Interest rates from early 1990s mean councils in Scotland pay £200m a year to state-owned agency on top of loan repayment

Union leaders are calling for a Treasury debt amnesty for Scottish councils after discovering they pay very high interest rates on £2.5bn of debts to a state-owned loans agency.

Data from Unite, seen by the Guardian, shows the Public Works Loan Board (PWLB) is charging Scotland’s councils about 8% a year on 926 loans which date back to the 1990s – nearly four times the highest rate currently available from the board.

Pat Rafferty, Unite’s Scottish secretary, said there was a clear financial case for the Treasury to oversee a full amnesty or debt restructuring for councils because some have borrowed heavily to protect services after suffering deep spending cuts.

“We believe these extraordinary circumstances call for special measures and that’s why we are pursuing an amnesty on these pre-devolution debts,” Rafferty said.

PWLB interest rates were set in the 1990s by the then Conservative government, and mean councils have been paying more than £200m a year in higher-rate interest on top of repaying the loans. Two councils, Aberdeenshire and Na h-Eileanan Siar, pay interest rates of 10% a year on £50m in debts, Unite said.

The PWLB, an arm of the UK Debt Management Office, is the largest funder of local council borrowing, offering rates of interest lower than commercial lenders. The PWLB now sets its interest rates independently.

The Accounts Commission, the spending watchdog which oversees Scottish council spending, disclosed on Thursday that the latest round of Scottish government spending cuts would reduce council budgets in real terms by 5% this year – a higher figure than ministers have previously acknowledged.

In all, they had absorbed a real-terms 11% cut in funding over the last five years, the commission said. Council finance directors have built up their emergency cash reserves to £375m to help tackle the impact of deepening government funding cuts.

Rafferty said it was perverse for one arm of the public sector – local authorities – to be paying hefty levels of interest to another arm of the government, at the expense of public services. Unite estimates that 40,000 Scottish council staff have been laid off, with 15,000 more jobs to go, while services are being slashed. The union estimates that councils have paid back £3bn on these higher rate loans since devolution in 1998.

“It is not the whole solution but part of a series of measures to alleviate the significant pressures on council revenue budgets so we can sustain jobs and services for future generations.” Rafferty added. Unite’s call is being backed by the Scottish Labour leader, Kezia Dugdale.

Data from the Chartered Institute of Public Finance and Accountancy shows that Scottish councils owed the PWLB £8.6bn in 2014 – nearly 58% of their overall £15bn debts.

The institute’s data also shows that Scotland’s 32 councils owe £2.35bn in other high-interest loans taken out from banks such as RBS, now publicly owned, Barclays and overseas lenders such as Franco-German bank Dexia.

Known as lender option borrower option (Lobo) loans, they allow banks to increase interest rates or ask councils to immediately repay them if that new rate is not acceptable. Some Scottish councils are paying rates as high as 7% – higher than the rate then charged by PWLB, paying millions of pounds in fees to arrange them.

Glasgow city council, which says it faces an £83m budget shortfall this year and is axing 1,500 jobs over the next two years, had Lobo debts of £450m in 2014 – nearly a third of its total £1.7bn debts. Its higher interest historic debts to the PWLB are worth £322m, costing local council tax payers £26m a year in interest.

Campaigners in the London borough of Newham, which took out Lobo loans worth £564m, and from Debt Resistance UK are challenging the legality of Lobos, claiming they are irrational and unfair.

“It is also important to remember that the very high interest rates associated with these liabilities – twice the rate of post-devolution – were then set by [the UK] government and not independently by the Bank of England,” Rafferty said.

He said Scottish ministers had a moral and financial duty to back Unite’s call for Treasury action to help cut those repayments because the Edinburgh government controlled council funding and their tax powers.

That was disputed by a spokesman for the Scottish finance secretary, John Swinney. The Treasury and the Scottish government said councils had complete control and authority over their borrowing decisions, and had to take responsibility for their actions.

The Treasury said the PWLB was legally obliged to ensure loans were not subsidised. They were charged at the correct interest rate at the time of a loan, to cover the costs of borrowing the money from the market.

“Central government funds PWLB loans so writing off the associated debts of any local authority, anywhere in Britain, would represent a direct cost to taxpayers across the whole of the UK, since the UK government would still be obliged to pay creditors,” a spokeswoman said.

A Scottish government spokeswoman said ministers in Edinburgh had no role or say in the PWLB. “Policy on local authority borrowing is a matter for each local authority and interest rates charged by the PWLB reflect the prevailing rate at the time the borrowing is undertaken,” she said.

A spokesman for the Convention of Scottish Local Authorities, the sector’s main umbrella body, said these higher PWLB interest rates would have been competitive in the 1990s but any steps by the Treasury to help reduce these rates would be “very much welcomed”.

“Councils can refinance debt but need to look at this against the premiums the Treasury will charge to do so. Councils will have refinanced where it has been financially advantageous to do so but for some of the remaining debt the cost of refinancing would result in a higher cost to the council,” he added.