Tag Archives: debt

Newham’s Debt Timebomb

28 Feb
Last year I wrote about the enormous debt racked up by Newham council in the ten years since Sir Robin Wales was elected as executive mayor.

As the result of recent correspondance with a local Labour party member, I thought I’d revisit the issue and explain a little more why it makes me feel so uneasy.

Of course public debt isn’t like personal debt, much as the Tories may try to persuade us otherwise. But equally local government debt isn’t like national government debt either. National debt for a country like the UK, which has a sovereign currency, is always ultimately repayable through creating new money (this is what the recent rounds of quantitative easing basically involved – creating new money to buy back old debt). Obviously it’s a last resort and can go disastrously wrong, as Mugabe demonstrated in Zimbabwe, but it means the UK can never go bankrupt and will never default on its debt.

But the same does not apply to Newham. We can’t print new money to pay off the debt, so the only options are taking on new loans to pay off the old ones or ensuring revenues exceed expenses and using the difference to pay down the loans. This latter option means raising taxes, cutting costs or a combination of the two. The former option will only work for so long, as eventually your line of credit runs out or the interest payments on the debt swell to an unsustainable point.

And it’s really the question of the interest that bothers me at this point. Sir Robin has been extremely fortunate to have been able to borrow and spend at a time of record low interest rates. If you look at the council’s accounts you will see that the cost of servicing the debt today, in cash terms, is the same as it was ten years ago despite the fact that there’s almost twice as much of it. But only a fool would believe that today’s historically low interest rates will last forever – or even for as long as the life of Newham’s loans.

So when interest rates start to go back up, the cost of servicing the debt goes up.

Where are those extra interest payments going to come from? Either more borrowing – which would be extremely foolish – or from revenues. Either council taxes have to go up sharply, or services have to be cut yet further. In Newham neither looks an attractive option: make some of London’s poorest people pay a lot more tax, or cut the services they rely on.

What Sir Robin has created is a debt timebomb. If he’s lucky, or astute, he’ll have moved on to bigger things (Lord Wales?) before it goes off. But the people who live and work in the borough will be stuck with the consequences.

 

Advertisements

Newham Council’s Mountain of Debt

3 Oct

People have expressed surprise that the mayor has proposed to borrow £40 million to lend on to West Ham United FC to part-finance their bid for the Olympic stadium. They ask how one of the poorest boroughs in London can afford to take on such debts.

What they obviously don’t realise is that Newham has already has massive debts. According to the draft statement of accounts for 2010/11, the council’s “total external borrowing at 31st March 2011 was £1,186 million.”?????? Against that, “the Council had investments of £303 million.”?????? Which leaves a net position of £883 million of debt.

That level of debt is truly shocking, but what is more alarming is the massive growth in those debts during the mayor’s reign.

As at 31st March 2002 Newham’s total external borrowing was £616 million. With investments of £91m that left a net debt of £525m.

Today’s total debt figure of £1,186 million represents an increase of 93%. Even taking the major increase in investments into account, the net debt position has increased by 69% over the past 9 years.

Although the council claims that the current debt is “well within [our] approved borrowing limit” it is a frighteningly large sum. According to the 2001 census (the most recent data on the council’s website) there are 91,822 households in Newham.

That means the council owes the equivalent of £12,916 per household.