Former business secretary Sir Vince Cable has warned that councils throughout the country risk being plunged into a major financial crisis after investing £1.5bn in the commercial property market.
Central government funding has experienced heavy cuts, forcing local authorities to consider increasingly unorthodox solutions to cope with their financial limitations.
Funding to local authorities has decreased by 37% between 2010 and 2015. One option that has been used to access much needed money has been to borrow from the Treasury-run Public Works Loan Board at decreased rates of interest. Council's have then been using those funds to invest in commercial property schemes that can bring of returns of up to 8%.
There are concerns that this approach is creating a bubble that could cause some local authorities to go bankrupt. Vince Cable, who was the business secretary in the Tory-Lib Dem coalition, said the investment strategy being undertaken by some councils was not wise.
He said that local authorities have a long and unsuccessful history of taking risks in property and financial markets. Hammersmith and Fulham Council encountered financial difficulties during the 1980's when it got involved in complex interest rate bets.
Mr Cable said he understood why such strategies were being considered. When councils are majorly constrained in what they can do concerning council tax and commercial rates, they attempt to prevent more serious cuts via unconventional methods. In some instances they are successful, but there is a major risk of local authorities going bankrupt.