A combination of risky investments and sharp drops in revenue during the lockdown could see many councils slash services, new report claims.
It’s no secret that councils have faced significant funding difficulties in recent years, but the scale of the problem is genuinely staggering.
A report last year by the Housing, Communities and Local Government select committee of MPs suggested that councils were battling against a £5 billion funding gap which has built over the past decade as a result of Government funding cuts.
It argued that austerity had “gutted” funding in all sorts of services which are classed as non-essential, including the likes of transport, housing culture.
That’s a huge sum of cash needed to provide what we have all come to expert from our councils, and meant that councils were left unable to deliver anything but a “bare bones” service.
As Clive Betts MP, the chair of the committee, said: “People expect well-maintained roads, regular refuse collections and cultural services, yet funding rarely stretches beyond meeting the urgent needs of social care services.”
And problems are exacerbated by the Government’s failure to set out clearly how much money will be allocated to local councils in the following financial year.
Safe as (commercial) houses
Because of the way funding for councils have been cut back, some have taken matters into their own hands. That’s meant spending some of the funds they do bring in from taxpayers on commercial property investments.
The thinking is pretty simple here really.
These councils know they can’t rely on cash coming in from the central Government to cover their costs, so they instead invest some of what they have, in the hope that the returns from those investments will provide them with an additional, regular income.
The Public Affairs Committee (PAC) ‒ another body of MPs ‒ has been monitoring the growth of the scale of these investments for some time, and warned back in 2016 that the Ministry for Housing, Communities and Local Government (MHCLG) was being “complacent” about the risks to local authority finance, taxpayers and council services.
This stems from the fact that a vast number of these investments are not funded through money the council already has, but instead by its own borrowing.
And lo and behold, it appears that with Covid-19, a reckoning has come.
Speculate to accumulate
According to the latest PAC report local authorities spent £6.6 billion buying commercial property in the three years to 2018-19 ‒ a whopping 14 times more than was spent in the preceding three years, while a further £1 billion was spent in the first half of 2019-20.
And to repeat: these investments haven’t come out of the council’s savings pot ‒ up to 91% of commercial property spending in that three year period has been through borrowing according to the PAC.
As a result, it says “some authorities have built up substantial long-term debts that need to be serviced by rental incomes that are far from guaranteed”.
No kidding. These commercial property investments range from cinemas to corporate HQs, from office blocks and retail parks to airports.
In other words, a whole swathe of industries that have been largely in lockdown since March, dealing an enormous blow not only to their financial returns, but the returns the councils are getting on their investments.
What this means for you
The PAC report includes a host of recommendations for how to improve the situation, such as pushing the MHCLG to be more proactive in its oversight of commercial investments by councils.
But the fact is that there are immediate repercussions to the way that councils have invested, and they will be felt by the likes of you and me.
Councils across the country who have been caught up in this may have to slash jobs – and with them services – in order to make ends meet.
For example, Luton Borough Council has heavily invested in Luton airport, to the point that it is reliant on its income from the airport to cover the costs of almost a quarter of its essential services.
But with hardly any flights in the last few months, that income has disappeared, resulting in the council planning an emergency meeting this week to approve a huge cuts plan, which includes stripping back 365 jobs.
Croydon Council is another high profile sufferer of the situation, having spent around £30 million buying the freehold for the Croydon Park Hotel, in the expectation that it would bring in £1 million a year.
However, the organisation running the actual hotel has now gone into administration.
Croydon Council is warning of up to 200 job losses as it has to scale back its activities to plug a £65 million black hole in its finances.
Yet again it’s the ordinary taxpayers who end up paying the price of these disasters, whether that’s reduced garbage collection, less support for job hunters, reduced hours at libraries or some other important service that is no longer sustainable.
I appreciate that the Government doesn’t have endless amounts of money which it can hand to councils, but the current situation ‒ where councils effectively have to take on risk to plug funding gaps, with the Government department responsible for their oversight effectively looking the other way ‒ is a farce.
Clearly MHCLG needs to be more on the ball in monitoring how councils use taxpayer money, and ensure they don’t end up investing in something overly iffy.
But that horse has already bolted ‒ there are big questions to answer over just how to ensure councils deal with the financial stress they now face.
How can we fix the financial problems facing most councils? Let us know your thoughts in the comments section below.