Finance and Growth: Two new developments

 

HMT offers lower borrowing rates to local government

Certainty is one of the most valuable assets financial planners can have, sometimes more valuable than money in the bank. And, to be honest, there is not much one can be certain about in the financial markets these days. 

HM Treasury has shown just how valuable certainty is in the current lending and borrowing climate. On 2 August, HMT sent an open letter to local government Financial Officers setting out the terms of the offer they first made in the Budget five months ago.

       The offer: 20 basis points discount on loans from PWLB.

       The catch: local authorities must ‘provide improved information and transparency on their                    locally-determined long-term borrowing and associated capital spending plans.’

In other words, local government can access debt more cheaply (in a time when they need to be investing in more capital programmes) in exchange for government having more certainty about the pipeline of borrowing coming their way. Overall, this is a win-win scheme for local government.

But, as we have argued in Banking on Growth, central Government’s control over local government funding affects their ability to borrow. Better borrowing rates should be accompanied by localised funding streams. That would be a really big step towards helping local government fund capital projects that support economic growth.

 

Devolved Transport Funding

Government took a small but positive step towards localism with their commitment to devolve major local transport funding. This consultation means that allocation of funding for new local roads, public transport schemes and local rail station decisions could be made at the local level.

Currently, decisions on capital funding for transport schemes are overly centralised: Government must approve all schemes over £5 million. 

Now, the government is proposing that ‘from 2015, local transport bodies will be able to decide for themselves how to spend their money on priorities best suited to their local needs without Whitehall approval.’   

The new Local Transport Bodies will also define their own boundaries, likely aligning with those of LEPs. Doing so will facilitate decision making at the level of the local economy and give LEPs more teeth. 

However, there is still a long way to go before local government has more influence than central government over local projects.

• The allocation of the £1.7 billion in local transport funds will be decided by formula rather than competitive bidding, so projects which may have high impacts in an authority may not get funded if resources are distributed based on population or the area’s contribution to GVA, for example, rather than transport need or return on investment.
• Local government lacks the ability to raise new finance to fund infrastructure projects, keeping the real power (money) in the hands of central Government.
• The transition comes with many strings attached, including the need for strong governance and finance arrangements, accountability and value for money.

More local decision making and less red tape for local transport bodies is very good news. But, the degree of control Government maintains over projects that affect and drive local economic growth should not be lost in the equation. What is being presented now continues to be devolution-lite.