The case for cancelling local authority debt

Rob Whiteman the Chief Executive of the Chartered Institute of Public Finance and Accountancy has warned of councils facing “a tsunami of reduced income and increased costs” as a result of the coronavirus crisis. Yet local government has not benefited much from the largesse of central government in response to the coronavirus crisis. It has received £1.6 billion assistance plus £1.8 billion in compensation for the decision to stop charging for business rates this year. At the same time the government has facilitated local authorities taking on a significant amount of extra debt; increasing their collective borrowing limit by £20 billion, with the option to increase it by another £20 billion.
   Rather than facilitating more debt, which has to be serviced, there is a compelling case for cancelling local authority debt held with the PWLB. This would give councils an approximate extra £4.5 billion a year income.

The impact of the Coronavirus crisis on councils

“Despite the fact that councils have been able to maintain resilient financial positions amid deep budget cuts, the absence of a long-term funding solution already implied that this position will not be sustainable for the future. But now a financial tsunami of reduced income and increased cost is heading in councils’ way. While it’s vital that our health service is given everything it needs to fight this disease, we must not forget the crucial role of services like public health, social care and all community services.”
Rob Whiteman Chief Executive CIPFA

Even before this crisis emerged, CIPFA’s Resilience Index indicated that 10% of councils show signs of risk to their financial stability. There can be no doubt that the unprecedented crisis resulting from coronavirus will worsen the funding shortage of local authorities. They are having to spend first and think about paying for it later. Whereas the government has thrown money around like confetti local government has not benefited from the same largesse. They are providing an extra £1.6 billion plus £1.8 billion to cover the business rates which will not now be collected this financial year.
As well as CIPFA’s alarm signal, councils are warning that the costs of organising in relation to coronavirus are putting them under increased financial stress. City of York Council Leader Keith Aspden told Public Finance that dealing with the crisis could leave it £20 million short.

“The government’s announced £1.6 billion of emergency funding to local authorities is necessary and welcome. However, the scale of this crisis means that the funding allocated to York, and other councils, is insufficient to support our communities’ and business needs over the coming months…”

“Locally, we have already committed to creating a local emergency fund to support our residents and businesses… We have also moved Council resources to establish new volunteer and help hotlines, so we can focus our efforts on supporting the most vulnerable in the city.”

Councils have warned that a number of services are being stopped or scaled back as they focus on dealing with the Covid-19 pandemic. The County Councils Network has set aside hundreds of millions of pounds to purchase thousands of new beds to help provide care for patients being released from hospital to free up beds. It said that changes to other services will help save thousands of lives and protect staff from the spread of the coronavirus.

David Williams, chairman of the County Councils Network, and leader of Hertfordshire County Council, said:

“In these momentous times, our two clear priorities are ensuring that our residents are kept as safe as possible, and that we can continue to deliver our services. Unfortunately, the unprecedented nature of the Coronavirus outbreak means that it is impossible to do both.”

CCN listed a number of services which are being scaled back, including household waste, road repairs, libraries, birth registrations, funerals, fostering events, adult education, and parks and open spaces.

The Welsh Local Government Association leader has also said that services will be scaled back in order to deal with the coronavirus crisis.

“It’s likely that council services in the coming week and months will have to be scaled back, and potentially in some areas services may have to be suspended as we continue to support those areas at most risk.”

CIPFA Associate Director Andy Burns told Public Finance

“The main service area facing increased pressure is adult social care. To qualify for social care support, people have to be vulnerable, with care needs, and relatively poor. The coronavirus crisis is creating more people who are potentially vulnerable – everyone over 70 could fall into this category and many of them might need to be supported.
At a lower level, councils believe that some home home-help services which had previously been rationed might need to be re-established. In some cases, family members who had previously helped their vulnerable relatives out with care are now unable to do so because they are self-isolating. In other cases, someone who was helping pay towards their parents’ care could have lost their income and be struggling to contribute now.
Many district councils, who do not provide social care services directly, are leading the coordination around volunteering and homelessness. They are also increasing resources to support local resilience forums, which bring together public agencies to keep services running and implement public health guidance on staying safe.
Many authorities are making payments earlier than normal to suppliers to ensure their financial health and to ensure they don’t collapse and can continue to provide services.”

Like businesses councils are seeing some of their income fall through the floor.

“The government has announced that it will compensate councils for income lost through the business rates holiday announced in the Budget and afterwards.
However, income from fees and charges is already falling through the floor. Many district councils rely on income from services like car parking and leisure centres which are no longer producing income. Many councils who are commercial landlords face decisions about what to do in response to tenants who say they are unable to pay their rent. Those who were expecting returns may find out they will not get them this month.”

Because the crisis is happening in the last month of the current financial year, some may be forced to make unplanned raids on their reserves to fund any year-end overspending. Assumptions made in budgets for 2021/22 may not now be achievable. Costs are going to be much higher in the first quarter of the year due to demand pressures caused by coronavirus. This will probably have a knock-on effect.

To read on, download a PDF here canceldebt2

Postscript: cancelling debt is obviously not a mad idea after all. It’s just been announced that Hancock is cancelling £13.4 billion of historic NHS debt. Although local authority debt (held by the PWLB) is a lot more, at £82 billion, it would provide £4.5 billion a year extra for grossly under-funded councils.

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