LOCAL RESILIENCE PROJECT – Circulating Money Locally

Case Study: The Old Clinic Ltd

Introduction and Background

There are many aspects to local resilience, and one of them is certainly economics. Susan Meeker Lowry, in her study of economics in this context, lists as her first priority Plugging the Leaks, believing that “A healthy economy is one in which money circulates within the community rather than being poured out”. It is clear that if the bulk of a community’s financial resources are sucked out of the local economy by – in particular – corporate interests, that local economy will be fragile and lacking in resilience.

Some money is always inevitably going to be spent beyond any given local economic boundary. Lowry puts no specific figure on what proportion this should be in order for the community to be in a healthy and resilient state, though one was provided by the Native American activist Russell Means, who was active in encouraging the economies of Indian reservations to become stronger and more self-sufficient. His rule of thumb was that “money should circulate within the community seven times before being spent outside”.

If this were to be achieved, it would require everyone in a community, including businesses, to make 78.5% of all their purchases within that community. This would undoubtedly be difficult to achieve, and to begin with could perhaps be best regarded as a target to aim at. It may be easier for individuals and families to achieve such an ideal, since their spending choices are essentially personal. For businesses the situation is more complicated, and economic pressures may be more severe. Nevertheless it is instructive, as a starting point, to look at both our personal and our business expenditure to discover what proportion of our money does actually remain within the community, and what proportion goes outside.

The Old Clinic Ltd

The company owns and administers a local property, hiring out rooms for the use of local small businesses. It is entirely owned and run by local people, and as such it is very much centered in the local community. Also it does not buy stock, does not incur transport costs, and has paid off the mortgage on the property (although it still has a substantial bank loan, following a major refurbishment project in 2011). These factors should, on the face of it, create a good chance for its financial outgoings to be locally focused. Nevertheless its Profit and Loss account shows only 39% of its regular expenditure going to local suppliers and tradesmen etc, 61% going outside the community.

The company does have outgoings beyond the P&L account however: principally dividend payments to shareholders (all of whom are local), corporation tax (which for small businesses is money extracted from the local economy), and capital repayments on the loan (which was originally spent more locally than elsewhere, and I have divided the repayments in the same proportion). When these are all included in the calculation, the balance is shifted: 69% is spent locally, 31% outside. This is encouraging, but would still require a strong and deliberate strategic policy to achieve the notional target of 87.5% being re-circulated within the local community.

I shall go through the various areas of expenditure under their separate headings, noting relevant facts and possible changes where they could be helpful. All figures are based on the company’s most recent accounts, i.e. year ending 31stMarch 2020.

Shareholders/Dividend payments

Payments to shareholders constitute the largest portion of money going out, and the fact that all the dividend payments are local makes the difference between the major part of total outgoings being local or not.

It is worth noting that Glastonbury High Street and the centre of the town are largely populated by locally-owned businesses rather than chain stores, which would give the community a good start in creating a locally-based, resilient economy. On the other hand there are several large stores on the outskirts of the town, any one of which probably has a turnover that approaches that of the whole High Street put together, and all of which suck financial resources out of the community – particularly considering where their profits go. Encouraging local business ownership would be an important part of localising the economy.

Banking/loan repayments

The Old Clinic Ltd banks with Triodos Bank, which is an ethical bank but which is not local – in fact which has no local branches anywhere at all. Loan repayments are by far the largest of The Old Clinic’s monthly items of expenditure; and for any business, finance costs would be near the top of the list of drains on the local economy.

For the purposes of this exercise, since the original loan was drawn down and spent prior to the repayments being made, that expenditure will exactly match the capital repayments over the term of the loan; I have therefore calculated the percentage spent locally (57%) and the percentage spent elsewhere (43%), and I have divided the capital repayments in that proportion. Interest payments, which over the whole period amount to something like the equivalent of 25% of the capital borrowed, are entirely a cost that goes outside the local community. These finance costs are mitigated by the ethical nature of the bank, although perhaps the most significant step towards localising the economy would be to establish a local community bank.

Note that the company has no overdraft and its regular bank charges are minimal, amounting to only 0.2% of turnover. If a substantial overdraft were in effect part of the company’s finance costs, it would have to be included in the calculations above. Insurance, although not supplied by the bank, comes into the same category but is not a large cost, currently amounting to only 1.7% of turnover.

Electricity, Gas, Water

These charges, amounting altogether to more than 7.5% of turnover, represent a more significant cost; in addition, the company has no internet or telephone charges – but if it did the total payments for services relying on national infrastructure could rise to 10% of turnover.

Set against this is local generation of energy supply, represented by solar pv panels installed on the Old Clinic’s roof in 2011. The company was very fortunate in that the major refurbishment project, which included substantial work to the roof and – whilst scaffolding was in place – installation of solar panels, took place in the first year of the Feed-in Tariff scheme. Since then the FIT rates have been reduced year by year, and have now ceased altogether; but with a 25 year contract, the Old Clinic’s FIT payments will remain at the original rates and rise annually in line with inflation until 2036. The effect of this is that FIT receipts amount to more than the company’s electricity costs, and more than 80% of the company’s total energy costs.

Of course this situation is very helpful at the present time, but is entirely dependent on fickle changes in government policy and will not last. From the point of view of community resilience and localisation of the economy, the long-term objective would need to include local energy generation on a far larger scale. With this in mind the company has invested in Avalon Community Energy (ACE), which has several schemes up-and-running, mostly in partnership with local schools, with solar panels installed on a larger scale than would be possible on the Old Clinic’s roof. ACE also has the longer-term possibility of establishing a solar farm.

Ultimately, true resilience and localisation would be to have the capability of becoming independent of a (potentially failing) national grid. Such a capability would mean a very substantial project, but is already conceptually possible.

Maintenance and repairs, cleaning, accountancy, administration

These services, together representing 10% of turnover, are almost entirely delivered by local businesses, suppliers, and individual tradespeople. This is a matter of deliberate policy on behalf of the company, so that the figure is unlikely to drop except as a matter of normal year on year fluctuations; at the same time it is difficult to envisage the figure rising to any significant extent.

Rates and taxes

There is little that a small local business can do to increase local resilience in the face of national revenue policies, except to respond and adapt to the tax regime as creatively as possible. The Old Clinic Ltd operates well below the VAT threshold and also does not pay business rates; the company’s tenants are the ratepayers in relation to their individual rooms, and nearly all of them are in receipt of small business rate relief. The only taxation is corporation tax, which amounts to nearly 15% of turnover. This needs to be recorded as part of the overall picture, but is unlikely to change significantly unless we experience circumstances of dramatic economic upheaval.