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How and why local councils are ‘loading up on debt’

Money Week reported last week that ‘dozens of local authorities in England’ have been totalling up a £1.7bn debt via commercial property assets. The sum has largely come from cheap loans obtained via a Treasury offshoot known as the Public Works Loan Board (PWLB).

The accumulation of these cheap loans, tracked by the UK government debt, has brought on concerns from financial observers that these kinds of investments yield ‘far more than the interest rate needed to buy them’.

How? 

In 2016, around 49 local authorities spent £1.3bn on property assets – an almost tenfold jump from the £142m total in 2015. £221m was spent in March 2017 alone.

An estimated third of all regional properties are being purchased by local authorities. It appears that shopping centres are the most lucrative investments, playing into the apparent disposable income of the younger generation: last year Surrey Heath council spent £86m on The Mall in Camberley, whilst Canterbury bought a 50% share of the Whitefriars centre for £79m.

Why? 

The central government funding cuts left local councils with a budget reduced by 37% in real terms between 2010 and 2015. Local authorities appear now to be turning to profit-making enterprises in order to plug the void and enable them to continue to provide essential services for their areas.

Loans offered by the PWLB are attractive to local authorities as the interest rate charges reflect the government’s borrowing costs in an ever-fluctuating market. The Board offers 45 or 50-year loans at an interest rate of around 2.5%.

Cambridgeshire County Council’s funding cuts have resulted in a shortage of school places. Lack of funding has meant that, for example, a third of primary school children are unable to attend The Round House Primary Academy despite living in the catchment area. Local parents have launched a campaign to introduce new forms of entry, while the council is under pressure to offer funding to create additional classrooms and communal areas.

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