Is the next crisis in local government finance just a Brexit-induced slump away?

As the Central Government grant to Local Government has been reduced towards nil, we’ve all seen the impact. A retreat from non-statutory services, such as buses and libraries, cuts to grants for the voluntary sector who, ironically, have done more than most to cushion the blow to residents of earlier cuts, and attempts to devolve services to the Cinderella tier of local government that is Town and Parish Councils.

In an attempt to stem the tide, local councils have sought to generate income by borrowing at current historically low rates of interest to invest in commercial property. Unfortunately, suspicion is growing that the surge in such investments is coming in the face of a market which is approaching, or at, its peak.

The biggest investor between 2014/15 and 2017/18 was Spelthorne Borough Council, which has borrowed £1 billion to invest in a variety of assets, including the BP campus at Sunbury. Spelthorne has the fifteenth smallest budget of any District (or equivalent) authority, and is hugely exposed to a slump in the value of its assets. But it’s far from alone. Woking, Runnymede and Eastleigh Borough Councils have all borrowed more than ten times their net revenue budget to finance property deals.

Alarm bells have been ringing for some time, and Lord Oakeshott, who runs the property portfolio of the Value & Income investment trust, was warning of the risks more than a year ago. He said of local authorities then;

They have no coherent investment strategy except raising short-term income to lessen the impact on public spending cuts, so this rush to spend will end in tears and the Treasury should close the PWLB (Public Works Loan Board) funding window soon.

According to the information gathered via Freedom of Information requests, the amount of money invested by local authorities rose from £76.4 million in 2014/15 to £1.8 billion in 2017/18, and, of course, this is money effectively owed to the Treasury.

The Government has, to its credit, seen the risk, and implemented new guidelines aimed at discouraging councils from borrowing money to profit from investments. That hasn’t stop the flow of investments, however.

The warnings from the Governor of the Bank of England recently, suggesting that a disorderly Brexit might lead to a 20% fall in commercial property values, is a warning of how badly things may go wrong, and the risk of more local authorities going the same way as Northamptonshire County Council is a serious one.

Liberal Democrats ought to be cautioning against risking council finances on volatile investments, and there is an alternative, one which would have wider social benefits than property investment, and that is to invest in building social housing. It would create jobs, reduce waiting lists, address increasing problems of homelessness, not to mention the social benefits of more stable lives for disadvantaged families and the opportunity to reduce the costs of handling the fallout from such crises by reducing the number of vulnerable people.

It’s time that we made that case, for local government finance reform hand in hand with social reform, rather than leave it to others. Like healthcare, early intervention reduces the risk of the need for major, costly interventions later, and frees up resources to offer more and better facilities.

* Mark Valladares is a Parish Council Chair in rural Suffolk, and worries about precepts more than he perhaps should.

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9 Comments

  • Mark,

    local government finance reform a hugely important area. Many councils ran into difficulties with investing reserves in Icelandic banks that failed in the financial crisis. The point you make about the alternative of investing in social housing is well made. The government has only recently relaxed the cap on borrowing for social housing. We now need to tackle the Land Question beginning with reform of the 1961 Land Compensation Act so that local authorities have the ability to assemble viable plots for large scale developments.

  • John Marriott 20th Dec '18 - 2:36pm

    Until some government – any government – actually treats local government and its officials and representatives as responsible adults and gives them the power and resources to make a difference in their area we will get nowhere. Equally, local government has got to be prepared to look at itself and some of its more questionable practices, like buying hotels or investing in dodgy banks, and be prepared to accept a restructuring programme, which has got to include a root and branch reform of the way it generates funds.

    Indulging in gimmicks coupled with a few platitudinous warm words is really no substitute for fiscally sound long term planning and a willingness to confront the taxpayer from a position of power actually to make things happen.

  • Peter Martin 21st Dec '18 - 8:57am

    ” A Brexit induced slump?”

    So far the economy has held up better than many expected. But I would say that we will likely get a slump in the next year or two. All the signs are there. The big one being falling house prices. Naturally, you guys will like to blame it all on Brexit.

    You might like to take a look at what is going on in Australia. !

    https://www.theguardian.com/australia-news/2018/nov/30/sydney-house-prices-have-biggest-monthly-fall-for-14-years

    It looks like they are in for “a Brexit induced slump” too!

    Who would have thought that Brexit could have such far reaching effects?

  • Nonconformistradical 21st Dec '18 - 9:30am

    @William Fowler
    I’d like to endorse what Mark says about the private sector’s (un)willingness to address social housing needs. The private sector couldn’t give a toss about social housing needs. It’s only interested in extracting as much as it can from those who can afford to pay over the odds – often for shoddy building work judging by the amount of criticism in the media about building standards.

    And along with Mark I too am disgusted at your comments about civil cervants. Please do not treat hard-working often inadequately paid people with such contempt.

  • Sue Sutherland 21st Dec '18 - 2:52pm

    I think we are already in a slump. We rely on consumption for our economic well being and retail is already suffering a decline. High St shops closing has been linked to the growth of online shopping but this only accounts for 20% of retail spending. Even online retailers are having to offer reductions to encourage consumers to spend in the run up to Christmas. When the economy is fine this never happens. A decline in retail was the first sign of a slump during the Thatcher years and this has been building up for a while.
    I think the reason for this is the uncertainty around Brexit which is making the consumer wary of spending on unnecessary goods. Gordon Brown largely relied on private expenditure to keep the economy going and this was funded by borrowing but at the moment consumers don’t seem to be willing to take that risk.
    The really bad news when a slump is on its way is when they stop making bricks because that means that house building has drastically declined. Our national beliefs include home ownership almost as a right so this is dire news in a society like ours. A proposal to build social housing in the public sector would, as well as being the right thing to do for peoples’ welfare, be a Keynesian boost to the economy.
    If Brexit does go ahead there will be even more uncertainty which will affect the individual consumer but also commercial investors, which in turn may affect pensions. I am horrified at the way the government and the official opposition seem to be sleepwalking into this disaster. I think the time may be quickly arriving when reform of our political system can be implemented with public support.

  • Peter Martin 21st Dec '18 - 6:06pm

    @ Mark,

    ” I haven’t said that Brexit will induce a slump”

    You must be one of a tiny minority Lib Dems then !

    Correct me if I’m wrong, but I as I understand the Lib Dem argument, it is that Brexit will lead to an economic catastrophe!

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