Surrey Heath Borough Council – How Did It Go So Wrong, So Fast?

How is the Liberal Democrat administration doing at Surrey Heath Borough Council?

At the Audit, Standards and Risk Committee meeting on 24 September 2024, it became apparent that the Council had a major hole in its budget.

The original budget for interest payments on borrowing was £5.4 million, with a contingency of £1.75 million earmarked from the Interest Equalisation Reserve to cover any increase in rates.

During the meeting, it was revealed that the expected outturn for interest costs was £6.5 million—still within budget when including the contingency.

But here’s the problem: only £2.1 million had actually been included in the budget. That left a £4.4 million shortfall.

Watch the moment the penny dropped here

The auditors unusually commented on the meeting, and the blurring of roles between executive councillors and audit committee responsibilities:

They also acknowledged the breakdown of relationships between Councillors (members) and officers:

The £4.4 Million Oversight

It is now clear that the borrowing element of the budget was understated by £4.4 million – yet councillors still signed it off as a “balanced budget.”

To put it in everyday terms: imagine drawing up a household budget that allocates all your income—only to discover you forgot to include your mortgage payments. That wouldn’t be a balanced budget. It would mean you’ve overcommitted somewhere else.

The same logic applies here. If £4.4 million in interest wasn’t accounted for, then there must be other errors in the budget to make it look balanced. But the Council hasn’t explained what those are.

The Finances at April 2023

The Council’s financial position in April 2023 – just before the local elections – was not dire.

In fact, it looked fairly robust. There was a balanced budget and £43m in usable reserves.

So how, under Liberal Democrat leadership, did we get from that position to a forecast where all reserves will be gone within two years?

Interest Costs and the “Rainy Day” Fund

There has been plenty of talk about how interest payments on property investments are putting pressure on the Council’s finances. So let’s examine the facts.

In April 2023, the Council had £171 million of debt:

  • £98 million long-term borrowing at fixed interest rates (unchanged for years)
  • £73 million short-term borrowing, subject to interest rate fluctuations, at an average rate of 1.28%

When the Mall was purchased, long-term rates were available at 2.19%, but short-term loans were cheaper—sometimes as low as 0.08%. The Council took the short-term route, and wisely set aside the savings into an Interest Equalisation Reserve fund.

By April 2023 this reserve had built up to £7.3 million:

Here’s the basic maths:

  • Every 0.5% change in interest on £73 million equals a change of £365,000 per year
  • At a 5% interest rate, the cost of borrowing that £73 million would increase to £3.65 million per year, an extra £2.7m per year. 

But the Council had £45m million in reserves when setting the budget in February 2024. Some of these reserves are allocated to specific projects or commitments, but there was still enough to cover many years of such interest rate pain. 

TrussFixation – A Convenient Distraction

Attend any recent Council meeting and you’re likely to hear repeated references to “Liz Truss” and “Trussonomics” from the Leader, Shaun Macdonald, and his acolytes. The implication is that interest rate rises caused by the Truss premiership are to blame for the Council’s financial difficulties.

But look at the data:

  • Global interest rates had already risen before Liz Truss took office – and continued after.
  • Her time in office coincided with just a small portion of a much broader trend.
  • Higher interest rates were predictable. Anyone putting themselves forward to run the Council in 2023 should have been prepared.

The Real Issue: Lack of Transparency

The usual explanations—blaming the previous administration for “reckless borrowing”, or Liz Truss for causing interest rates to rise – don’t withstand even basic scrutiny. A £2.7 million increase in interest costs does not turn a balanced budget, backed by over £40 million in reserves, into a financial basket case overnight.

There must be other factors at play—ones we haven’t been told about.

In fact, in 2024 the new administration increased short-term borrowing by 41%. Here is the report, and here is the extract showing the rise from £73 million to £103 million.

Why has the Council expanded the very type of borrowing it now blames for its financial troubles?

What’s more troubling is the opacity. The Council still hasn’t explained:

  • What the actual budget errors were

  • What else has changed since May 2023

  • Why public reporting failed to reflect the scale of the problem

Until that changes, speculation will continue—because without facts, residents are left to fill in the blanks.

What Do the Auditors Say?

The most recent auditor’s report for Surrey Heath Borough Council makes grim reading.

Far from portraying a responsible Council “making tough decisions to protect vulnerable residents”- a claim often repeated to justify asset sales—the auditors are, in fact, scathing in their assessment.

Key Findings from the Audit Report

Some of the more concerning conclusions include:

“Significant weaknesses identified in governance”

“We are not satisfied that the Council has proper governance arrangements in place in respect of the Audit Committee”

“We are not satisfied that the Council has proper arrangements in place to secure economy, efficiency and effectiveness in its use of resources”

These are not minor criticisms. They speak to deep structural and cultural problems within the Council’s leadership and financial management.

