A black hole is opening up in the Edinburgh city budget that could eventually lead to the city going bankrupt. A combination of the recession, the Trams project and the SNP’s policy of freezing the council tax is opening a deficit that is being filled with job cuts, wage cuts and cuts in services. This is unlikely to be enough to fill the growing gaping hole in the city’s finances.
The current (2009/2010) revenue budget of £1042 million (m) is made up of £225m collected from council tax and £816m form central government. The central government amount will be cut back in real terms in 2010/2011 and even maybe in absolute terms. This is because the government itself has a massive deficit from baling out the banks. So Far they have spent £350 billion (b) on direct and indirect (quantitative easing) bailouts. They are liable for another possible £700b from their insurance of the banks’ toxic assets. They have to reduce this deficit by issuing more debt and cutting public services, jobs and wages. It is unlikely given the depth of the recession and long-term plateaus of much lower economic activity that they can repay the debt from increased tax revenues. Therefore, they will be forced to make additional prolonged cuts in services to repay this debt.
At the same time the recession is biting hard in Edinburgh. Unemployment has increased by nearly 7,000 – 5,000 jobs in finance – over the last eight months in Edinburgh. This more than two times the rate of jobs losses in the rest of Scotland. The total for 2009 is likely to reach at least 10,000. This would mean an approximate short-fall in council tax of £10m. On top this is an increase housing benefit and mortgage payments which will be met by a combination of City and government finances. This would come to another £50m. There is also a reduction in business rates as businesses go bust. The total shortfall is in the region of £65m or 6.5% of the total budget.
The second hole in City’s budget is from the collapse in the City’s land sales. The recession was in the end a bubble in residential and commercial property. This has bust with a sharp contraction of bank credit after the banks losses to the property market, individual and corporate loans and derivatives’ trading. The City had previously kept council tax rises down by the sale of this property. This has now disappeared. For example, the Meadowbank stadium was valued at £18m prior to recession now the price on offer is £6m with no offers. Property companies are themselves in financial trouble or are unwilling to start new developments with the fall in property prices and the tightening of credit and increasing levels of unemployment. This lies at the root of the crisis in the Trams project.
The Trams project was essentially a carrot to developers to redevelop the Leith docks area with residential and commercial property. The plan was that the quick air-conditioned tram system could whisk the new well heeled residents of Leith Docks to the city centre and their highly paid jobs and exclusive shops without spending too much time in the company of the indigenous residents. It is in effect the ultimate bubble project. But given the recession these property developments are not going ahead. The City had hoped to raise money from these companies and the sale of City land to fund up to about £55m of the cost of the tram project. With costs spiralling up this needs to be about £90m. The Scottish government will not come in with any further money as they themselves face severe cuts from Westminster as central government grapples with paying for the huge deficit that has been run up in bailing out the banks.
This means that the City council face either blindly going ahead with the project until the money runs out. Or make massive cuts to pay for the shortfall and/or raise the council tax. They would need to make a 30% increase in council tax to pay for the shortfall in the Trams budget and the reduced council tax revenues from the effects of the recession. This is what the City of Edinburgh’s “modernisation” of pay is all about? It is a way of cutting costs and absolute wages through the back door. Instead if the SNP had not made their promise of freezing council tax and if they had an introduced a progressive local tax then this problem would have been much smaller.
All of this is likely to lead to huge conflicts between City of Edinburgh council and its employees and the public who use its services and the contractors building the Trams. In the end somebody will have to be pay for the hole. The building contractors will use the courts to recover any outstanding monies from a finished or unfinished Trams project.
The City’s employees and the public who use their services will have to unite together to stop big businesses and the inept councillors from walking away from this mess scot free otherwise the effects of this recession will be even more harshly felt by the people of Edinburgh. That is why we must all unite behind the bin men as they are first in the firing line of the City council’s offensive against the people of Edinburgh.