Croydon Council has warned that rising interest rates are a major concern for the authority as most of its borrowing, taken out between 2017/20 and valued at £545m, will need to be refinanced from this year.
A report by Jane West, Croydon’s corporate director of resources, outlined that the majority of the £545m borrowed over the three year period was in the form of short-term loans, “which has left the authority exposed to current higher interest rates”.
She said: “The debt is anticipated to be refinanced from 2023 onwards and therefore likely to drive significant increases in annual repayment levels.”
This comes as the Bank of England raised interest rates by a half point to 5% on 22 June to tackle the stubbornly high inflation in the UK.
West said: “There is borrowing cost uncertainty from interest rates, with the Bank of England currently continuing to increase the base rate, and the timing of capital receipts from asset disposals, assumed in the medium-term financial strategy (MTFS) at c£50m per annum.”
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General Fund debt of £1.3bn
Overall, Croydon Council has a General Fund debt of c£1.3bn. West detailed that in 2023/24, it is estimated that c£66m will be needed to service this debt, which represents around 16% of Croydon’s net budget.
“The council’s historic legacy borrowing and debt burden has therefore become critical to the sustainability of the council’s revenue budget.
“With circa £1.3bn of General Fund debt and an environment of rising interest rates, the delivery of an effective Asset Management Plan and an ambitious Asset Disposal Strategy, including reducing the number of buildings used by the council, will be essential to mitigate rising cost pressures, reduce the overall debt burden and help the council balance its books,” West added.
Bleak financial outlook
In the report, West also stated that she anticipates the council’s expenditure to exceed its financial resources in each year of the period between 2023/27, with its MTFS estimating an ongoing budget gap of £38m per year from 2024/25. She stated that Croydon required a capitalisation direction from the government of c£63m to balance its budget in 2023/24.
West added that the council is in discussions with the Department for Levelling Up, Housing and Communities (DLUHC) to seek further financial support in regard to Croydon’s “level of historic legacy indebtedness and balancing the budget”.
However, she highlighted that annual capitalisation directions (transferring revenue cost into capital cost, which must be funded over 20 years) increases the council’s debt burden.
“Debt write-off is the council’s preferred option and therefore a request was made to DLUHC in January 2023 for government funding to write off £540m of the council’s General Fund debt. DLUHC has subsequently asked the council to propose a wider range of options, and these are currently being worked on,” West continued.
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