Councils pay ‘eye-watering’ sums of interest to UK treasury

Borrowing from the PWLB is used to pay for major projects such as new schools, leisure centres, and roads. But unlike other funding that councils receive, this money comes at a cost. Interest accumulated on the loans in the last financial year alone cost Scots local authorities £414m.

This is the equivalent of 15 per cent of all the money they raised last year through the council tax.

It is also roughly the same amount as is being spent to bring faster broadband to the Highlands and Islands, four times more than it will cost to build a brand new college campus in Fife, and 28 times the value of a new specialist education school in West Lothian.

Interest paid on nearly £2bn worth of loans taken out before devolution have been particularly expensive for councils. These have high interest rates, with 62 of these loans being charged at more than 10%.

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Trade unionists and campaigners said the interest rates paid by councils to the treasury were “starving local government of vital resources”.

One researcher who works on council finance branded the loans “a hidden treasury profit centre” and the rates of interest being charged as a “stealth tax” on local government spending.

The Treasury said that interest rates are designed to ensure it is not lending money at a loss and that councils borrow prudently. They added that pre-devolution loans were more expensive for all councils, not just Scottish ones.

The analysis, carried out by investigative journalism co-operative The Ferret in conjunction with The Herald, used the average annual interest rate on each council’s loans to calculate the total amount of interest payable on their outstanding balance with the PWLB at the end of 2021-22. The £414m figure is the sum of each individual council’s interest payments.

Edinburgh council had the highest bill, with interest payments costing £47m. East Renfrewshire had the lowest at just over £3.5m.

Interest payments on Comhairle Nan Eileian Sar’s (Western Isles council) loans are by far the highest as a proportion of its council tax income. The £8.45m of interest it paid accounts for three quarters of the money it brought in through the tax.

Other councils where interest payments make up a large proportion of council tax revenue are South Lanarkshire, West Lothian and Dundee. Payments in all three are equivalent to 25 pence in every pound of council tax raised.

The £414m of interest paid in 2021-22 is a slight increase on the £408m which councils paid to the PWLB in the 2020-21 financial year.

The average interest rate paid by councils on PWLB loans in 2020-21 was just over 4%. This is higher than average rates paid by English councils, which were just below 3.5%.

If Scots councils had paid the same rate of interest as English councils in 2020-21, then £53m would have been saved across the country.

The £2bn worth of loans taken out before devolution contribute to the disparity in the interest rates paid by local governments in Scotland and England.

In 2016, the trade union Unite calculated that Scots councils sent back a minimum of £3.3bn of interest to the treasury on pre-devolution debt in the 17 years which had then passed since the opening of the Scottish Parliament.

At the time, Unite called for this debt to be written off to help councils facing financial constraints.

The interest rates for these loans were set when the UK Government had direct control over PWLB interest rates. In the years after devolution, the terms of lending were set by independent commissioners.

However, powers to set the lending arrangements for PWLB loans were put directly back in the hands of the treasury in 2020 after reforms put in place by former Chancellor, George Osborne.

According to Joel Benjamin, a researcher on local government finance, these reforms mean that PWLB borrowing is “in effect a stealth tax on council infrastructure financing, whereby the chancellor dictates the rates councils pay”.

“Scottish taxpayers rightly unhappy with the status quo on council borrowing should make their voices heard with Rishi Sunak,” Benjamin told The Ferret.

“PWLB is a hidden treasury profit centre. It’s also regionally and politically biased and penalises those most in need, because poorer regional and urban councils need to borrow more, often at higher interest rates.

“As taxpayers, we’re ultimately on the hook when things go wrong, so it’s vitally important local citizens have a role in shaping how the system works, and who benefits from council borrowing.”

PWLB loans are generally seen as the cheapest way councils can borrow to finance new infrastructure, due to the relatively low levels of interest they charge compared to commercial lenders.

But interest and repayments on the loans are paid from council reserves, which are already stretched as a result of budget cuts. This means they have less money to spend on essential services for local people.

As well as interest on the PWLB loans, councils also have to pay back £375m in loans which will come to maturity this year, further increasing the impact of debt servicing on council budgets.

Just three councils –Edinburgh, Glasgow and South Lanarkshire – will have to pay back loans worth nearly £150m.

The Scottish Government provides 85 per cent of funding to local authorities, with the other 15 per cent raised through the council tax.

According to an Accounts Commission report published in May, councils have seen a real-terms cut to their budgets of 4.2% since 2013-14.

The report notes that local government funding had decreased “proportionately more than the rest of the Scottish Government budget over this period”.

Meanwhile, a spending review announced by Finance Secretary Kate Forbes last month included further cuts to councils as well as other parts of the public sector. In order to give councils the ability to raise more cash, the Scottish Government lifted the council tax freeze last year. It had been in place since the SNP came to power in 2007 and prevented local authorities from raising council tax rates.

Every council has decided to increase council tax rates, with 22 of them opting for a three per cent rise. This rise comes at a time when many households are already struggling due to significant increases in the cost of living.

Wendy Dunsmore, an industrial officer at Unite, said the size of the repayments on PWLB loans was “depressing” and added that they were further “starving local government of vital resources”.

Dunsmore said: “Unite launched our Drop the Debt campaign in 2016 due to the very high interest rates repayments that councils were having to fork out to the Public Works Loan Board and the UK treasury.

“However, the Scottish Government is also starving local authorities of the funds necessary to maintain vital service provision.

“The moral of this story is that both UK and Scottish Governments are content to blame each other for this miserable situation, when both are equally to blame for local services being cut to the bone.”

Roz Foyer, general secretary of the Scottish Trades Union Congress, argued that it was “entirely wrong” that Scottish councils are still paying “eye-watering” interest on pre-devolution debt.

“Westminster should see that this debt is forgiven. Doing so would reduce the impact on council revenues and, if required, provide extra borrowing capacity for much-needed investment in areas such as public transport and home retrofitting,” Foyer said.

“As Westminster embarks on another round of austerity, we need every penny we can find to support investment in services and staff.”

A Scottish Government spokesperson argued that its “own budget is 5.2% lower in real-terms in 2022-23 than the previous year”.

They said: “Despite this, we are providing local authorities with a total funding package worth almost £12.7bn – an increase of more than £1bn or a real terms increase of 6.3% compared with the 2021-22 settlement.

“This funding package includes support for local authority historic debt amounting to £360m.”

A spokesperson for Cosla, which represents local government in Scotland, said: “Scottish Councils borrow money to build assets within communities to deliver essential services and they pay interest on debt outstanding. When deciding on whether to borrow, councils apply principles of prudence which ensures that their debt is kept at affordable levels.”

The Treasury said that it determines interest rates on PWLB loans using a methodology designed in accordance with the National Loans Act. It argued these ensure prudent borrowing and that the local authorities can afford to provide services to citizens.

It added that pre-devolution loans were charged at higher interest rates for a number of reasons – including Bank of England interest rates – and Scottish local authorities have always had the same access to the main PWLB loan rate as English ones.

• Are councils working? is an investigation by The Ferret, co-published with The Herald, exploring local issues, services, communities and more. Support The Ferret's journalism by becoming a member for £5 a month. Use discount code Sale10 to get two months free: theferret.scot