Council loan repayments delay needed amid coronavirus financial crisis

Councils need access to cheaper short-term loans with delayed repayments to help them tackle the cash flow problems threatening their efforts to lead communities through the immediate COVID-19 crisis and beyond, the LGA says today.


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The minimum term for a Public Works Loan Board (PWLB) loan available to councils is one year but this is too long to help with the immediate cash flow shortfalls faced by councils as a result of the pandemic.

The LGA is warning this will force some councils to turn to short-term loans at expensive rates. This would divert vital resources away from the services communities are relying on to get through this pandemic to pay interest rates of what effectively amounts to ‘pay-day’ loans.

It is calling for the PWLB to offer shorter-term loans to councils to ease the pressure they face. The LGA said the Government also needs to delay repayments by councils on all new and existing loans to further help councils manage the financial challenges they face.

Many councils have seen increased cost and demand pressures as a result of the pandemic at the same time as a significant drop in income. In the past three months, almost £1 billion in combined business rates and council tax income has gone uncollected as businesses and residents struggle to cope.

The early payment of some grants by the Government and deferring payment of business rates by councils to the Treasury has helped. However, the LGA said councils will need further funding and financial flexibilities in the weeks and months ahead to meet ongoing COVID-19 pressures and to keep services running normally.

The calls form part of the LGA’s response to the Treasury consultation on the future lending terms of the PWLB which aims to prevent local authorities from using loans to buy commercial assets primarily for yield. Councils are warning that the move would have unintended consequences by making it difficult for councils to access PWLB borrowing for other purposes. 

Councils have always owned and managed properties which may charge rents, but their sole purpose is not for “yield”. For example, property that is held to regenerate high streets may also generate a commercial rental income, which may or may not more than cover the costs of holding the property and so result in a “yield”.

Under the new plans, councils undertaking such schemes could be banned from accessing loans for other schemes. This would throw into doubt the future of capital programmes which help deliver on key government priorities, such as housing and regeneration and will be even more vital as we look to get local communities and economies back on their feet after the COVID-19 pandemic has passed.

Councils have seen their central government funding reduce by £15 billion in the past decade. The LGA said many councils have faced a choice of either accepting these funding reductions and cutting services or making investments to try and secure services.

A recent report by the National Audit Office into council borrowing concluded that, in many cases councils are not only making investment decisions that can help them replace funding shortfalls, but also contribute to their local economy and environment.

Cllr Richard Watts, Chair of the LGA’s Resources Board, said:

“Councils are playing a vital role in supporting communities through this crisis - supporting efforts to track and trace the virus, protecting the vulnerable, helping rough sleepers off the street and keeping other services, such as bin collections, running normally.

“The Government has written off debt for NHS bodies as a result of COVID-19. Providing councils with access to short-term loans and delaying repayments is the least it can do to help tackle the significant cash flow problems many face.

“The scale of the economic, environmental and community challenges that we will face should not be under-estimated. It is vital that councils can support the economic recovery as emergency measures are lifted and we come through this crisis. This is vital if we are to ensure that all communities can contribute to and benefit from this recovery.”

Notes

  1. The LGA’s full response to the consultation can be read here. As a result of the coronavirus pandemic the Treasury has extended its deadline for responses from 4 June to 31 July. The LGA is offering to help the Government use this helpful additional time to engage properly with councils - for example by arranging a series of virtual round tables - to discuss the proposals in detail and to develop more helpful approaches given the challenges our country now faces.
  2. Extra COVID-19 costs and losses of income incurred by councils in March, April and May, amounted to £3.2 billion. This national total has been met by the two tranches of emergency funding provided by government to councils so far. LGA analysis shows councils could need as much as £6 billion more to cover the costs of coping with the coronavirus pandemic during this financial year.
  3. The PWLB is a statutory body of the UK Government that provides loans to public bodies from the National Loans Fund.