Gateshead Council, which sparked protests this summer by closing two leisure centres to save money, is spending almost a quarter of its core income on debt repayments – the highest figure in the North East and well over twice the national average.
The council closed Gateshead Leisure Centre and Birtley Swimming Centre in July in order to realise £600,000 “unachieved savings” on its leisure budget, blaming government cuts. There are hopes of reopening both under community control.
The leisure centre closures are a tiny part of £55mn savings that councillors agreed a year ago would be needed over the coming five years. Now they are being warned that £32mn more cuts, including possible redundancies, and a further two years use of financial reserves are needed to meet the challenges of the 2024/25-2028/29 Medium-Term Financial Strategy (MTFS).
Figures published recently by the Office for Local Government (Oflog) reveal that in financial year 2021-22 (latest available) Gateshead allocated 23.6% of its core spending power (CSP) to servicing its debt.
That was more than two-and-a-half times above the median average for councils in England with the same responsibilities – unitary authorities, metropolitan districts and London boroughs – which was 9%, and more than double the median of 11.3% for the North East’s 12 councils.
Gateshead’s debt at the end of 2021-22 financial year was £666mn, according to a budget report presented to councillors in February this year, and under the MTFS it is expected to reach £877mn by 2027-28.
Gateshead’s position is not made any easier by the fact that its reserves are comparatively, though not exceptionally, low. According to Oflog, in 2021-22 its non-ring-fenced reserves as a percentage of net revenue expenditure were 44.3%, compared to the England median average of 54.9% and the North East’s median of 58%.
These financial woes come in spite of the fact that in 2021-22, also according to Oflog, Gateshead had the highest level of Band D council tax (£1,914.92) and the highest level of CSP per dwelling (£2,095.34) of all councils with the same responsibilities.
It was known as long ago as last November that savings of £55mn over five years would be essential to ensure the financial sustainability of the council. Social care and inflation were said to be the main causes of the funding gap.
More pain to come
Nevertheless, at the start of this year the council still appeared confident of its ability to manage its debts. According to its February budget report, in 2021-22 it had experienced no difficulty meeting the key indicator of prudence in the Chartered Institute of Public Finance and Accountancy’s (CIPFA’s) Prudential Code for Capital Finance in Local Authorities nor were any difficulties envisaged for the current or future years.
However, its own financial risk assessment did acknowledge the risks from movements in interest rates. An increase in Public Works Loans Board (PWLB) rates leading to the council paying more on borrowing than budgeted was judged to be “possible”, and would have a “medium impact,” councillors were told.
Now a new review of the MTFS to be discussed by the full council on 23 November, makes clear just how much more pain is still to come. By the end of 2027-28 there will be a cumulative funding gap of £49.7mn to close even after the use of reserves, requiring extending the use of reserves from three years to five years, into 2026-27 plus another £32.2mn of so-far unidentified savings.
“Using reserves in this way means that it is crucial to plan and deliver a pipeline of savings, efficiencies, and reinvestment to achieve a balanced budget in future years,” says the refreshed MTFS. There are said to be significant challenges to capital investment including housing, climate change and quayside regeneration as well as to day-to-day services.
Gateshead, like other councils, faces a list of external challenges, including pay awards, the cost-of-living crisis, social care funding, the impact of 13 years of austerity and Brexit. On top of all this, the Bank of England increased base rates again in June to 5.25%, where they remain, with consequences for borrowing costs. The Bank increased the pressure further this week by warning of zero growth until 2025.
”The challenge that the council faces should not be underestimated,” warns this month’s councils report. “Any [further] increase in the base rate or further uncertainty in the economy could translate into increasing the cost of borrowing should the council need to borrow for the capital programme. This will have a corresponding impact on the revenue budget and business cases for projects included in the capital programme.”
The council is also preparing the ground for possible redundancies: “Savings proposals may have staffing implications. These will be managed through the council’s redundancy policy and procedure as necessary. At this stage it is proposed that any cost of redundancy payments and the release of pensions (if applicable)… will be met from within the overall corporate resource position at outturn each year, should the position allow.”
