Local authorities in Scotland have come under fire recently over the proportion of their revenue from council tax being spent to repay high levels of debt. The Scottish Green Party commissioned a report which suggests that Scottish councils spend almost half of their tax revenue to service interest on £11.5 billion of borrowing. A similar report by the trade union Unite in March this year found an average of 44% of council tax income on loan interest.

Council tax revenue accounts for a relatively small portion of local authority financing (just under 20%), but this a not insignificant share of total revenue funding. The obvious criticism levelled at local authorities is that they could be putting this money to better use, by spending it on key services for communities.

The problem, of course, is that with decreasing revenue grants from central government, local authorities are having to turn more and more to external sources of funding to be able to afford to discharge their basic statutory duties on the one hand, while also investing in infrastructure to try to stimulate growth in their local economies. A recent report by the Accounts Commission revealed that Scottish councils are on course for a funding gap of over £550m in the next 2-3 years. There may be no option but to borrow money.

Lender Option Borrower Option (LOBO)

Some local authorities have been driven towards borrowing solutions known as Lender Option Borrower Option (LOBO). There are three Scottish councils among the top 10 LOBO borrowers among UK local authorities. While many will still maintain that local government is a responsible borrowing sector (citing the specific duties to borrow responsibly and the duty to have regard to the CIPFA Code of Conduct), LOBO loans have a thorny reputation and could leave some local authorities vulnerable to challenge.

Earlier this year, a resident of Newham Council claimed that the Council had acted irrationally in its use of LOBO loans. She lodged objections to the Council’s accounts, prepared by external auditors PwC, calling for the auditors to seek a ruling in the High Court that the loans were unlawful. No formal legal challenge has been raised as yet, but the issue attracted a measure of controversy which is unlikely to fade away.