Scotland’s councillors have been warned by their spending watchdog that they need far better long-term financial planning and expertise to help manage local authorities’ debts totalling £15bn.
An inquiry by the Accounts Commission has found that councillors were often in the dark about the long-term affordability of record debt levels, and were failing to exercise enough oversight of decisions to increase borrowing.
The inquiry, its first investigation into council borrowing, found that none of the 12 councils it focused on had strategic plans for borrowing that went beyond three years – the minimum timeframe expected under current rules.
Its report warns that councils face even tougher spending cuts and efficiencies because of deepening overall cuts in government funding, and face the risks that interest rates will rise, increasing the costs of repaying that debt and of borrowing more.
Douglas Sinclair, chair of the Accounts Commission, said: “This is a highly complex technical area. Councillors don’t need to know every detail, but they do need to know enough to ask the right questions.
“This is a critical part of council business, which requires close and effective scrutiny, particularly in times like this when budgets are so tight.” Councillors and officials needed to be really confident “that their borrowing policies deliver best value in the longer term”.
Earlier this month, the Accounts Commission disclosed that Scotland’s 32 local authorities had total aggregate debt of £14.8bn in 2013-14, after a surge in borrowing since Alex Salmond’s government introduced a council tax freeze and spending cuts came into force six years ago.
They now spend around £1.5bn a year servicing their borrowing, covering capital borrowing, paying off historic PFI debts and borrowing for new housing, while experiencing an 8.5% real-terms cut in government funding.
A parallel study by the Guardian found that council debt levels in Scotland now stand at £6,166 per household, compared with £3,100 per home in England and £2,825 in Wales. Councils have increased borrowing to reduce pressure on day-to-day spending, and to modernise buildings.
Councillor Kevin Keenan, finance spokesman for the Convention of Scottish Local Authorities, said borrowing was essential to allow new schools and roads to be built, rebuffing Tory warnings that this report made worrying reading.
“Councils undertake borrowing for many reasons and the fact that they borrow to invest in infrastructure should not automatically be seen as a bad thing,” Keenan said.
“Councils have played a significant role in boosting the local economy through these challenging times and investment in capital infrastructure has been a key aspect of this. This was a position supported and indeed encouraged by the Scottish government.”
The Accounts Commission has recalculated overall debt levels using current prices and found that year-on-year, council aggregate debt has stayed at a comparable rate of about £14.8bn to £14.9bn for the past three years. In cash terms, debt has increased year on year.
The commission also discloses that council borrowing is now more short-term and medium-term than in the past, increasing the pressure on their revenue budgets because it will need to be repaid sooner.
In 2009-10, nearly 50% of overall borrowing had a repayment period of 40 years or more. That now stands at 35%. Councils now need to repay nearly 50% of their debt in the next 20 years, an increase of nearly 10 points since 2009. About a third of it needs to be repaid within the next 10 years.
In a series of criticisms, the commission said councils had to improve their financial training of councillors; be tougher in their scrutiny of borrowing decisions; make far clearer links between day-to-day spending policy and the affordability of borrowing; and have far better scenario planning in case their income falls or interest rates rise.
Its report warned: “Councils face reducing revenue budgets and increasing demand for services. As a result many councils have projected funding gaps and need to generate recurring long-term savings. Councils’ existing borrowing commitments extend for up to 50 years, and while any current decisions to borrow allow the council to invest in services, they also place more pressure on revenue budgets.
“Councils therefore need to clearly set out how current and past borrowing decisions impact on the future revenue budget over the life of the borrowing term.”
