Fanny Malinen: Here are the debts we shouldn't pay and why

Writer Fanny Malinen lays out the extent of Scotland's deep problem with local authority debt - and makes the case for getting rid of it

SCOTLAND'S local authority debt is illegal, illegitimate and odious, says a report by the Green Party, published in November. 

It is "based on grossly unfair terms, violates democratic principles" and "cannot be serviced without seriously impairing the ability or capacity of local authorities to fulfil basic human rights obligations".

Local authorities' long-term debt totals £11.5bn. It consists of borrowing from HM Treasury's Public Works Loan Board, from banks in the form of LOBO loans and Private Finance Initiative (PFI) projects. 

All are significant: Scotland has the highest PFI/PPP borrowing per capita in the world; out of top 10 LOBO borrowers in the UK, three are Scottish councils; and on average, local authorities in Scotland spend the equivalent of 42 per cent of council tax income on servicing debts.

Considering the scale of cuts and job losses in local government, these debts are clearly not sustainable. Nor are they just.

Debt is a form of power

In the wake of the 2008 financial crisis, RBS was bailed out by £45bn of taxpayer money. Still, the bank continued to lend to local authorities: for example, in 2010-2011 RBS made £40m worth of LOBO loans to the city that hosts it. 

Edinburgh currently pays nearly seven per cent interest on these loans called "inverse floaters", where interest is inversely tied to the LIBOR rate – comparing unfavourably to the PWLB rate of around three per cent. 

To complete the picture, it is worth mentioning that RBS was one of the banks fined for rigging LIBOR, one of the world's most important benchmark rates. This is why it would be wrong to focus only on the financial elements of these debts or their economic impact, even though that is usually how debt is spoken of. 

In the wake of the 2008 financial crisis, RBS was bailed out by £45bn of taxpayer money. Still, the bank continued to lend to local authorities.

There is more to it: debt is an essential part of coercing countries and communities into the neoliberal order where services are privatised and wealth concentrated in the hands of the few.

Take interest rates. Interest is supposedly the price of money, determined by the neutral forces of supply and demand, compensating the lender for the borrower's risk. But it doesn't take much to observe that political decisions influence who credit is given to and under what terms. 

Under a Conservative-led Westminster government, Labour-run councils have been paying more interest. And when George Osborne raised PWLB interest rates in 2010, the move drove councils further towards bank lending – increasing the flow of funds (in the form of interest) from public sector to private.

But the most telling illustration of the politics of debt in recent years has been the Greek crisis. The European Union and the International Monetary Fund spent over €200bn to bail out the country – except that in reality, 77 per cent of the bail-out went into rescuing the financial sector, not the Greek people. 

The most telling illustration of the politics of debt in recent years has been the Greek crisis. The humanitarian crisis this has caused has been well documented.

Still, the creditors have for the last six years used the bail-out loans as a political lever to dictate the country's economic policies, forcing through a massive privatisation programme, harsh austerity and hikes in regressive taxes. The humanitarian crisis this has caused has been well documented.

Greece was not the first country to be subjected to such violence by creditors. When a hike in US interest rates in the early 1980s resulted in many countries of the global south defaulting on their dollar-denominated loans, international financial institutions came to their rescue only to impose neoliberal economic policies that have resulted in skyrocketing poverty and inequality. 

And considering the ever-accumulating interest, many African, Asian and Latin American countries have already paid their original debts back manifold, yet they continue to owe even more to their creditors.

Tools of resistance: audit

Of course, there has been resistance since the 1980s, arguing that debts accumulated not in the interests of the people or without their consent shouldn't be paid. The main tool of these movements has been to audit debts to determine exactly who has borrowed, under what conditions and what the money has been spent on.

Ecuador's leftwing president Rafael Correa initiated a debt audit when he came into power in 2007. It resulted in the country defaulting on $3.2bn of its debts, freeing up funds to be spent on public services. 

When the first Syriza government came into power in Greece, it too took on a debt audit. The Truth Committee on Public Debt was led by the parliament's speaker, Zoe Konstantopoulou – a human rights lawyer – and produced a preliminary report in June 2015 that declared much of the country's debt illegal, illegitimate and odious. 

But when Syriza capitulatedsonly a month later, the new Speaker of the parliament evicted the committee and removed its findings from the parliament's website. 

Ecuador's leftwing president Rafael Correa initiated a debt audit when he came into power in 2007. It resulted in the country defaulting on $3.2bn of its debts, freeing up funds to be spent on public services. 

The work continues in the form of a social movement, which is how it started before Konstantopoulou took it on.

There are also moves towards audits on local authority level: local elections in May 2015 lifted progressive coalitions into power across the Spanish state. Madrid has since started an official audit that aims to include citizen participation, and in a recent declaration, over 500 elected representatives from all over the Spanish state called for action to reject illegitimate debts and an immediate end to austerity justified by them.

