Back council debt cancellation or face “new phase of austerity”, Labour told

The Labour Campaign for Council Housing has said that the Labour Party must “support and campaign for debt cancellation” for councils in the pandemic – or face a “new phase of austerity”.

In a letter to the Labour leader Keir Starmer and deputy Angela Rayner today, the organisation described a “deepening crisis of local government funding, which is spiralling out of control”.

Chair Ben Clay and secretary Martin Wicks welcomed the call from the Local Government Association Labour group for the government to cover the costs of councils’ expenses in tackling the virus, as well as the loss of income.

But it warned that even if the government does so, the impact of the virus will not be “short-lived” and further measures would be needed to stabilise council finances. The group has said that Labour should demand the following from government:

1. “They should cover the extra costs of dealing with the pandemic and the lost revenue resulting from the lock-down in full;
2. “They should cancel local authority debt held by the Public Work Loans Board, thus providing around £4.5bn extra spending power a year; and
3. “Urgent discussions should take place on what Preston Council leader Matthew Brown has called “a new financial settlement for local government” based on actual needs.”

Clay and Wicks wrote that failure to campaign for the above demands would mean that “councils will begin to fail” – warning that “key workers would receive thanks for their critical work during the pandemic in the form of redundancy notices”.

The group said that if Labour councils were to try and set balanced budgets without sufficient funding, they “will impose cuts in jobs and services which could well be worse than the Osborne cuts”.

The government last week announced additional funding for local authorities, of £500m, to be distributed across all local authorities in the UK. It also committed to covering some of the lost income suffered by councils.

The leaders of both the Local Government Association Labour group and the cross-party organisation London Councils slammed the package – describing the sum of money as “wholly inadequate”.

Research by the Local Government Association last month revealed that councils face a funding gap of over £7bn – the financial burden of the pandemic amounting to £10.9bn, while the government has provided £3.2bn in additional funding.

148 of 173 councils asked in a recent survey predicted a budget shortfall and at least five have warned they may issue a section 114 notice – this prevents any new expenditure and gives a council 21 days to make an alternative budget.

A budget made after the issue of a section 114 notice would involve significant cuts to existing services. Several local authorities have said that they are weeks away from issuing such a notice.

The Labour Campaign for Council Housing issued its campaign statement in response to the crisis faced by councils, emphasising the additional spending power that would be made available to them by cancelling the PWLB debt.

It has argued that the government set a precedent when it cancelled the debt owed by NHS trusts, which amounted to a total of £13.4bn, to ease the pressure they faced during the pandemic.

Supporters of the campaign include Labour left MPs John McDonnell, Richard Burgon, Zarah Sultana, Paula Barker, Ian Byrne, Clive Lewis, Claudia Webbe and Mick Whitley, as well as Bristol mayor Marvin Rees.

Labour’s Steve Reed rejected the campaign during a LabourList interview last week, saying that the proposal would cost around £90bn and that resources should be sent “where need is greatest, not where debt is greatest”.

The Shadow Communities and Local Government Secretary added: “Let’s not just reward badly-run Conservative councils that are speculating with public funds, let’s send money to where people really need it to move on where their lives and access opportunity.”

Below is the full text of the letter send to the Labour leadership today.

Dear Keir and Angela,

Debt cancellation is a necessary part of the solution of the local authority funding crisis to prevent a new phase of austerity.

We are writing to you in relation to the deepening crisis of local government funding, which is spiralling out of control. We believe that we are rapidly reaching the point of the collapse of council services and of some local authorities. Robert Jenrick’s “comprehensive package” is insufficient to prevent a new phase of austerity for local government. The LGA Labour group is rightly calling on the government to cover both the extra expenses of dealing with the pandemic and the lost revenue resulting from the lock-down. Every pressure needs to be brought to bear on the government to honour its commitment to compensate councils for ‘doing whatever is necessary’.

However, even if we succeed in getting the government to do that it is quite clear that the impact of the pandemic will not be short-lived. Indeed various Labour council leaders have said it will impact for three to five years. As an emergency measure to deal with this situation we have called for the cancellation of local authority debt held by the Public Works Loan Board. This would provide councils with an extra annual spending power of around £4.5bn a year, which would go some way to stabilising council finances.

