First let’s consider the political split by number of councils, which is what you normally see on political maps. Today, 114 are Conservative-controlled, but this number fell sharply from its previous level of 147 in local government elections in May, and almost the same number (111) have no single party in control. Labour comes next with 94 councils (down from its 2015 peak when it briefly overtook the Conservatives), and the Lib Dems are in the rear with 15 councils.

Rich council, poor council

Things really get interesting when we start looking at debt¹⁾There are two databases we use – the PWLB loan exposure tables published by the DMO every March, and the Ministry of Housing, Communities & Local Government tables published every quarter, which includes other sources of borrowing such as LOBOs and loans to other councils.. Labour councils have the most, with £26 billion owed to the PWLB and £37 billion overall. Tory councils have about half the amount of PWLB loans, and a bit less than two thirds of the debt that Labour councils do. But the number of councils the parties control is different, so to improve the comparison we consider the debt owed per council.

On average, each Labour council owes £400 million, an increase from the £312 million they owed in 2012, according to the government’s figures. Meanwhile, Conservative councils owe just £194 million on average, a figure that has barely changed since 2012, even though the number of Tory-controlled boroughs has fluctuated significantly over the years. Lib Dem council debt is even smaller, at £159 million on average.

Of course that is only one side of the balance sheet – there are also investments to think about, including cash, money market funds, bonds and other assets like commercial property. Here the picture is reversed. Conservative councils are richest, with £13.4 in billion total investments in June 2019, while Labour councils had just £9.8 billion in total, according to data published by the Ministry of Housing, Communities and Local Government.

We can combine this data with borrowing figures and political control to produce a figure for average net debt per council (debt minus investments divided by number of councils controlled by each party). Now the differences are particularly striking: Average Labour net debt per council is £293 million, for Lib Dems it is £104 million, while for Tory boroughs it is just £77 million.

A constraint on front line services

As it is with individuals, debt is a constraint on councils. Those with larger debts – particularly if taken out when interest rates were higher – are constrained in their ability to spend. This spending is vital for councils because of the front line services many of them deliver. We can also track this with government data.

On average, Labour councils spend £362 million each per year on services such as education, social protection and housing benefit, compared with £239 million for Conservative-controlled councils. It’s easy to see why the Labour boroughs with their high net debt burden are more constrained than their Tory peers.

They are tightly constrained in terms of revenues they can raise, such as council taxes or business rates. If the economy worsens, they ought to spend more to alleviate their residents’ hardships, but their legacy debt burden prevents it.

And our use of averages disguises the acute pressures some councils face. So although on average, Labour councils pay 0.25% higher interest than Conservative councils, a few such as Labour-controlled Bradford or Wakefield, pay interest rates of 5.5% and 6.1% respectively. Or consider Edinburgh, although not outright Labour but controlled by a Labour-dominated coalition, which pays 5.2% on a whopping £922 million of PWLB debt.

Unfortunately these councils can’t easily escape this debt burden because – as we discussed last year – the PWLB charges penalty rates for early repayment. Thus, while Labour councils’ PWLB loans have a notional value of £26 billion, when you include repayment penalties this goes up to almost £40 billion, according to the DMO’s figures at the end of March.

However, when PWLB rates are low it can sometimes be beneficial for high interest rate councils to take the hit and refinance into a lower rate, paying the penalty either with excess cash or additional borrowing. That’s exactly what some councils such as Newham or Cornwall have done with their LOBOs recently.

Javid’s surprise rate rise

But this came before the surprise decision last month by Sajid Javid’s Treasury to abruptly raise PWLB loan rates by 100 basis points. This was viewed by some commentators as a response to the recent trend by wealthier councils such as Spelthorne or Woking to borrow from the PWLB at recent low interest rates in order to invest in commercial property.

It’s true that this phenomenon is an abuse of the PWLB system: Spelthorne’s annual budget is less than a hundredth of Edinburgh’s, but it has borrowed more. However, the Treasury could have easily stopped this by banning the use of PWLB funds for such purposes. The rate rise is a blunt instrument that serves to punish Labour councils by keeping them chained to their debt portfolios.

This move shouldn’t be viewed in isolation though, because two thirds of council spending is funded directly by the government. In 2017, MHCLG began a consultation about changing its funding formula for councils, and asked whether legacy debt costs (the burden that mostly falls on Labour or Labour-leaning councils like Edinburgh) should be taken into account.

In other words, if the DMO and the Treasury wouldn’t budge on PWLB repayment penalties, MHCLG might sling the most indebted councils some extra funding in compensation. Affected councils welcomed this idea, but this summer, DHCLG announced that the funding review would be postponed to 2021. Until then – or sooner if the government changes – councils remain subject to the whims of the Treasury.