The Greens' report refers to the work of the Greek debt audit, and speaks of Scotland's local authority debt in the same terms. 

"The crisis facing local authority finances, the unsustainable, unethical and potentially illegal nature of the debt that is precipitating this, and the significant negative impacts that this is already having across Scotland, justifies a cancellation of local authority debt," Patrick Harvie wrote in the National following the report's publication.

Who pays?

Unsurprisingly Graham Simpson, the Scottish Conservative local government spokesman, commented that it "would be utterly irresponsible and unfair to simply write-off council debt. A move like that would send a shocking message to everyone else on fiscal responsibility. We'd be as well telling councils to just waste as much cash as they like because, one day, a government will come along and pick up the tab."

Let's pause for a moment. There has been a lot of talk about fiscal responsibility for the last three decades of neoliberalism, and especially so since the latest financial crisis; about the need to reduce debt and the deficit, to balance budgets, to cut spending. 

Indeed, the need to avoid public indebtedness at any cost has been the driving factor behind innovations such as PFI: they conveniently hide debts off balance sheets. 

In other words, in trying to avoid showing the UK government would have to borrow to build a new school, they have made local authorities borrow up to five times as much, just out of sight. You could call that responsibility – or you could call it the opposite.

Paying one's debts is held up as the moral and honourable thing to do, but it seems to only apply to the ones of us who are not too big to fail. 

An even more interesting point to unpick is the comment that it would be irresponsible to tell councils they can do whatever they like and if it goes wrong, the government will pick up the tab.

After all, this is exactly what they did to the banks – and that is the reason for the current round of austerity measures that are pushing people into poverty.

Paying one's debts is held up as the moral and honourable thing to do, but it seems to only apply to the ones of us who are not too big to fail. 

This is why collective action, like a debt audit, is important: it makes us bigger, and powerful enough to stand up to the vested interests of banks and the politicians they have in their pockets.

Picture courtesy of Images Money

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Thu, 01/12/2017 - 09:44

Well said, it's about time this was reported in the media like this, let's move this subject to the top of the reporting agenda.PFI is an agreement between politicians and the private business sector to burden ordinary council tax payers and therefore local authorities with debt that will never be paid ensuring that huge interest payments have to be made indefinitely as each loan is added to future loans keeping local authorities at the doors of RBS and other Westminster chosen loan companies with the begging bowl.
Who will lead the fight to get these PFI loans written off so that council tax money can be spent on services and not on huge neverending interest payments to private companies who will no doubt be rewarding the politicians who signed these deals with under the table payments.

Peter Dow's picture

Peter Dow

Fri, 01/13/2017 - 15:00

I want to thank Fanny and the authors of the excellent "Local Government Debt in Scotland" report for Green MSPs.

CommonSpace is excellent source for such detailed high-quality analysis that we rarely see in the mainstream media (MSM).

CommonSpace best writers like Fanny are like reliable clocks that tell the time accurately all the time whereas the MSM is like a stopped clock that is right once or twice a day - and for such rare occasions one must be grateful and thank the MSM too, as I did the other day simply for mentioning borrowing and debt limits in a superficial way, as follows.

Peter Dow's picture

Peter Dow

Fri, 01/13/2017 - 15:01

"SNP to borrow 'to the max' using Scotland's new powers"

story carried in the Scotsman, Herald, Scottish Sun, Express, Telegraph etc.

This is a very important story of central importance to Scotland's future prosperity and I thank the mainstream media for reporting on it.

The good news is that the government is using its borrowing powers to the max.

The bad news is that "the max" is too little, too late for the government to borrow to invest sufficiently to deliver strong economic growth to take up the economic slack caused by the slump in the oil sector consequential to low global oil prices.

The paltry borrowing powers should be much higher than "a maximum annual limit of £450 million" - I suggest £10,000 million annually should be the new max.

I further suggest that instead of the "Scottish ministers will be able to borrow up to £3 billion" our policy should NOT IMPOSE ANY UPPER LIMIT ON TOTAL NATIONAL DEBT.

Upper limits on national debt are an arbitrary ideological goal of economically illiterate fiscal conservatives and such need to be consigned to the dustbin of failed economic theories.

It is a perfectly reasonable economically sound expectation that Scotland would add £billions to its national debt every year forever.

Yet First Minister Sturgeon has tied her government's own hands when, in February 2016, she signed the Fiscal Framework Agreement which imposed the paltry borrowing limits referred to in the story.

There needs to be a renegotiation of the Scottish government's fiscal framework.

Peter Dow's picture

Peter Dow

Fri, 01/13/2017 - 15:03

Peter Dow is a Scottish scientist and a republican socialist whose legal human rights are cruelly violated by the police and courts in Aberdeen, where he lives.

Peter Dow's political defence blog publishes the truth about the wrongful and unjust royalist arrests, prosecutions, convictions and punishments he endures.

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