Treasurers already facing the prospect of having to make eye-watering efficiency savings have been left reeling by a shock hike in borrowing costs.
The Public Works Loan Board (PWLB), the main source of government loans for public bodies, last week announced an immediate change to the way it calculates interest rates for councils looking to repay their loans early.
Analysts say the move could add billions of pounds of long-term debt to councils’ balance sheets and will drastically reduce the scope for efficiency savings from good financial management.
Keith Beaumont, finance policy director at the Local Government Association, said: “This has come completely out of the blue and the sums are significant. It will certainly make debt restructuring much less attractive.
“Many authorities look at debt portfolios to see if they can restructure their loans to free up money for the front line.”
Previously, the PWLB used the same interest rate both for the cost of borrowing and when calculating whether authorities looking to repay their loans prematurely would pay a premium or receive a benefit from a discount.
But in a circular sent out last Thursday, the board revealed it was introducing a different rate for authorities seeking to repay their debts early much like a high street bank will charge different rates when buying or selling foreign currency.
Irene Silvester, chairman of Butlers, a financial consultancy specialising in local government, said the changes would make debt restructuring “more difficult and costly for councils”.
“In an era when all local authorities are looking to reduce costs and risks, this change could not have come at a worse time,” she said. “The move to reduce discount rates on early repayment of debt will result in greater costs falling not only on local government but also central government.”
Ms Silvester said the change would mean a£1m loan to be paid off over 50 years would now cost an extra£100,000 to repay.
Councils hold an estimated£50-60bn of PWLB debt. Under the old system, many would have been sitting on potential discounts materialising if they chose to restructure. Much of that windfall has now been wiped out.