Borrowing rate hike threatens future capital projects for county council

A shock decision to hike the cost to councils of borowing from the government has put Essex County Council’s major capital programme aspirations into severe doubt.

As it stands ECC is borrowing £600m externally, the majority of which is from the Public Works Loans Board – the government body that lends to local authorities. That had been set to increase to around £900m by 2023.

But that level of increase has now been thrown into doubt following a decision on Wednesday by the government to increase the cost of new borrowing from 1.8 per cent to 2.8 per cent with immediate effect.

Repayments to the Public Works Loan Board (PWLB) has to be found from revenue streams, such as council tax.

Town halls are able to borrow from the PWLB for long-term capital projects, such as housebuilding schemes, at rates which tend to be lower than those offered by private lenders.

Councillor Mike Mackrory, leader of the Essex County Council Lib Dem group, agreed that many schemes will not progress because of the extra cost to the council.

Capital funding pays for projects such as new roads, schools or increases in school places, improving social care, health and wellbeing.

An Essex County Council spokesperson said: “The council funds a significant proportion of its annual capital programme from borrowing and has largely satisfied its borrowing requirement by securing loans from the Public Works Loans Board (PWLB).

“It remains to be seen whether, as a consequence of the action taken by the PWLB to increase its lending rates, the council will need to reconsider its future capital programme aspirations, or whether other lenders will step into the local authority market to offer viable alternatives to borrowing from the PWLB.”

The county council already estimates  that the proportion of the revenue budget that is required to fund borrowing costs will increase from seven per cent in 2017/18 to 9.1 per cent by 2021/22.

This increase partly reflects the impact of the council’s capital programme proposals over the forthcoming three years, but also a reduction in its net revenue streams.

Cllr Mackrory added: “An inevitable consequence of putting up interest rates is that it will have an effect on any authority’s ability to borrow.

“So it’s a really worrying move by the government and it has come completely out of the blue.

“It makes long term or even medium term planning extremely difficult for local authorities.

“But I would suggest that it is rather questionable that other lenders will be able to fill that breach.

“I imagine there will be a very large demand that will they be able to offer at that low rate. Even at 2.8 per cent.”

But Cllr Mackrory agreed that some schemes being planned for now will be stalled or even cancelled due to the rate hike.

The county council has already put on hold any further forays into the commercial market because of the uncertainty around those investments.

He added: “But this is a real shame because there are capital projects that are very deserving and that we really want to be getting on with.

“And now some of them will be put on hold. There is no magic solution I’m afraid.

“It is such a precipitous decision by the government to do that without any warning.”

The Local Government Association (LGA) warned the increase will significantly increase the cost of borrowing for councils, including district councils that are reponsible for housing and put capital schemes at risk.

A spokesperson for the LGA said: “It presents a real risk that capital schemes, including vital council house building projects, will cease to be affordable and may have to be cancelled as a result.”

Piers Meyler

Local Democracy Reporter