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Hard-up council re-mortgages debt, but future tax payers must pick up the bill

Hard-up council re-mortgages debt, but future tax payers must pick up the bill

🕔26.Nov 2014

A decision to re-mortgage Birmingham council’s £3 billion debt will place a significant additional burden on future tax payers who will have to pick up the bill, auditors have warned.

Labour councillors have agreed to cut the Minimum Revenue Provision (MRP) – the amount of money the council is required by law to set aside each year to repay borrowing.

The move, similar to a householder re-mortgaging, will release £567 million over 20 years and in the short term help to offset spending cuts and maintain service provision.

But for the 30 years after 2034, the cost of debt repayments and interest will rise substantially, costing the council £1.1 billion more than would otherwise have been the case.

District Auditor Mark Stocks said in his annual report he would not challenge the council’s right to make the changes, but pointed out that the cost in future years would impose an additional financial burden on Birmingham council tax payers.

There would also be a potential impact on the long term viability of the council.

Mr Stocks said: “We do not propose to challenge the reduction in the 2013-14 MRP payments as a result of the offset of previous voluntary MRP payments, or the impact of the changing the period over which MRP payments are to be made by the Council.

“However, we draw members attention to the significant additional burden this change places on future tax payers and the potential impact on the long term financial viability of the council.”

He warned against using the same process to raise money to meet a £1.1 billion equal pay bill.

“The proposals also include potentially temporarily reducing future levels of MRP to mitigate the impact of a shortfall in resources to fund equal pay settlements. We note that the council has not implemented this part of the policy and will only do so if particular circumstances arise.

“We consider this part of the policy to be contentious. We will monitor the implementation of this part of the policy and if utilised we will need to be satisfied that it is in accordance with the Local Authorities Regulations 2003 and the DCLG Capital Finance Guidance on Minimum Revenue Provision.”

Labour council leaders insist that cutting MRP is a standard financial practice and that any additional costs after 30 years will be wiped out by inflation.

But Conservative finance spokesman Cllr Randal Brew said the move amounted to “creative accounting” that would impose a huge cost on future generations.

Cllr Brew added: “I am assured by council officers that when you factor in inflation and present net value it all adds up to being cost neutral. But the fact is that £1 billion still has to come out of the budget in 30 years’ time and that will be a budget challenge for whoever is in charge then.

“What we are doing in reality is mortgaging our children and grand children’s future and I have to be extremely concerned about that.”

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