A trickle of shoppers wanders past the faded concrete facade of a former House of Fraser and into The Square, a leaky glass-roofed retail complex that squats in Camberley town centre.
“It would be really nice if it was a really good department store, but I think everyone’s shopping online now, aren’t they?” says Kerry Summerley, on the hunt for maternity tights for her daughter.
This empty store, like so many across the UK, is a visible manifestation of the decline of bricks-and-mortar retail and the weak economy.
But here in Michael Gove’s back yard of Surrey Heath, it also holds the key to the financial struggles facing the local council.
The House of Fraser building and the shopping centre were bought by the council for a combined total of £113m in 2016. Funding was tight and the purchase, paid for by borrowing, seemed a way of regenerating the town centre and producing an income stream.
Seven years on, with high streets across the UK struggling, compounded by the Covid pandemic, the two sites are thought to be worth £33m – 70% less than the purchase price – while rising interest rates mean the cost of servicing the council’s debts has increased.
“We bought at the top of the market,” laments Shaun Macdonald, the Liberal Democrat council leader whose party took over from the Conservatives in May.
Surrey Heath is far from unique. Since Birmingham council’s financial crisis came to a head with the issuing of a section 114 notice last month, a declaration that it can’t balance its budget, a rash of local authorities, urban and rural and of all political colours, have warned of the intense financial pressures they face.
This month, Tory-led Hampshire said it risked, “financial meltdown”, while Havering, on the eastern fringes of London, and Coventry, in the West Midlands, both sounded the alarm.
Chunky Covid grants helped cushion the pressure on council finances during the pandemic, and financial settlements have since increased after years of decline. But local authority spending power remained 10% lower in 2021-22 than when the Conservative-Lib Dem coalition came to power in 2010.
And councils are facing surging demand for the services they have a statutory duty to provide, such as social care, just as the cost of delivering them has increased sharply as a result of high inflation.
Local authorities across the UK are facing a combined cash shortfall of £3.5bn in the current financial year, according to analysis by the trade union Unison.
Pete Marland, the chair of the Local Government Association’s resources board and Labour leader of Milton Keynes council, says he expects this funding gap “essentially, to stand still, not to get better” and that £8bn to £10bn might in fact be needed to meet rising demand.
He argues that councils have often borne the brunt of austerity, because ministers can blame local councillors for the resulting cutbacks. “It’s not that the government is saying, ‘Cut this, cut that’, the government is effectively changing the number on a spreadsheet,” he says.
And he stresses local authorities’ lack of options to close the gap. Their power to increase council tax is capped by central government, barring a local referendum, and the additional “social care precept” is not enough to match demand.
Meanwhile, the bands for council tax have not been revalued since 1993, even as house prices have soared. And while councils receive a share of local business rates revenue, some is clawed back by central government – well over half, in the case of wealthier areas.
Council leaders also bemoan the cost and complexity of competing for short-term pots of money from government initiatives such as the levelling up fund.
Here in leafy Surrey Heath, it is not the pressure of tending to the elderly or the homeless that is battering the council’s books – this is a district council, and those responsibilities lie with the county council.
Instead, Macdonald is counting the cost of a string of risky investments – in particular, the purchase of the shopping centre and the House of Fraser building.
In common with a cluster of other councils in the area, Surrey Heath bet big on property in a bid to offset the squeeze from Westminster.
The quirks of local authority financing mean the properties remain on the council’s balance sheet at their original value – but if either were sold at a loss, Surrey Heath would have to set aside enough reserves to cover the gap.
“It feels really frustrating, because we all want to do good things, exciting things, for our community, but you’re left with this millstone of debt round your neck that you have to service. And you can’t sell it on, because the way it works is if you sell it on, you crystallise this huge debt, which wipes out your reserves,” says Macdonald.
“If I go to the market and try and sell these big assets, it would wipe out everything we have. We would be gone.”
He has previously suggested the council may be just two years away from effective bankruptcy – a claim dismissed by the local Conservative association as “fake news”.
“My call to arms to my residents and stakeholders here is to say, ‘We can see the iceberg coming, we now need to steer around the iceberg,’” he says. That is likely to mean very difficult decisions in terms of cutbacks or asset sales.
A spokesperson for the Department for Levelling Up, Housing and Communities said the government had been clear that councils “should not take excessive risk with taxpayers’ money”, adding: “We stand ready to speak to any council that has concerns about its ability to manage its finances or faces pressures it has not planned for.”
The Square, with its 1980s atrium-style roof, is bringing in rent – it is home to big-name retailers such as Boots and Primark – but several of its units are standing empty or occupied rent-free, and it needs significant investment to bring it up to date, not least because the roof leaks in several places.
The former Labour councillor Rodney Bates, who voted against the original purchase of The Square seven years ago, recalls feeling he did not have sufficient information to make a decision. “I didn’t feel as if it added up,” he says.
“We had been dealing with things which were maybe a few million, and suddenly we were looking at something that was over £80m, and that was a massive jump.”
At the time the investment was made, a cluster of other councils nearby were also plunging into real estate. A National Audit Office report from 2020 details £6.6bn worth of commercial property deals by English local authorities over a three-year period from 2016 – 14 times more than in the previous three years. The vast majority of these, 80%, were made by just 49 councils, largely in the south-east.
Many of these, Surrey Heath among them, were on a recent list compiled by ratings agency Moody’s of the 20 local authorities with the highest debt-to-income ratios.
Five more were in Surrey, including Woking, which recently issued a section 114 notice after a speculative splurge that included skyscrapers.
As with so many other councils, Macdonald and his colleagues are now painstakingly examining a range of unpalatable options to “steer around the iceberg”, as he puts it.
And he echoes the warning of Hampshire’s Conservative-led administration, which has urged the government to overhaul the entire system of council financing. “I think the overall structure is broken, to be honest,” he said.
