The Treasury has sneakily added to the woes of cash-strapped local government by increasing interest payments on council loans to bring in an extra £1.3 billion for the Chancellor at the time of huge cuts in services. The decision comes when councils have already been asked to cut provision by 7 per cent next year and face a freeze in council tax revenue.
This will affect interest payments on projects like school extensions and road maintenance, making it more expensive for councils to take out new loans when they are already being squeezed by being asked to take a 28 per cent reduction over four years. It came into immediate effect on the day of the spending review announcement and at a time when the Bank of England has frozen base rates at a minimum of 0.5 per cent for months.
The Treasury discloses in the small print of the spending review that the loans – made by the Public Works Loan Board – will rise by 1 per cent. Local council borrowing, according to Budget forecasts, is likely to hit £5.3 billion this year – and some £4 billion comes from the PWLB.
The Treasury estimates the 1 per cent rise in interest rates will bring in £150 million next financial year, £310 million in 2012-13, £380 million in 2013-14 and £450 million in 2014-15. Existing loans will not be affected as long as councils signed up for a fixed rate agreement over 25 years. Effectively, it will encourage councils to run down their reserves – if they have any – to pay for new capital projects or cancel new schemes if they become more expensive to develop.
On top of this, capital funding provided by central government will also fall by 45 per cent over the next four years – with most of the remaining cash being concentrated on local transport schemes.
A spokesman for the Local Government Association said: “This is more unwelcome news for local councils and we are rather puzzled since borrowing actually fell last year so there is no suggestion that councils are not being prudent. It makes it more expensive for councils to borrow money for capital projects than central government.”
The Treasury explanation for the rise is that ministers have to discourage more lending because it will increase government. Putting up interest rates is a way of putting more pressure on councils not to take up more loans.
