Should councils be taking financial risks?
By Joe Harker
Many councils in the UK are strapped for cash as budget cuts have resulted in thousands of staff being laid off and public services slashed to the bone. There is also a risk of losing out on up to £1 billion in EU funding if money is not quickly assigned to local projects. Councils have asked for more funding but they may have no choice but to put up with tighter budgets.
The Economist reports that some councils are responding to the lack of money by taking economic risks. By turning their councils into a business, some local authorities are hoping to be self sufficient and be able to fund their own services by themselves in future years.
The National Audit Office has calculated that government funding for local authorities has fallen by half in real terms since 2010. However, their obligations have grown as the population rises and ages. Councils have more people depending on their services and people with a greater need for services due to age and health. Social care is becoming harder to carry out as there is just not enough money to go around and a greater demand for services.
There comes a point where budgets cannot be cut any more without leading to serious problems, with leader of Shropshire Council Peter Nutting saying "the fat has been squeezed out of the system now". To avoid losing more money they are having to open up new revenue streams that can replace the money the government used to provide.
One such example is Ashford Borough Council, which has been buying shopping centres, renovating office blocks and built a cinema complex. These investments now bring in revenues that can keep public services going as more councils face bankruptcy. To them it's better to spend money to make money while you've still got it rather than keep going until there's no more funding available.
Meanwhile, Essex County Council has invested in a shopping centre in Keighley, West Yorkshire, more than 150 miles away. There are concerns that in a time of austerity councils are spending their money recklessly but they insist that the revenues from their investments will be more important in keeping council services afloat as government funding continues to be slashed.
They way they see it is they can invest money in potential revenue streams and try to ensure that money will continue to pour in, or they can spend that money on their services and obligations until they run out of cash. The money could be spent on services and obligations now, or they could be invested and bring in revenue to keep the council from going broke.
The Financial Times warns that councils investing around the country are building a "credit bubble" by borrowing to fund their investments. However, this is leading to "an accident waiting to happen". If the investments fail then councils will have thrown away money that could have gone on public services. Councils are not business experts and if their business ventures fail the government could have to step in and bail them out.