Problems with the Audit Committee

Grant Thornton, the external auditors, highlighted specific weaknesses in governance:

  • The Chair and Vice-Chair of the Audit Committee (Cliff Betton and Bob Raikes) are both from the controlling Liberal Democrat group, undermining independence.
  • There are no independent lay members on the Audit Committee, contrary to good practice.
  • Lianne MacIntyre, the Councillor responsible for Finance, also sits on the Audit Committee—again, a clear conflict of interest.
  • Council Leader Shaun Macdonald has attended and actively participated in Audit Committee meetings, despite not being a member or named substitute.

These actions blur the lines between executive oversight and political control, increasing the risk of politicisation, which the auditors explicitly warn against.

Note: Conservative councillor Jonny Cope is due to take over as Audit Committee Chair from July 2025.

The Financial Reality

The auditors also raised serious concerns about the Council’s budgeting:

  • Significant inaccuracies were discovered in the 2024/25 budget after it had already been approved.
  • The budget is now forecast to be overspent by £8.6 million—a 50% overrun.

Breakdown of the overspend includes:

  • £4.4 million in missing interest costs
  • £1.4 million in direct service overspends, including:
    • £300,000 drop in car park income
    • £500,000 of double-counting and other housing budget errors
    • £330,000 drop in other income

These are not minor technical slips—they are systemic budgeting and governance failures.

Where Did the £4.4 Million Go?

So where exactly did things go wrong in the budget? The truth remains unclear.

One clue lies in the Quarter 2 Financial Monitoring Report for 2024/25. According to the main report, there’s an overspend of £1.4 million in direct service costs—roughly 10% of that budget.

But if you examine Appendix 1, you’ll see total variances of £3.4 million—including both favourable and adverse differences. Some of these balance each other out, but the overall picture is one of a Council not in control of its finances.

Any experienced reader of accounts would conclude the same: these are not normal variances in a well-run organisation.

Valuations and the Illusion of Losses

It’s clear that some asset revaluations have been carried out – and these have affected the Council’s financial forecasts.

But revaluations can often give a misleading impression when reading accounts. To illustrate, take the computer equipment in my business. These assets are assumed to have a useful life of five years, so their book value is reduced by 20% each year. This process is known as amortisation. By year five, they’re recorded as having zero value.

Yet I still use several of these “fully depreciated” items every day. They work fine – but on paper, they’re worthless.

This revaluation shows up as a cost in the profit and loss account, even though no cash has left the business. It’s just an accounting entry.

The same principle applies to the revaluation of council assets. These are technical adjustments, not real-world spending or cash movements – but they can significantly skew how the accounts appear. That’s why it’s important to understand what’s behind the numbers, rather than taking them at face value.

Sale of Assets – Short-Term Fix or Long-Term Loss?

Surrey Heath Borough Council has begun selling community-owned assets—including green spaces, local shops, and the community car park in Deepcut—claiming these sales are necessary to prevent insolvency.

But the reasoning behind this sudden financial crisis remains unclear. Despite vague explanations, the Council is pressing ahead with irreversible decisions.

There may be valid debate around the merits of selling certain assets. But one thing is beyond dispute:

Once public land and community infrastructure are sold, they’re gone for good.

Was There Really No Other Option?

This is supposedly a short-term emergency—yet just a year ago, Surrey Heath had the second-highest reserves-to-income ratio in the South East:

As of April 2023, the Council’s reserves were large enough to cover 17 years of elevated interest payments. Just two years ago, the Interest Equalisation Reserve alone stood at £7.3 million.

Why Sell Community Assets—But Keep the Investments?

The Council owns multiple industrial estates and commercial properties that generate reliable income. If this truly is a short-term cash flow crisis, why not sell one or two of those as going concerns?

  • These investment properties could sell for multiples of their annual rental income
  • Selling them wouldn’t permanently lose community infrastructure
  • It would align with the stated goal of protecting frontline services and residents

Yet instead, green space and car parks are on the chopping block—assets with high community value but limited cash return.

You Might Be Surprised What the Council Owns…

So What Now?

The numbers don’t lie – but they also don’t explain themselves.

What’s happened at Surrey Heath Borough Council is not simply a tale of unfortunate economics or unforeseen pressures. It’s a story of missed warnings, governance failures, and poor communication with the public.

Residents deserve honesty, accountability, and competent stewardship of public money. If the Council truly believes in its course of action, it should be willing to fully explain the errors, be transparent about the additional borrowing, and justify the irreversible sale of community assets.

Until then, it’s not just the Council’s reserves that are being spent—it’s public trust.

Stuart Black, Frimley Green

June 2025