High levels of local authority debt will see residents face an “extreme and long-lasting” impact on local services, the Public Accounts Committee has said.
Shared Data Unit analysis of data by the Department for Levelling Up shows UK councils owe a combined £97.8bn to lenders, equivalent to £1,455 per resident, as of September 2023.
Taking into account all types of local authorities, such as police and crime commissioners and combined authorities, the debt pile rises to £122bn.
Dame Meg Hillier, the committee’s chair, said some examples of debt were “staggering”.
But council leaders say years of under-funding mean they have been forced to take out loans and invest in commercial properties just to keep services running.
For the past decade, councils have been encouraged to make commercial investments to provide an alternative source of income aside from the usual mix of grants, council tax, rates and fees and charges.
Town halls across the country have bought hundreds of commercial assets from shopping centres, to office parks, cinemas, energy companies and housing developments.
But council leaders, who have seen government grant funding reduce by 40% in real terms since 2010, have had to borrow increasing amounts to pay for those investments. This has mainly been through an arm of the Treasury known as the Public Works Loan Board.
In recent years, various commentators have warned that the debts held by councils – which must balance their budgets every year – are unsustainable. In 2020, chair of the Public Accounts Committee Dame Meg Hillier said the Government was “blind to the extreme risks” of council borrowing levels.
Since then, six more councils have had to issue section 114 notices declaring themselves effectively bankrupt: Croydon, Slough, Thurrock, Birmingham, Woking and Nottingham.
In the case of Croydon, Slough, Thurrock, Woking and Nottingham – those effective bankruptcies could be directly linked to failed investments and spiralling debts. Thurrock’s £469m funding black hole, for example, was caused by a series of failed investments in solar farms.
A 2023 report by credit agency Moody’s warned that “weak government” and the falling value of commercial properties due to the pandemic meant more councils were likely to go bust.
Yet, despite the risks, a report by the Local Government Information Unit (LGiU) in March also found 52% of councils planned to increase borrowing to plug gaps in town hall funds.
Where councils have gone bust, savings and cuts have followed. Nottingham placed 500 jobs at risk in December
In Nottinghamshire the table below shows Nottingham City Council’s debt level at Quarter 2 in the financial year 2023 / 24 – it is worth over £2,700 per city resident. Conversely Rushcliffe Borough Council has no debt at all.
The average debt per person across the nine Nottinghamshire councils for the 2023-24 Q2 period is approximately £787.11
Speaking in November when Nottingham City Council declared effective bankruptcy, leader Cllr David Mellen outlined the issues facing local government he said:
‘Cllr Mellen said using reserves does not solve the long-term problem and added: “Councils are using their reserves in greater value than us this year to solve their budget problem, and unless the Government come forth with proper funding of social care, they will be in problems next year.
“Other council leaders, not just Labour council leaders, have been on the media talking about this problem. This is a national thing where local government is being starved of resources.”
“This overspend is not down to the council wasting money.
“This is about adult social care overspending, this is about being greater demand for children in care and placements being made more expensive.
“This is because many more people are presenting to us as homeless and we have a duty to house them, and it is because the rate of inflation over the last year have sky-rocketed.”
Department for Levelling Up, Housing and Communities – UK Government
“A DLUHC spokesperson said:
“Councils are ultimately responsible for their own finances, but we are very clear they should not put taxpayers’ money at risk by taking on excessive debt.
“The Levelling Up and Regeneration Act provides new powers for central government to step in when councils take excessive risk with borrowing and investment. We have also established the Office for Local Government to further improve accountability across the sector, which will help detect emerging risks and support councils to continue delivering key public services.”
- We are making available a funding package for councils worth over £64 billion for the year ahead – an above inflation increase of 6.5%.
- Issuing a section 114 notice is a local decision made by a council’s section 151 officer and government has no role in the process.
- Local authorities have freedom to set their own capital strategies, on the basis that they are best placed to understand local need and consistent with devolved decision-making and accountability. The system has worked well for the majority of authorities. However, a small number of authorities have taken on excessive levels of risk with debt and investments.
- The government has taken a number of measures to strengthen the system to constrain this activity, including reforms to PWLB lending terms and strengthening statutory guidance.
- The Levelling Up and Regeneration Act provides new powers for central government to step in when councils take excessive risk with borrowing and investment. It will also provide powers to address risk from historic practices.
Local Government Association
A spokesperson for the Local Government Association, which represents councils across England and Wales, said:
“Councils have faced a choice of either accepting funding reductions and cutting services or making investments to try and protect them. This was an approach that was encouraged by the government.
“While councils have made investment decisions to help them replace funding shortfalls, the majority of council borrowing is focused on investing in projects that contribute to their local economies or help them provide core functions, such as housing and transport schemes. When making investments, councils are required to follow strict rules and assessments to ensure they invest wisely and manage the risk of their investments appropriately.
“The Government needs to come up with a long-term plan to sufficiently fund local services.”
District Councils’ Network
A spokesperson for the District Councils’ Network said:
“These metrics are misleading, in particular because of the way they include Housing Revenue Account debt. This distorts the metrics and means they do not compare like-with-like. They also do not fully take account of councils setting aside money to pay off debt and service the cost of borrowing. More fundamentally, we believe it is misleading to look at these metrics in isolation.
“District councils – and all councils – regularly and prudently borrow money to kick-start infrastructure, regeneration and other projects which are essential to their area’s future. The preventative services that district councils provide – such as housing, homelessness prevention, leisure and wellbeing, green spaces, community outreach and environmental health – save money downstream for the NHS, the wider public sector and the taxpayer. Prudent borrowing and investment helps grow the local economy and brings the council extra revenue for the benefit of local taxpayers.
“District councils continue to deliver excellent value for money. They receive much less central government grant than other types of council. On average, districts receive less than 10% of the total council tax bill in two-tier county areas. District councils have 15% less spending power in real terms now than in 2015. Spending power for other types of council has increased by 5-15% over the same period.
“Investment has helped to ensure councils can maintain vital services on which our residents and communities rely.”