Comments on Borrowing by Councils

There are two type of spending by councils:
  • Revenue spending
  • Capital spending

    Revenue spending

    is what the council spends on recurring items like salaries and paperclips.

    All of the council's revenue spending should be balanced by what the council earns from "trading" activities, like charging for car parking and interest on its balances, plus the amount that it raises each year from Council Tax.

    Capital spending

    is what the council spends on long-life assets like land, buildings and motor vehicles. There is a very respectable argument that says that long-life assets should be paid for by borrowing, because to pay large amounts for capital assets lie land and buildings from Revenue Assets (like Council Tax) means that today's taxpayers would be paying "up front" for the benefits enjoyed by taxpayers 10 years down the line.

    Grey Areas

    The problem with this simplistic approach is that there are grey areas. For instance, how do you categorise computer equipment? Strictly, it is a capital asset, so should be paid for by borrowing. On the other hand, because computer equipment goes out of date very quickly, you can argue that it ought to be paid for from current revenues, because you will have to repalce it within 12 to 18 months if you are to keep up with developments in the technology.

    Another problem is that borrowing has a cost in itself. It is always more expensive to borrow to buy something than it is to pay for it outright. Councillors have, therefore, to make judgements about these issues on a case-by-case basis.

    Another problem is that central government complicates matters by making special rules about borrowing by councils; worse, they complicate things even more by changing the rules from time to time - sometimes at very short notice.

    Debt Free Councils

    A case in point is the recent decision by government to abolish Local Authority Social Housing Grant (LASHG). This will very seriously compromise West Devon's ability to build new Social Housing (what we used to know as Council Houses). This is a very complicated issue: simply put, one effect of this is that WDBC has had to make a decision to become a "debt-free" council by paying back the borrowings that it made many years ago, when interest rates were very high. To do this, it has had to incur an early repayment premium of over a million pounds.
    The reason for this is that, because of the government's change of policy, it was the only way we could ensure that funds were available for our house building for another year. The net effect of paying the premium "up front" was that we should have money available for the housing strategy that we should have lost if we had not become debt-free. The reason for that is that the government allowed an extension of LASHG only to councils that became debt-free before the end of the last council accounting year. I said it was complicated.

    So it's all very well for LibDems to make snide comments about paying "up front" for assets, implying that borrowing is a good thing. Whilst that's true enough, it glosses over the fact that there are times when, because of goalposts being constantly moved by government and economic factors completely beyond the council's control, it isn't always the right thing to do.

    The reality is that a balanced council can make decisions based on the realities of the current situation, not on the basis of a single party's current policy. This is a good reason, in my view, for having a council which doesn't have a single political party in overall control.

    That's why I am and remain independent of party politics when I am acting as a councillor, though I welcome the conflicting views of the parties to inform the decisions that the council has to make.


    Published as an Internet document by R W Mathew, Willowby, Down Road, Tavistock, Devon