Dundee City Council is set to be hit by a £400,000 charge next year, after the UK Government hiked interest rates on public sector loans.
The move has been heavily criticised by finance convener Willie Sawers, who said the increase was “the last thing we need.”
Rates have gone up from 0.2% above the government’s cost of borrowing to 1%, meaning local authority loan repayments will soar.
Councillor Sawers said the council’s finance department was looking into how badly the spike could affect budget plans. He added, “Obviously if we are spending an extra £400,000 on loans then that money is not going to be spent on the likes of social work services or education.
“This has just come completely out of the blue and is the last thing we need at a time when we are having to save £20 million from our budget. Having this extra burden simply adds extra pressure on top.
“Instead of going towards public services and new capital projects, this money will now go into some black hole in the Treasury.”
Local authorities across the UK are now facing a combined fee of £1.3 billion to pay off the extra interest. Critics of the move have highlighted that the extra money could have been better used to safeguard jobs, train teachers and protect frontline services rather than be lost to a loan bill.
The Westminster Treasury lends money to councils through the Public Works Loan Board (PWLB) and has operated that way for more than 200 years.
Funds allocated this way are predominantly used to finance the building of roads and schools and to make repairs to council houses.
Until now the interest rate the Treasury charges has only been fractionally higher than the amount it pays out to service its own overdraft.
The unwelcome shift comes following the news that Scottish councils owe a combined total of more than £9 billion.
SNP Treasury spokesman Stewart Hosie estimated the interest increase could cost Scotland £120 million and worsen cuts to services.
The loan rate news was revealed in a letter sent out to local authorities 11 days ago by Mark Frankel, secretary of the PWLB.
Last year the board made £5 billion of new loans and it now has £50 billion worth of loans outstanding the majority to councils for capital projects.
The interest rate hike is understood to be part of measures to ensure charges better reflect the availability of capital.