The latest council borrowing figures from the Public Works Loan Board did not come as a huge surprise to those of us working in local government.
As councils grapple with funding pressures on many fronts, it follows that borrowing would increase as they seek new avenues of funding for infrastructure and commercial investment projects – and the PWLB has long been the top choice of lender.
Our State of Local Government Finance Survey 2018 found that 94% of councils looking to borrow were planning to approach the PWLB, a similar picture to previous years.
But of course borrowing can be a signal of both health and sickness.
It is very difficult to truly understand what this figure means without knowing more about the circumstances.
There are many possible situations which could be playing out, probably simultaneously:
1. Councils are being turned away by other lenders. If so, we should be concerned that local authorities are no longer considered to be financially stable and that lenders are not confident in their ability to repay their debts.
2. Councils are taking an entrepreneurial approach to income generation, borrowing to purchase rental property for example. We know this is already happening in most places but it is not without its challenges. Public opposition to councils investing in property, particular outside their local area, has been mounting and the Government came very close to clamping down on it earlier in the year. Moreover, there is concern that councils may not see the returns they expected from their commercial endeavours and therefore may find themselves unable to service their debts.
3. Councils are borrowing to fund major infrastructure projects that are no longer being covered by central government grants. It could be that councils and their residents are fed up waiting for the cash to trickle down to them and have decided to borrow to fund big ticket projects like clean energy generation projects, rail and road improvements and flooding defenses. Although disappointing that councils might feel unable to access national funds, this could be a good sign in terms of local areas taking the lead, as long as the return on investment figures stack up and maintenance costs are considered.
It is important that we dig deeper to find out if councils are going to end up in trouble further down the line, or if they are successfully taking the reins and generating new sources of income to fund their core services.
It may be tempting for policy makers to see these figures and decide that this borrowing should be curtailed, and the Ministry of Housing, Local Government and Communities has started down that road by introducing new requirements for councils to present a formal investment strategy, but we should be wary of limiting councils’ financial powers even further unless we really need to.
