By Alan Clawley.
Why does the government still encourage individuals, businesses and local councils to borrow and banks to lend whilst telling us that the national debt incurred by government is a problem for which the public must be made to suffer through cuts in services?
We all know the story but it bears re-stating. In 2007 some building societies and banks got badly into debt because millions of their customers were not repaying their loans. In the accounting system, banks building societies and credit unions regard loans as assets on their balance sheets as long as they are likely to be repaid with the interest that makes a profit for the bank. Money deposited by customers, or savings, counts as a liability because it does not belong to the bank.
Note the terminology that implies from the bank’s point of view, lending is good and ‘the more the better’, whilst savings are discouraged. The opposite applies to customers who view their savings as assets and their loans as liabilities to be repaid as quickly as possible. Assets balance liabilities, so when banks write off loans their assets are reduced and the losses are borne from income, by borrowing from another bank, or in the last resort from the government, which means the taxpayer. The customer who defaults on a loan is normally pursued through the courts but as you can’t get ‘blood from a stone’, the banks consider that a waste of time and money. So loan-defaulters spend the money and never pay it back.
Governments say that although these institutions are privately owned they play too big a part in our lives to be allowed to go under. So the government has borrowed billions of pounds on their behalf to shore up their balance sheets until they can sort themselves out.
This is where the public comes in. The government says that the country cannot afford both the repayments of these exceptionally big loans as well as the present level of public services so we must spend less on public services. The Labour Party agrees although they would repay the loans over a longer period and cut public services more slowly than the government.
Local councils and to some extent the public, appear to have swallowed the message like a dose of medicine and capitulated with hardly a murmur. Perhaps there is a feeling amongst those who have done nicely by borrowing from banks and building societies and who feel that its time to pay for the good times. Only those most seriously affected by public service cuts have mounted any resistance. The trades unions are rightly angry because the cuts fall on the lowest paid workers and some vulnerable individuals who were set to lose their care packages have taken the council to court and proved that the cuts were illegal.
So, how can we (non-experts) know if Birmingham City Council is telling us the truth when it says that the government is forcing it to cut the cost of services by over £200 million next year? How many of us will study the 166-page Budget Book or by spend time scrutinising even the simplified version of the accounts that come with the Council Tax bill. At the risk of sounding like an anorak, I confess that I spent several days poring over the budgets. I’ve even emailed the council to check my figures because I thought they must have made a mistake. So, what have I discovered?
When I looked at the overall cost of running the Council I saw that it is to INCREASE by £14 million, i.e. from £3,513 million in 2010/11 to £3,527 million in 2011/12. To arrive at this bottom line the council has made CUTS of £149 million but INCREASES of £164 million, which includes £14 million extra for the Leader’s budget. I can’t see where the much-publicised cut of £212 million comes from. The CAPITAL BUDGET has been reduced by £16 million but this consists of a £95 million CUT and a £79 million INCREASE on projects such as the Library of Birmingham, Harborne Pool, Sparkhill Pool, Alexander Stadium, Safety works to parks Highways Maintenance, Big City Plan, High Speed 2, New Street Gateway, Eastside, and Icknield Port Loop.
Birmingham remains heavily subsidised by Central Government. Much of the money is for specific projects such as Neighbourhood Renewal Fund or Connexions. When government cuts that funding Birmingham tends to take the easy way out by cutting the projects that were funded thereby blaming the government for the cut in that service. This is not inevitable although solutions like charging students higher fees are unpopular. Birmingham is funding projects from its own resources by borrowing more.
The new Library of Birmingham will be paid for entirely by PRUDENTIAL BORROWING. No government funding is involved. The Council is hoping to use another device called TAX INCREMENTAL FUNDING which enables them to borrow more money for redevelopment schemes like Paradise Circus on the strength of the Business Rate revenue that will accrue when they have been completed – a form of gambling on the state of the economy many years ahead. The council is bringing in entry charges to its museums and historic houses and I suspect that large parts of the new Library will be sub-let to private companies who sell coffee, ice cream, books and music. Services that are at present free will be charged. The effect is to shift the burden of funding to local government who will take the blame or the credit for deciding what to fund or charge its citizens for in future.
The council’s claim that the specific cuts are necessary because of government cuts cannot be justified. The council will receive £159 million less for some purposes but £173 million more for others, making a net INCREASE of £14 million. The Council proposes no cuts in the numbers or salaries of its 47 chief officers and senior staff whose salaries total £4,380,000 a year. It is possible in my view to reduce their number to 30 and total costs by a third by losing posts such as ‘Corporate Director of Business Change’, ‘Head of Policy and Performance’, ‘Head of Intelligent Client Function’, ‘Project Director – City Region’, ‘Head of Governance and Facilities – Transformation’ and ‘Senior Directorate Manager – Transformation’.
The Revenue budget has been constructed to take funds away from frontline services and give it to the corporate activities of the council. Council borrowing has increased at an ongoing cost to the taxpayer. This has not been forced on the council by central government as the council claim but is a deliberate choice. An alternative budget based on other priorities can be devised whilst keeping overall running costs down. An independent regulator such as the Audit Commission, rather than the courts, should have ensured that any cuts were fair and necessary, but it too is being abolished and the council’s own Scrutiny Committees are clearly not up to the job.