Council tax, bins and business loans

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By Rachel Jones
Know Your Money Editor

Birmingham city council and Essex county council have told BBC Radio 4's Money Box that they are on the brink of launching their own banks to help small local businesses. Both want to provide credit in the form of loans to local firms who are struggling to have any luck with the high street banks. Officials at both of the councils claim that strict checks will be in place to make sure that organisations receiving such cash boosts are financially up to the job. It is thought that the two councils will work with existing building societies and banks to offer loans. Both assert that they will not be setting up branch networks or taking deposits. The idea may interest some Britons, but what does it mean for those who are considering applying for such a loan and also, what will the effects upon the UK's taxpayers be?

Small businesses avoiding the crunch

The Federation of Small Businesses (FSB) announced - on the same day (January 23rd) that the UK was officially confirmed to be in a recession - that it has received an increase in the number of calls about the legal position of firms considering redundancies. In the fourth quarter of last year, the FSB's legal advice line saw a 214 per cent increase in calls as small businesses looked to areas to slash outgoings in a bid to weather the economic storm. As such, the organisation calls for more support to be given to small and medium-sized enterprises to tackle the problem of unemployment.

John Wright, the FSB national chairman, says: "As we officially move into recession we must not forget that small businesses are the engine room of the economy and are actually in a key position to generate new jobs and avoid further redundancies. Small businesses are the sector to help pull us out of the recession and they need all the support they can get to do so."

Indeed, Stephen Hughes, the chief executive of Birmingham city council, told BBC Radio 4's Money Box that it was the responsibility of councils to help out local firms "as leaders of the communities". Furthermore, if the economic problems are not knocked on the head, social difficulties will follow.

Council cash pots

According to the BBC, Birmingham city council is looking to lend anywhere between £100 and £200 million. Essex county council, meanwhile, wants to dish out around £50 million. Lord Hanningfield, leader of the county council, reassures Radio 4 that the loan applications will go through a vigorous process.

"We intend to do a thorough risk assessment, we're not just using local government officers, we're using banking people," he states.

The council says that the move will support families and businesses during the credit crunch and that its local residents and taxpayers are important to it. Dubbed the Bank of Essex, the council claims it will channel emergency funds available from the European Investment Bank to businesses, bypassing the high street lenders.

But this approach has been questioned by individuals who think that the scheme is too risky and could be playing with the money of taxpayers, at a detriment to them.

Unsafe move for taxpayers?

Mark Wallace, from the Tax Payers Alliance, tells BBC Radio 4's Money Box that councils should not enter the world of finance because they lack the necessary skills and expertise to dish out loans. He asserts that they are not structured to act as investment banks and should be looking to safe investments - not business loans - to avoid a repeat of the Icelandic banking disaster.

The Essex Liberal Democrats liken the Bank of Essex to a game of chess, with taxpayers' money as the pieces up for grabs.

Criticising the Conservative council, the party says: "It is hard to believe that any administration could be even thinking of taking on potentially toxic loans financed with taxpayers' money and it is a gross mishandling of residents' hard-earned cash."

But Tony Travers, a local government expert at the London School of Economics, asserts that councils are going to have to tread carefully if they push through with their plans. He tells BBC Radio 4 that the two councils must make sure that they do not subsidise companies that may be financially unsound to begin with.

Credit-crunched Britons may remember that UK councils had millions of pounds saved in Icelandic banks which subsequently collapsed. And while the effects of this crisis to taxpayers were minimal, it could be said that the outcome of this latest venture is yet to be seen. Once again, Britons may have to put their trust in authorities and keep an eye on their cash.

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