At the recent national policy forum, Steve Reed said that “Labour leaders do not want debt cancellation” because “it implied no distribution of funding on the basis of need”. Firstly, it’s not true that Labour council Leaders do not want debt cancellation. We know that because 17 of them have signed our statement in support of debt cancellation. These are Labour leaders of Amber Valley, Birmingham, Bristol, Cheshire West & Chester, Corby, Ealing, Halton, Kirklees, Leicester, Liverpool, Luton, Milton Keynes, Norwich, Preston, Stroud, Telford and Wrekin, Wirral. In addition the deputy leader of Leeds has signed, and opposition Labour group leaders in Derby, Gloucester, and Swindon have as well. This cannot be dismissed as an insignificant expression of opinion even if it is currently a minority of Labour council leaders.

In regard to the method of funding of local authorities we believe that it should be based on annual assessments of social needs in each locality, at least adjusted in line with inflation each year. However, the reality is that we will not be able to secure such a system in place before the financial crisis comes to a head. We believe that Labour should therefore be demanding of the government:

1. They should cover the extra costs of dealing with the pandemic and the lost revenue resulting from the lock-down, in full;
2. They should cancel local authority debt held by the PWLB, thus providing around £4.5bn extra spending power a year; and
3. Urgent discussions should take place on what Preston Council leader Matthew Brown has called “a new financial settlement for local government”, based on actual needs.

This would provide the basis for Labour, the unions and service users to come together to try and force another government U-turn. Without a serious campaign along these lines, which can shift the government, then section 114 notices will start to emerge and councils will begin to fail. When Islington Council leader Richard Watt described the local authority crisis as “an existential” one he was not exaggerating.

If we are unable to move the government and Labour councils set balanced budgets with insufficient funds, they will impose cuts in jobs and services which could well be worse than the Osborne cuts. But the cuts will come before the next financial year. We have already heard of one Labour council sending out notices to staff asking for volunteers for redundancy. In a recent Zoom meeting in Leeds, one senior councillor explained that without extra money soon there would be compulsory redundancies, charges for services for which there are currently no charges, and closure of all libraries and museums.

Key workers would receive thanks for their critical work during the pandemic in the form of redundancy notices. More and more people who desperately need services will not be provided with them. It will be no good Labour councils telling their constituents it’s not our fault, it’s the Tories. That did not work under the previous Leader. If Labour councils are implementing a new phase of austerity it would hardly enhance the Party’s electoral prospects.

So we believe that it is absolutely critical that Labour and the unions mobilise a campaign to stop this new phase of austerity for local government which will be socially disastrous.

Bristol mayor Marvin Rees, writing to us, in support of debt cancellation said: “I have called on national government to underwrite the true costs of the pandemic to local authorities, including lost income. My Labour administration supports debt cancellation, including through the Public Works Loan Board, as part of a funding solution.”

He is right. Debt cancellation is part of the funding solution, in conjunction with full funding for the impact of coronavirus on councils. It is the simplest measure to stabilise council finances whilst efforts are made for urgent discussions on a funding system based on need.

As a council housing campaign we think that debt cancellation, which would include cancellation of the (largely fictitious) housing revenue account debt, is crucial for addressing the underfunding of existing council housing. It would provide HRAs with at least an additional £1.25bn a year, which would help to address the backlog of work which has built up as a result of the pandemic, and could help boost new council house building. Moreover, we think that Labour should demand of the Tories now, what it committed to in its manifesto, that they should provide a £10bn a year grant for new building of social rent council housing. This will not only address the housing crisis but will put back to work people thrown out of work as a result of the pandemic and the lock-down.

One of the consequences of the pandemic is likely to be a spike in evictions. A large scale council house building programme is critical for dealing with homelessness.

We are therefore appealing to you to support, and campaign for, debt cancellation as an emergency measure which is crucial for stopping the introduction of a new phase of austerity which, in the context of a pandemic which is far from over, will be socially disastrous. If Labour Councils implement a new phase of austerity we will pay a heavy political price.

We would be keen to discuss these issues. Angela made a commitment during the deputy leadership campaign to meet us within 100 days. We would welcome the opportunity to take up that offer and would be grateful if you could provide us with a date that would be convenient for a Zoom meeting.

Many thanks

Ben Clay, Chair Labour Campaign for Council Housing
Martin Wicks, Secretary Labour Campaign for Council Housing