Preparing for the gathering financial storm

October 27, 2009

Chris Leslie
Local Government Chronicle

If there is one thing likely to dominate the headlines over the coming decade it is the political obsession over the level of public sector debt.

Setting to one side whether the collective anxieties of our politicians are justified, what is clear is that constraints will be applied to the public sector in general – and to capital expenditure in particular – with major ramifications.

Cutting existing revenue programmes is harder than axing theoretical infrastructure plans, which is precisely what the Treasury is already doing, reducing the current £44bn capital investment budget in half to £22bn by 2013-14.

But the corollary of the apparent ‘easy’ savings made in future capital spending could be a return to the crumbling schools, roads and housing we encountered during the under-invested 1980s and 1990s.

Slashing capital expenditure in this way may prove to be a false economy. And the pain may not only be felt in reduced grant aid – but also in loan availability.

While many local authorities welcomed relaxed capital rules and the introduction of more flexible ‘prudential borrowing’, the apparent largesse of HM Treasury in supplying capital loans at exceptionally cheap rates has had the unintended consequence of crowding out virtually all other capital raising routes, except for the private finance initiative – which as we now know is encountering major difficulties of its own.

But should we not be recognising the dangers in the dependency the sector now has on the Public Works Loans Board? If Ministers decide that indebtedness needs drastically scaling back, there is surely a risk that the PWLB may add extra conditions or costs to loans or even begin turning off the tap.

There are few signs that this is happening yet, apart from an apparently generous move by the Treasury to ‘allow’ councils to pay back old loans earlier. However, it is certainly worth forward-thinking local authorities taking steps now to sustain local capital schemes should the worst happen.

Councils do have the powers to go to the capital markets directly, even though these are rarely used because the costs and hassles associated with municipal bond issuance and other arrangements have been prohibitive when compared with the easier PWLB monies.

Yet it may now be wise to dust off the instruction manual and think through how to source capital in a self-determined and autonomous manner. If off-balance sheet means are to be the only game in town, then the ‘Revenue Bond’ used in the US and elsewhere could be highly relevant.

In our new report Capital Contingencies we urge theTreasury to sanction in the Pre Budget Report the ‘accelerated development zone’ piloting so that councils can gain experience in tax increment financing.

And we encourage Ministers to get Whitehall in order through stronger cross-departmental working on capital approvals, MAA ‘single capital pots’ with five year commitments, and ‘lead department’ arrangements with a clearer framework for determining those consents.

A level playing field, rather than the table stacked in favour of one PFI variant, would help.

Having additional public capital lenders other than the Treasury would also be useful, something NLGN has recently advocated, arguing that a pooled mutual reserves fund across the local government sector could have strong potential, an innovation now being explored also by the LGA.

Ultimately, the local authority sector will either be buffeted by the harsh winds of change as national politicians scale back capital commitments, or they will counteract some of these forces through their own endeavours.

Preparing for the tsunami of the looming public sector recession is certainly worthwhile.


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