housing, commercial property development and renewable energy schemes.

As a result, local authority debt has almost doubled since 2010, to over £100bn. Since October 2021, the Bank of England has raised interest rates 14 times in a row, from 0.1 per cent to its current level of 5.25 per cent. The average interest rate on local government borrowing has doubled in that time, and NIESR finds that debt servicing costs now account for 15 per cent of the average council’s spending. In total councils are spending £3.2bn per year on debt interest alone.

At some councils the costs are far higher, and a few have debt costs that are greater than their total income. Spelthorne, in Surrey, has debt servicing costs that are more than three times the council’s core spending power (meaning its income from central government and council tax).

Councils such as Thurrock have been criticised for “gambling” on investments that they did not properly understand or which they failed to manage. However, Mosley said that overall councils have issued a relatively small number of section 114 notices (the legal process by which a council declares itself insolvent) relative to the cut in their budgets. “I'm actually quite impressed by the number of councils that haven't gone bust,” he said. Seven of the UK’s 317 local authorities have issued section 114 notices since 2018 (some more than once).

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Mosley said this suggests that much of the spending by councils has been prudent – his analysis also observes a “sharp increase” in housebuilding by local authorities since 2010 – and described the principle of investing in the face of financial headwinds as “commendable” where it has been done well. Councils have increased their assets in aggregate, but their liabilities have increased even more.

Many councils have also raised capital by selling assets; more than 75,000 properties such as libraries, swimming pools, playing fields, community centres have been sold off since 2010. This too was a short-term measure that has now left them unable to deliver the same services without facing even higher costs.

Mosley said the next government, whichever party forms it, will have to “face the music” as debt interest becomes an even greater liability on the balance sheets of councils already struggling to provide services. Adjustments to business rates and council tax, he warned, will appear “very small, against this massive black hole that has been building over the last ten years”.

[See also: NS Spotlight council bankruptcy tracker]

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