From councils that disastrously dabbled in derivatives in the 1980s to depositing hundreds of millions in Icelandic banks just before the crash of 2008, stories about local government and finance in the UK rarely have a happy ending.
There is usually the same grim conclusion: that clumsy local authorities cannot be trusted with hard-earned taxpayers’ money.
This is certainly the moral that seems to emerge from the actual bankruptcy of the London Borough of Croydon, which this month admitted that he could not establish a balanced budget as he is legally required to do.
Croydon is one of many English councils that have embarked on the latest local government craze: grabbing business assets using cheap government-subsidized debt that has been provided with almost no questions requested by an official body, the Public Works Loans Board. Much of that went on the property. Local authorities spent £6.6billion on property between 2016 and 2019, according to the UK. National Audit Office — 14 times more than in the previous three years. But they have also bet on other business ventures, from renewable energy producers to start-up banks.
The idea was to bolster the authorities’ revenue with income from real investments, helping to support public services affected by austerity such as libraries and schools. A sort of pro-social carry trade.
The risks in counseling are mind-boggling. Take Spelthorne, a small authority near London with a base annual budget of around £11million. She has borrowed over £1bn to build a property portfolio mostly outside her own locality. Or Thurrock in Essexwhich also borrowed £1bn (almost five times its £220m budget), much of which was then invested in unnamed renewable energy schemes.
Croydon’s financial improvement came as the Covid-19 lockdown stifled income from investments such as a major shopping centre, hotel and several property developers, while leaving it to pay off £1.8bn in debt pounds sterling (double what they were three years ago).
It’s easy to blame all of this on a virological act of God mixed with good old advice ineptitude. But in reality, the crisis is revealing something rather different: how unchecked election incentives lead councilors to behave recklessly. It’s not that hard to understand. Facing horrific pressure on their revenues (the central government has reduce the purchasing power of municipalities one-fifth since 2010), it is logical that elected officials bet on preserving services without the electorally unsympathetic expedient of increasing the housing tax.
Faced with this powerful incentive, prudential rules aimed at limiting borrowing to capital investment have proven ineffective. During this time, surveillance has been minimal. The lenders have been too docile, while the public has been blind.
The government is now try to turn off the purring PWLB ticket printer, raising interest and denying access to local authorities who borrowed solely to generate financial revenue.
But that’s only part of the solution. What is more important is that the decisions are subject to more rigorous scrutiny. It is outrageous that local authorities can invest hundreds of millions while refusing to say where for reasons of “commercial confidentiality”, as Thurrock has done for example with its energy programs.
Governments should facilitate the monitoring of the financial health of local authorities. Very few boards currently have credit ratings. Those wishing to borrow should be required to post at least two. Borrowing powers could then be subject to rating constraints. If there are rules, these should be accompanied by sanctions. In a rash act of deregulation, David Cameron’s government overthrew the old regime which imposed a regime of statutory standards, which councilors could be struck off for breaching.
While Boris Johnson is pinning his government’s hopes on a ‘race to the top’ agenda to fix regional inequalities, he can’t afford to put the advice aside. Whitehall is unable to organize everything from the center. It must strengthen their financial power to make their regions better places to live. Local authorities need more financial freedom, including greater fiscal powers.
Borrowing and advice are a dangerous mix. The way to limit spills is to let in plenty of sunlight. If there is hope for local devolution, Mr Johnson must pull back the blinds.
