The Local Spending Spree
4H1 100KM/il7 A In E
By NICHOLAS DAVENPORT
I17 he has had to eat his words, Mr Callaghan must not be chided too severely. He has done his best, but his spending colleagues have been allowed to overrule him. But he did tell the House of Commons on February 23 last year that the growth of the public-sector expenditure, other than the capital expenditure of the nationalised industries, would be limited in this period to an average of 41 per cent a year at constant prices. Indeed, as the estimates he was then presenting were only 1.8 per cent up, he went on to say that he expected public expendi- ture in 1966-67 to increase by less than 41 per cent at constant prices. In fact, it has increased by 5 per cent at constant prices or 81 per cent in money terms—this at a time when the gross national output will be barely increasing in real terms. To make matters worse, capital expendi- ture in the public sector at £3,979 million is scheduled to rise by 161 per cent in 1967-68. Yet the Government decided in February 1966 that the total of resources available to the public sector should be related to the prospective in- crease in the national production!
One of the alarming features of this growth in public spending is the increasing part played by the local authorities. If I may take London as a fair example, the current expenditures of the Greater London Council are expected to rise this year by 101 per cent and its capital ex- penditure by over 30 per cent! (It has just come to the market to borrow £60 million more, which will enable it to. borrow a like amount from the Public Works Loan Board.) It is difficult to see how fast local spending is actually mounting this year because of the change in the system of local government finance. In future a 'rate support grant' is replacing the various designated grants and the total of Exchequer assistance is to be limited to 54 per cent of relevant current expenditures in England and to 621 per cent in Scotland. But even so there is a rise of £155 million or 12.3 per cent in the Exchequer cost of local government spending in the coming year. It reflects increases in pay and prices, the expansion of services and additional Exchequer contributions of £43 million. How does the Treasury make sure that it is getting full value for these enormous grants and that wastefulness and extravagance are being eliminated as far as possible? It does not even try. It leaves it all to the town clerk and the council officials. But it is abundantly clear that the big urban councils need a top-class business manager—as one or two have in fact decided on—who is trained not so much in local government routines as in business efficiency and 'profit-making' techniques. Ad- ministrative economies of only 21 per cent in local government spending would save the Ex- chequer £35 million and the nation over £70 million. Ratepayers should bear this in mind when they hear over the next few weeks the hideous amounts they will have to pay in rates for the next financial year.
These estimates are for current expenditures. When it comes to capital expenditures, everyone will boggle at the size of the programmes which the local authorities have to carry out. The grand total; according to Mr Callaghan, amounts to £1,435 million in 1967-68—a rise of 121 per cent. Disregarding roads, here are the main items: Local Capital Expenditures In £ million
1966-67 1967-68 Housing* £643 £750 Police and Prisons 26 29 Education 294 313 Health and Welfare 122 140 • including improvement grants For the most part the local authorities in these great capital programmes are merely acting as agents carrying out the decisions of the central government. Any rational person would suppose that the central government would therefore look after their finance and keep a watch on their expenditures. But not at all. The central govern- ment only partially looks after their finance and when they have to raise money themselves in the capital market it penalises them by making them pay the high rates of interest required by foreign lenders who are so bribed to make deposits in sterling. This is an old story but it is worth re- telling. The Tory Chancellors between October 1955 and March 1964 denied the local authorities access to the PWLB, except the smaller ones who were financed out of PWLB repayments; they had to go to the market and pay the market rates of interest. The result was a huge rise in short-term debt, for the local treasurers were
naturally disinclined to saddle their councils with long-term debt at the prevailing high rates of interest (which at one time topped 7,,Rsr cent). In March 1965 the short-term debt reached £1,825 million—nearly 20 per cent of the total --and this was considered dangerously unsound. Mr Maudling was the first Chancellor to relent and restore limited access to the PWLB at a lower rate of interest: Mr Callaghan carried the concessions further. For 1965-66 the local authorities were allowed to borrow from the PWLB no less than £535 million, well over half their net borrowings and greatly in excess of Mr Callaghan's estimates. As these drawings were at a 'subsidised' rate of 51 per cent, Mr Callaghan had to limit the recourse to the PWLB for 1966-67 to close on £400 million. In ten months of this financial year the councils had borrowed £351 million. For the balance of their borrowings, which will total over £1,000 million, they have had to pay over 6f per cent, even for short-term money in the capital market.
In view of the colossal amount of social in- vestment the local authorities have to carry out for the central government, it is absurd to let them scrounge in the open market for what they can raise at rates which are made artificially high to attract foreign money for the defence of sterling. The borough treasurers have been extremely clever in developing a short-term mort- gage market and in popularising one-year local bonds, but it is time that the central government guaranteed them direct access not only to the PWLB but to the stream of savings which are accruing to the superannuation funds of the state. The impression grows that local authority finance is in a muddle, is becoming dangerously inflated and ought to be brought under a more rational control.
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