Calling up the local troops

February 28, 2009

Chris Leslie, SFI

In battle, a General must be certain that their first line of attack can be backed up with alternative resources should the worst occur and a new wave of forces be required. So it is also true for the Government as it grapples with the persisting credit crunch. Despite an initial massive recapitalisation of the banks in 2008, followed in January by further injections of public money and guarantees for mortgage securitisation, the need for further policy reinforcements remains. So what should the Government’s next contingency be?

With the credit squeeze increasingly felt in the high street, in households and in small businesses and not just the grand board rooms of UK plc, the time has come for deep-rooted action targeting support into every community and neighbourhood. Bilateral macro-policy choices between Whitehall and the City are insufficient; government needs to intervene not just at the national level but locally as well. Local authorities, often the largest employers in many towns and cities and with stewardship of around a quarter of total public expenditure, should be active players, not passive bystanders waiting for guidance notes or Ministerial edict. And there are signs that local councils are beginning to stir, marshalling the resources at their disposal and standing ready to counteract some of the worst aspects of recession.

Some authorities are revisiting concepts of public sector banking, notions not considered since the 1980s when it was assumed that the private banking sector would be universally capable of supplying the cheapest lines of credit across the economy. Today, with the banks petrified by mutual distrust, only the public sector is able to access capital thanks to its solid AAA rating. The next wave of attack in public policy should therefore involve a concerted effort to facilitate access to capital for householders and businesses via public authorities, perhaps using the Post Office, perhaps a nationalised Northern Rock, and also perhaps through local authorities as well. Until the 1980s, local councils routinely supplied mortgages to many residents – a function now dormant but capable of revival. And the Government seem to be gradually waking up to this possibility, cutting the ‘standard national interest rate’ at which councils can offer mortgages to 3.93% in the first week of February. The next step should be a positive ‘green light’ from Ministers to blow away some of the aversion among Directors of Finance to new lines of activity, coupled with the abolition of the ‘standard national rate’ which prevents councils from offering even more competitive rates to homeowners desperate for ordinary mortgages.

Some local authorities – notably Essex and Birmingham – have been actively considering ways to offer lines of credit to their local business sector, offering a helping hand where the bank manager has shrunk away. The history of the credit union and mutual building society movement intertwines with local government, and it is heartening that councils of all political hues are beginning to think about a new role in their local economy. But waiting for local inspiration to strike is not enough – the LGA and the collected family of councils who want to show leadership need to mobilise and let the top of Government know that they are ready to act.

For instance, the Bank of England’s new Treasury authority to spend up to £50 billion in an “Asset Purchase Fund” mustn’t only be targeted at large corporate bonds and the FTSE100. It should develop a facility to percolate this recapitalisation effort to the grassroots of industry too, to SMEs and local firms who would happily swap equity for new investment. The local government sector should demand urgent dialogue with the Bank of England on precisely how they will achieve this. One solution could involve a new ‘scouting’ role for local authorities on the Bank’s behalf, as they are better placed as agents across the country to know which local businesses are viable but threatened by credit contraction.

Further, the diminishing availability of PFI monies to support much needed infrastructure investment in roads, bridges, rail, schools and more besides should force a complete rethink about how we could raise alternative capital. One idea is the creation of a new Local Authority Mutual Fund acting as a ‘pool’ of some of the £15 billion of reserves held by councils, currently on deposit randomly throughout the international banking system. If a share of these reserves were marshalled into a council-to-council savings and loan scheme, using local public funds to support local public infrastructure projects, then councils could not only find a safer haven than the Icelandic banks, they could shore up the haemorrhaging of private finance.

Next, councils should recognise that they are immensely more competent and financially capable than they were 15 years ago – which means they can afford to think a little more laterally about how their finances could be astutely managed to add support to their wider economies. For a start, chief executives should act immediately to beef up their internal policy teams with economic and financial nous. They could also make a reasonable case to the Treasury to allow a little Keynesian flexibility in the regulations requiring balanced budgets, which currently force each authority to match in-year expenditure with in-year income. If the Treasury had to balance their budget annually, no fiscal stimulus would ever be possible. Now we are in a new era of the three-year spending settlement, it should not be imprudent to allow councils the scope to balance over the three-year time frame. This could facilitate a new suite of policy choices for council leaders, perhaps a council tax discount in one particularly difficult year, or additional employment programme support in another year.

Local government has earned the right to new autonomy, but has yet to achieve true freedoms that could make a real difference. Ministers should deploy local government to act in support of the economy rather than hold them back because of centralist orthodoxies or old prejudices. Conscripting these capable reservists is the sound decision to take.


Explore More