25 February 2011

Exploding the Tory myths about Hammersmith's debt burden

Like the Tory-led government, Hammersmith Conservatives should stop using debt as a smokescreen to do what they want to do ideologically – cut down the state.

Tory Hammersmith & Fulham councillors are justifying their decision to slash with abandon by saying there is an urgent need to pay off the council’s debt. They either believe this, in which case they are economically illiterate, or they don’t, in which case they are dishonest. We thought we’d ask our own economic policy guru, Labour councillor Professor Andrew Jones, to explode a few Tory myths.

Myth No 1: H&F’s debt is unsustainable.
It isn’t, any more than a mortgage on a home is. Another word for debt is borrowing. And just as people borrow money through mortgages to have somewhere to live, councils of all colours borrow money (incur debt) to provide facilities and local services. A previous Hammersmith Tory administration increased the debt to build the unloved Town Hall extension and the now defunct Janet Adegoke swimming pool. Labour borrowed to build affordable local homes for rent. Both parties borrowed to improve schools. 

The difference between a council’s debt and ordinary people’s is that councils can get much better deals, such as 20-year fixed rates, and they can switch deals when rates fall. It may not suit the Tories’ political purposes to publicise this but Hammersmith council officials have rightly taken advantage of record low interest rates in recent times to make much of the council’s borrowing very cheap by historical standards.

Myth No 2: Paying off debt quickly is always best.
When the economy is doing well, paying off debt more quickly can be a good idea. This is why the last Labour administration in Hammersmith paid off £12 million in 2005/6 – more than the Conservatives in four years – without damaging services. 

But when times are hard, just as most people can’t afford to increase their mortgage payments without having to cut back on basics like food, heating and clothes, the only way that councils can repay their debt quickly is, as Hammersmith is doing, by cutting essential services such as child protection and Sure Start and by selling off community buildings.

This brings us to Myth No 3: H&F Tories are practical, not ideological.
Far from it. Hammersmith’s debt is more affordable than ever due to low interest rates, which means the pain being caused by over-rapid debt cutting is impractical and unnecessary. So why is the council inflicting it? The answer is that they are using debt as a smokescreen to do what they want to do ideologically – cut down the state. Cut it nationally and cut it locally.

You can disagree with this ideology while accepting that an honest difference of opinion here is possible. What isn’t acceptable is the Tories’ dishonesty in hiding behind the smokescreen of economically illiterate arguments about council debt to make ideologically-driven cuts.

Finally, there's Myth No 4: H&F Tories achieve value for money.
On any measure, they don’t. What they are doing is asset stripping at a period of low return after a recession. They consistently fail to look to the long term or to undertake any cost-benefit analysis of their actions. 

Take the sale of community buildings. This will bring in a mere £800,000, around one half of one per cent of the council’s borrowing. Our community will lose out today, and if a Labour council wants to expand services in the future, buying new buildings will cost more than if we had kept the ones we have. And even if the sell-offs were necessary, it makes no sense to make them now at the bottom of the market.

Equally, while cutting voluntary sector grants saves trivial amounts of money, taking away this Big Society safety net will increase demand on Hammersmith council from the most vulnerable in our society. How will the council find the extra money to meet the demand? By cutting services to those on middle incomes? Or – despite all their fine words – by leaving the most disadvantaged to suffer?

Hammersmith Conservatives are also quite prepared to spend money with reckless abandon when it suits them. Their plan to replace the Town Hall extension, which they themselves built with debt, is likely to cost millions and benefit only property developers.

It is time to look beyond the myths.
Whether you call it debt or borrowing, there is no economic requirement to cut services and facilities in order to pay off what Hammersmith council owes at this reckless pace. Politics is always about choices. H&F Tories are making an ideological choice and they should come clean about it.

3 comments:

Anonymous said...

Hey,

I have a question for the webmaster/admin here at hfconwatch.blogspot.com.

May I use part of the information from this blog post above if I provide a link back to your site?

Thanks,
Jack

hfconwatch said...

Sure.

Martin Thirlaway said...

I have had a look at figures in the 2011/12 Budget and Treasury Management report

Total debt at 31 March 2011 is £475,520,000 of which £414,829,000 is HRA and £60,691,000 is General Fund.

The interest on the HRA part is paid for from tenant's rent and HRA subsidy. It does not impact on the general fund or Council Tax.

The Council claims debt of £133,000,000 which is a statistic called the Capital Financing Requirement. Interest is not payable on statistics, only on the real debt of £60,691,000.
During 2011, £16,000,000 matures and policy is to not renew that loan(s)

On 31 March 2012 the government will repay HRA debt of £210,288,000 as part of the HRA self financing settlement. This will be spread evenly over all loans.

Total debt at 31 March 2012 will be £249,232,000 of which £204,541,000 is HRA and £44,691,000 is General Fund.

The maturity profile of debt at 31 March 2011 is
1-2 years 16,000,000
2-5 years 25,534,000
5-10 years 77,922,000
10 plus years 356,064,000

Total 475,520,000

The maturity profile of debt at 31 March 2012 will be
1-5 years 13,849,000
5-10 years 42,263,000
10 plus years 193,120,000

Total 249,232,000

Early repayment of loans will incur premia that will make such action uneconomic.

Over five years, including 2011/12, the maximum total repayments to avoid the premia are £29,849,000.

This is a long way from the £133,000,000 the council claims.