Is Wokingham Borough Council racking up too much debt?

The Liberal Democrats say the Conservatives running Wokingham Borough Council are being “profligate” because they are racking up huge amounts of debt and taxpayers will have to pay it back and cover the enormous interest payments.

They have highlighted figures from a council report which states that by 2023 the council’s borrowing will have reached £676.8 million.

But Cllr John Halsall, leader of the council, has described the Lib Dems’ claims as “destabilising, desperate and deceitful”.

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The Tories insist the council’s finances are being managed responsibly and it is borrowing money to make long-term investments so it can use the returns to cover the cost of the services thousands of people rely on.

They argue that these money-making investments are vital because the council’s funding has been decimated by austerity over the last decade and it no longer receives a revenue support grant from the government.

If you are one of the Wokingham council taxpayers who has been left feeling confused, here’s what you need to know:

Will the council be left with almost £700 million of debt?

The council’s own Medium Term Financial Plan states the level of borrowing will reach £676.8 million by 2023.

Around 70 per cent of that (£476.2 million) will be external borrowing, which means it will be borrowed from banks and other organisations and the council will have to pay it all back with interest.

The other £200.6 million is internal borrowing, which is when the council effectively borrows money from itself by transferring cash from one purse to another. It may still have to be paid back eventually, but there is no interest.

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While £676.8 million is a massive amount, not all of that is deemed to be debt.

So far, the council has borrowed a total of £324 million, but £241 million is not considered to be debt because the council has invested that money to generate returns and most of it can be recovered.

That leaves £83 million, which is classed as the council’s net debt.

How much will this cost me?

Interest payments cost the council around £7.8 million a year, but it insists that council taxpayers don’t foot the entire bill because it uses returns from investments to pay some of it off.

It currently collects a total of £7.2 million a year from various investments, such as the purchase of shops and warehouses which have been rented out.

According to the council, just £7.52 of the council tax paid by each Band D household over the course of the year is used to pay off interest on various loans.

And while the council is expected to rack up over £10,000 of borrowing for every household in the borough by 2023, it won’t ever be required to pay that back all at once.

It has to pay off several loans within two to three years, but some don’t need to be settled until 2075.

At a recent meeting Bob Watson, the council’s head of finance, said: “When we take a loan out, we pay it back at the end. There’s never any creditors calling on us to say ‘we want the money, please liquidate your assets’.

“There’s never likely to be a case where we would have to pay back anything earlier than we originally envisaged on the treasury management strategy.”

What about the impact of Covid-19?

Over the last decade, councils across the country have been forced to cut millions from their budgets year after year as government funding dwindles, because the law states they must set a balanced budget (with no deficit) each year.

That meant they weren’t well prepared for a pandemic that comes with a sudden spike in demand for council services and additional costs. 

They were also forced to shut down income-generating car parks and leisure centres and offer council tax discounts and business rates holidays.

Wokingham Borough Council has been given £9.3 million of emergency funding from the government to help it cope and the finance chiefs are confident they can see out 2020/21 without making significant cuts.

Before the pandemic, it also had a relatively healthy level of reserves – unlike many other councils – and some of that money has been used to plug the funding gap.

However, this pandemic is far from over, despite promising vaccine news, and if that emergency government funding dries up before the council can generate much-needed cash flow then difficult decisions will need to be made.

Will the council go bust?

The financial impact of the pandemic has forced some councils to consider issuing a Section 114 notice, which means they have effectively declared themselves bankrupt and can only spend money on statutory services for protecting vulnerable people.

Wokingham Borough Council is not one of those councils and it actually expects to finish the year with £9 million of reserves – but there is a long and difficult road ahead and no one expects the government to significantly increase council funding when the pandemic ends.

Therefore, the council will continue to borrow money to make investments which can be lucrative but never risk free and the majority of the money it borrows needs to be paid back with interest.

And while interest rates are due to remain low as the UK looks to recover from the economic impact of Covid-19, they won’t stay low forever.

The council states that if it ends up in a difficult position and it is struggling to make repayments, it can simply sell off £496 million of property it owns and other assets and use that money to repay the debt.

However, this year The Office for Budget Responsibility predicts that the price of offices and commercial buildings will fall by nearly 14 per cent.

That significant drop may not be permanent, but it shows that valuations can fluctuate and if the council is eventually forced to sell up, it may get a lot less than it expected.