A council spokesperson told North East Bylines: “The debt profile for every council differs depending on their functions and capital requirements. Gateshead complies with all regulatory guidance with regards to capital and debt management, with the financial impact of this included in the council’s MTFS, which is reviewed annually.”
Gateshead was not the only North East council with high levels of debt identified by Oflog. Although the 23.6% of its CSP that goes on servicing its debt was the highest, the debt itself was not proportionately the largest in the region. Gateshead’s accumulated debt stood at 366.3% of CSP. Top place was held by South Tyneside with 478.1% of CSP, though in 2021-22 servicing this huge debt, one of the largest in England, cost it a comparatively modest – though still well above average – 18.7% of CSP.
A spokesman for South Tyneside Council said: “We take a very low risk, prudent approach to borrowing, with the council’s long-term borrowing levels managed in accordance with the statutory Prudential Code.
“Through the setting of our Medium-Term Financial Plan, we ensure that they are affordable and sustainable and, in many cases, generate income streams back to the council which offsets borrowing costs. For example, our leisure memberships have continued to grow in line with investment across our leisure portfolio.
“Borrowing is one component of strategic financial planning that has supported a wide range of capital investment across the borough, in regeneration schemes, housing, schools, highways, footpaths, transport schemes as well as leisure.
“Debt servicing costs as a proportion of CSP is forecast to fall by the end of 2023/24 and further over the next three years, as is our overall debt as a proportion of CSP.
“Over recent years, we have also made substantial savings against a backdrop of unprecedented government funding cuts. However, the council’s priority is to invest in the long-term future of the borough for the benefit of local people and communities.”
Other councils with high debt levels, according to Oflog, were Newcastle with debt at 368.7% of CSP and servicing costs of 17.8% and Northumberland with debt of 322.3% and servicing costs of 15.7%.
Oflog does not at present give comparable statistics for combined authorities. Concern about Tees Valley Combined Authority’s (TVCA) level of borrowing has however been raised by Councillor Bob Cook, a Labour member of the authority’s cabinet and leader of Stockton Council, according to a report in the Northern Echo.
The cabinet was told in a report from its director of finance and resources at its most recent meeting that borrowing in the financial years to 2026-27 was planned to be £295mn, bringing the total by then to £457mn. The cost of borrowing will rise annually from £9.268mn this year to £25.442mn in 2026-27 while the TVCA reserves are run down from £104.302mn at the start of this year to £2.656mn. Most of the reduction in the reserves – £61.514mn – is already happening this year.
According to the report referred to, the £457mn accumulated borrowing by 2026-27 “is well within the government agreed borrowing caps of £1,000mn. The repayments for the borrowing are affordable and can be financed from revenue funding received both during and beyond the investment plan period.”
The debt repayment statistics are among the first to be published by Oflog, which was launched on 4 July under interim chair Lord Morse, a former chair of the National Audit Office, as announced in January by Levelling Up Secretary Michael Gove and reported by Norh East Bylines on 28 January.
Oflog’s strategic objectives include empowering citizens with information about their local authority, enabling them to hold local leaders to account. Its first publications, apart from local authority finance, cover adult social care, waste management and adult skills.
It is normal for local authorities to borrow to invest. What is not normal, as the Oflog figures show, is the level of indebtedness reached by a few councils, including Gateshead and South Tyneside. Councillors and officials may take comfort in the fact that their debts are within the Prudential Code, but council taxpayers could still be forgiven if they are uneasy. Those with mortgages will know first hand what difficulties interest rate volatility can bring. It is now evident that some council officials are becoming concerned too. Though Gateshead has long warned of budget challenges and tough choices, the tone of its latest report reflects a greater sense alarm that ever. Its huge debt is part of the reason.
The establishment of Oflog in July, with its aim of “empower[ing] citizens with information about their local authority, enabling them to hold local leaders to account”, among other things, is to be welcomed. It has made a good start by shining a public light on council debt, a subject often left languishing in obscurity. Judging by Oflog’s first batch of reports council taxpayers, bamboozled by long and complex financial reports, will be able to look to the new watchdog for clear and simple information about their council’s performance.