A local council in Surrey has signalled it is close to effective bankruptcy after amassing debts worth almost £2bn to fund a property investment spree, raising fresh questions over the fragile health of local authorities after years of austerity.
Woking borough council said it was “in the territory” of being unable to meet its financial obligations, amid a surge in debt interest costs on its investments, which include a shopping centre, residential skyscrapers and 23-storey Hilton hotel.
Big Debt problems
The council, one of several in England with big debt problems, said it was at risk of issuing a section 114 notice, which effectively signals insolvency. Although councils cannot technically go bankrupt, a section 114 is able to force central government to intervene to ensure local services are sustainable.
The process is seen as an admission by an authority that it lacks the resources to meet current expenditure, that its reserves are depleted and that it has little confidence it can bring its finances under control in the near future.
Woking is currently subject to a government review of its finances. Control of the council passed to the Liberal Democrats last year, after a fraught local election which partly focused on the vast debt pile accumulated by the former Conservative administration.
The development comes as Michael Gove’s levelling up department turns the screw on local authorities with high levels of debt. The government has ordered inspectors to review the finances, investments and governance, or has directly intervened, at several authorities, including Slough in Berkshire, Thurrock in Essex and Warrington in Cheshire.
Woking said it would increase council tax by 3% in 2023-24, but added: “It is not evident at this stage, however, how the council will establish a balanced budget for 2024/25.”
According to budget papers, the council borrowed about £1.8bn for investment purposes but is only bringing in £38.5m, a figure expected to rise to £43.3m next year.
“That’s clearly unsustainable and is five times the amount of council tax,” said Will Forster, the council’s deputy leader. “The major issue is the council’s borrowing commitments, which is something as a new administration we have inherited.”
He said Woking was committed to increasing its debt levels to £2.4bn by 2026, with much of the increase linked to its town-centre Victoria Square redevelopment, which includes a new shopping centre and a trio of tall residential and commercial towers.
“That is huge for a small borough council like Woking. We’re in a tough position.”
Debt fuelled investment programmes
Several English councils have used debt-fuelled investment programmes over the past decade, arguing that budget cuts directed from Westminster forced them to take matters into their own hands. However, questions have been raised over the suitability and scale of some projects.
Local authorities have also run into trouble after a sharp decline in town- and city-centre footfall since the onset of the Covid pandemic, leading many retailers to pull out of key high street locations, hitting the value of their investments.
Conservative-run Thurrock council was the last authority to declare effective bankruptcy, after issuing a section 114 notice in December as it grappled with a £500m deficit caused by a series of disastrous investments. That followed other recent failures at Northamptonshire county council, Croydon and Slough.