Opinion: Is the Council’s New Spending and Borrowing Strategy the Right One?

Published on: 5 Feb, 2017
Updated on: 7 Feb, 2017

Council finances produce few headlines until things go wrong. Here in Guildford financial management has been one of the borough council’s strengths, supported by council officers regarded as very able by councillors and observers across the political spectrum.

But the council is intending a significant change in their financial strategy. We should pay attention, after all it is our money they are spending and managing.

Cllr David Reeve

Here Cllr David Reeve, a GGG member for Clandon and Horsley, reviews a part of their plan, its possible consequences and proposes an alternative approach…

On Wednesday evening this week (February 8), a meeting of Guildford Borough Council will consider the General Fund Capital Programme* that is proposed for the period 2017 to 2022.

This programme involves capital borrowing that is very substantially greater than that which has been customary in the borough for very many years. This is because the programme plans to deliver a wide range of projects that have been under discussion for a considerable period, for example: Slyfield Regeneration, the Sustainable Movement Corridor and property acquisitions in support of Town Centre Developments.

Of course, many residents may be unaware of the extent of new borrowing that is required to fund the programme.  Over the six-year period between 2016 and 2022 the minimum net new borrowing position would reverse from a surplus of £145 million, money that is currently invested, to a new level of borrowing of between £338 and £465 million.

many residents may be unaware of the extent of new borrowing that is required to fund the programme…

Not all of the difference between 2016 and 2022 arises from the capital programme; some £91 million of existing loans will reach maturity during that period, and it is probably fair to assume that – even without the proposed capital programme – much or all of this amount would be rolled over into new loans.

Nevertheless, the capital programme over the next six years is likely to cost some £367 million. By any standards, this is a large number.  However, there is a range of considerations that should be borne in mind when trying to form a judgement regarding this proposed programme.

Many people would argue – with some justification – that there has been insufficient investment and renewal over recent decades, and that many or all of the proposed projects are desirable or essential.  In that view, the current proposal simply catches up with the position where we should have been already.

Projects in the capital programme are categorised as “approved” or “provisional”, so the appearance of a project in the capital programme – especially if it is provisional – does not mean that it will necessarily go ahead without further consideration and endorsement by the council.

In addition to the formal capital programme there is also a “capital vision” of projects beyond a five-year horizon and/or projects which are too uncertain in time-scale or value to be included.  This means that background consideration should be given to retaining sufficient financial capacity and flexibility for future projects which don’t yet qualify for inclusion in the existing programme.

The borrowing arising directly from current operations and the proposed capital programme will persist for many decades into the future.  Information placed before us all shows that (with the exception of a short excursion in the mid-2020s) net borrowing will remain above £500 million until about 2038 and will still be at £400 million in 2066 although the value of that debt will be eroded by inflation as time proceeds.

Nevertheless, these figures still represent very substantial debts to be carried forward to future generations, and it is important to note that we must expect that there will be further Local Plans in the mid-2030s and again in about 2050 which will no doubt come with their own demands for additional capital investment.

I would suggest an alternative, slightly more conservative approach…

So there is a judgement to be made now regarding the extent to which current projects, albeit long-term, and arguably important, should be funded through extensive and long-term borrowing that could impact the financial freedom of future councils to construct and carry out their own major capital programmes.

Risk to the council’s existing investments must also be evaluated.  I understand that of the council’s current investments, roughly one quarter, or £25 million in round terms, could be subject to the new “bail in” legislation i.e. the responsibility for rescuing failing banks will lie with large investors, including local authorities, instead of with the government.

And in addition to investment risks, there are also risks associated with borrowing to invest during market conditions that are more unpredictable than at most times in the last fifty years. It is striking that even experts cannot reliably predict the relatively short-term future, let alone the long term outlook.

Although interest rates are at historically low levels at present, the cost of servicing the proposed borrowing at the fixed interest rates currently available to councils from the government is likely to be about £10 million to £12 million each year.  This figure could rise in the future as loans reach maturity and are renewed at potentially less favourable rates.

So I would suggest an alternative, slightly more conservative approach.  The council could restrict itself to a less ambitious programme.  This could allow the highest priority projects to proceed, and to be paid for over a shorter period of time; shorter term borrowing is nearly always cheaper.

The lower priority projects that were deferred could be reviewed at some point in the relatively near future – in perhaps eight to ten years’ time – and could be considered alongside proposals that we don’t, and can’t, even imagine at present.

In this way, we would tend to end up with a rolling programme of investment, with decisions being taken at the time – and with the benefit of the better information that would then be available.  Phasing the council’s capital programme in this sort of way rather than initiating a whole series of projects over a period of just a few years seems to have a number of advantages:

• avoiding a “big bang” approach would impose considerably fewer demands on the capacity of managers and staff within the council to control an ambitious programme;
• on average loans would tend to be of shorter duration, so would benefit from reduced interest rates;
• some decisions would be taken later which would make it much easier to consider them in the light of the prevailing circumstances, rather than attempting to make decisions now on the basis of predictions of future conditions and demands;
• later decisions would avoid the problem of today’s council taking decisions – and incurring costs – that would effectively be imposed willy-nilly on future councils.

Of course everyone will have their own view on the pros and cons, their view of the importance and urgency of the projects in the programme; their appetite for risk; and their view of this generation’s obligations to those in the future – both in terms of the physical environment and of the financial burden that we will bequeath to them.

I believe that we are standing at a genuine point of departure.  For the first time in many years we are looking at substantial investments which will have profound impacts future generations.  We need to get it right.

Time is short but I would be very interested to hear the views of the wider community.

Please give your views by using the “Leave a Reply” feature below…

*Details of the council’s proposed programme are in item 9 of the agenda reports pack which is available on the GBC website.  Agenda item 10 covers the long-term borrowing profile over a period of 50 years.

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