The Office for Budget Responsibility (OBR) has warned that local authorities’ borrowing is presenting a “risk” to public finances.
According to the OBR’s latest Fiscal Risk and Sustainability Report, which was published on 13 July, local authorities’ Public Works Loan Board (PWLB) debt has increased from £77bn in March 2019 to £96bn in March 2023.
“The marked rise in ‘prudential’ borrowing we highlighted in our 2019 Fiscal Risks Report remains a fiscal risk, as local authorities have taken advantage of low interest rates offered by the PWLB,” the OBR’s report stated.
It highlighted that this borrowing has “largely” been used to finance the acquisition of retail and commercial property sites as investment assets. However, it stated that this was only until the government tightened the PWLB lending guidance in 2020.
“Nevertheless, the accumulated debt associated with these investments remains a risk as commercial property prices typically experience large falls during economic downturns, and recent interest rate rises have added further pressure to debt-servicing costs,” the OBR explained in the report.
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.
15th Annual LATIF & FDs’ Summit – 19 September 2023
250+ Delegates from Local Government & Investment
Pressures already materialising
The OBR highlighted that debt servicing pressures from commercial property assets have already started to materialise for some local authorities, most notably Woking Borough Council.
On 7 June, Woking issued a section 114 notice as it faces a £1.2bn funding deficit by March 2024. Contributing to the budget gap was the fact the authority had set aside “insufficient monies” to repay its debt, which stood at £1.8bn as of 31 March 2023. In total, the authority has borrowed £1.3bn from the PWLB.
The report stated that Woking Borough Council was one of seven local authorities with outstanding balances from the PWLB exceeding £1bn, as of the OBR’s 2019 report.
“Most recently, Woking council announced a suspension to all non-essential spending following an ‘extremely serious financial shortfall owing to its historic investment strategy that has resulted in unaffordable borrowing, inadequate steps to repay that borrowing and high values of irrecoverable loans’,” the OBR’s report said.
Other councils which were named by the OBR for issuing section 114 notices included Slough, Thurrock and Croydon.
The OBR’s report highlighted that the government has provided exceptional financial support for all three of these councils through capitalisation directions of almost £0.3 billion for 2023/24.
This comes as four other local authorities, Guildford, Southampton, Bradford and Hastings, have warned this week that they could face potential section 114 notices in the future.
Most notably, Guildford Borough Council has warned that a section 114 notice could be issued in the future due to the increased cost of financing its £300m borrowing debt.
—————
FREE weekly newsletters
Subscribe to Room151 Newsletters
Follow us on LinkedIn
Follow us here
Monthly Online Treasury Briefing
Sign up here with a .gov.uk email address
Room151 Webinars
Visit the Room151 channel
