This week has been awash with news on the Scottish debt problem.

Put simply every year Scottish Local Authorities are forced to allocate on average 42% of their income from council tax to servicing debts, many of them procured since 2008.

The problem is not that local authorities have been borrowing to finance large scale works – this is entirely reasonable and normal – it is how they have secured funding for such projects. Many of the loans in question were agreed with terms that disfavoured local governments through LOBO loan agreements (lender option borrower option). LOBO loans  have initially favourable rates but these  can be renegotiated at the prerogative of the lender every few years where the lender has the option to increase the rate, with the borrower having the option to either repay the loan in full or accept the rate change. Local authorities financing schools with LOBO loans rather than their traditional Public Works Loan Board loans is comparable to an individual paying for their extension with a Wonga Loan rather than a re-mortgage. It is an easier way to access large amounts of money, but less stable than the alternative. In short private financial institutions are benefitting from the high interest payments they receive from local authorities which – given the fact they can effectively raise interest rates whenever they choose – could convincingly be likened to legal extortion. Local authorities cannot afford this and in the most extreme case, that of the Western Isles Council, 103% of their income from taxes goes to service long term debt.

The Scottish Green party have asserted that as the loans were agreed on unethical terms they ought to be wiped completely. The Scottish Conservatives, however, have stated that to do so would be ‘irresponsible and unfair’. The Accounts Commission (whose self-proclaimed mandate is to hold Scottish councils to account and help them improve) has asserted that regardless of how the debt was procured and what it was used for they will have to be paid off by their respective councils. Perhaps they could help Scotland’s Local Authorities to avoid taking on toxic debts in the future?

One might ask what tempted Local Authorities up and down the country to take out LOBO loans in the first place? After the 2008-2009 financial crash and the Conservative-Liberal Democrat coalition budget cuts after 2010 councils looked to ways to fill the budget void. Add on to this the fact that George Osborne raised the interest rate offered to councils by the Public Works Loan Board – their traditional go to for credit- and all of a sudden LOBO loans started to seem like an attractive alternative. Although short sighted, the loans were taken out to stop cuts in front line services when they would have affected people most – and this is not something they ought to be punished for doing.

Although it may not be financially viable, or responsible, to write off existing loans with a no-consequence approach, it is imperative that the Scottish, and indeed British, Parliaments recognise that there is a major problem that must be confronted. The governments could take responsibility for the debt – thereby getting it out of the hands of private corporations – and pledge to stop any future loans being agreed on this basis. At this point, government intervention is required. It would not serve Scotland’s Local Authorities well to skirt around the issue and brush them under the carpet, only for them to manifest themselves into a far more ghastly problem for another administration to deal with; it would just be to cut off our nose to spite our face. And this is not a problem that solely concerns Scotland. Westminster must smell the coffee – although that, perhaps, is unlikely to happen given the current political situation.

Jubilee Scotland is currently doing work to fight these dangerous LOBO loans. This work is campaign against Scottish Local Council Debt. 

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