Commercial income shortfall to hit councils hard

Local councils are set to shed thousands of jobs and cut services as they count the cost of lost income from commercial investments during the coronavirus pandemic.

In the last few years, commercial investments have become a popular revue stream, with many councils turning to holdings in office blocks, retail parks, airports and cinemas in an attempt to find alternative incomes and protect local services that faced cuts or closure during a decade of deep austerity cuts. In fact, MPs have said that ‘risky’ investments in commercial property have ‘ballooned’ 14-fold in three years, mostly funded by new debt.

But with lockdown measures closing shops, workplaces and cinemas and leaving some airports deserted, councils’ rents and other revenues have been affected, with two authorities – Manchester City Council and Luton council – losing £100 million in airport dividends alone.

Using data from the Institute for Fiscal Studies, the Guardian has reported that more than 30 local authorities receive at least a quarter of their annual income, which they spend on services, from commercial investments.

Now, the Public Accounts Committee has warned that some councils have exposed themselves to commercial investments which risk cuts in local services and a big bill for local taxpayers. In the last three years, local authorities spent an estimated £6.6 billion of taxpayers’ money acquiring commercial property – over 14 times more than in the previous three-year period – with a further £1 billion in the first half of 2019-20.   

According to the House of Commons committee, up to 91 per cent of this commercial property spending was financed by borrowing – meaning some authorities have built up substantial long-term debts much of which will depend on rental incomes to repay. The PAC says that the Ministry of Housing, Communities and Local Government has been blind to the overexposure of local councils to certain sectors, risking a repeat of the impact of the overexposure of local authorities to loans from Icelandic banks in 2008.

Meg Hillier MP, chair of the Committee, said: “In just three years some councils’ external borrowing has exploded – and all on MHCLG’s sleepy watch. Councils are locally led and must make their own decisions. But it is hugely disappointing that the Department does not have a clear view of potential risk of over exposure despite the Committee warning about this four years ago.

“If local authorities were counting on rents to repay that debt they are now, with the hit from Covid-19, in a very risky position – which means taxpayers and local services are in a very risky position. Add to this recent reports that large numbers of English councils are now at risk of technical insolvency because of Covid pressures and the picture is serious. The Department did not even bother to keep track of the underlying numbers or likely risk but at the end of the day, central government will have to step in if a council fails. Taxpayers and service users need to know that the government has their back and can see and help prevent serious problems with risky commercial investments.”