Capital ideas, by Chris Leslie

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They used to say that the national obsession was home property values, dominating middle-class dining table conversations up and down the country throughout the 1980s and 1990s. How things change. Today our media and politicians are discovering a new obsession; the collected anxieties about the escalating budget deficit and the state of our national debt.

So dominating is this fixation that companies, charities, public and private institutions – and especially local authorities – are all grappling with what the downstream consequences will be of the credit crunch earthquake, and just how will we survive the tsunami of a public sector recession when it hits in the next couple of years.

Research from the New Local Government Network shows that the greatest adverse impact could be the hit on capital investment – the grants and loans that come from the Treasury so vital for repairing and improving the fabric of our communities. With the Private Finance Initiative propped up by special Treasury units and the European Investment Bank, we are already seeing some small and medium-sized worthy projects going to the wall because of higher financing costs; take the East Yorkshire / Hull energy-from-waste scheme that was sent back to the drawing board last week for precisely that reason.

The time has come for forward-thinking local authorities (for these are the bodies responsible for the bulk of our domestic infrastructure) to think afresh and prepare for a new era. In our report, Capital contingencies: supporting local capital finance in an era of high public debt, we make a series of recommendations and challenges to both local and national government.

We already know that Treasury plans to halve capital grant from £44bn currently to £22bn in 2013/14 will upset many carefully laid plans. To view this investment as ‘discretionary’ and removable is, in our view, an entirely false economy. But there are other dark clouds looming – perhaps the rewriting of the ‘prudential borrowing’ freedoms and gradually constraining flow of cheap capital from the Public Works Loans Board.

Local government has grown so used to this freely available source of money on demand that it has dominated and crowded out most other direct relationships that councils used to have with the money markets. We predict that councils will need new and alternative routes to raising capital.

Perhaps we will see the renaissance of the municipal bond market – or at least those bond arrangements via special purpose vehicles that count as ‘off balance sheet’. Perhaps we will see the talk of a new local government wide ‘collective fund’ pooling reserves and/or employing superannuation funds to backfill investment in PFI schemes. Councils need to rediscover the habit of innovation and self-determination when it comes to their own resourcing strategies. The environment for capital finance is likely to change radically over the coming years and the sector ought to be extra vigilant for signs that government may rein in the flexibilities it has enjoyed during the ‘NICE’ decade.

Chris Leslie is director of the New Local Government Network

About Chris Leslie

Chris Leslie is director of the New Local Government Network.

One comment on Capital ideas, by Chris Leslie

  1. Des McConaghy says:

    OK, so now we know that resources will be scarce beyond precedent and so inevitably the best brains will concentrate on new ways of borrowing money – and I guess Chris is right; the bond market is another new avenue. But sooner or later local government will also have to rekindle its original interest in actual wealth creation; in recreating the Victorian city tradition where social and economic community were more identical than they are today.

    Of course, there were very good reasons why the management of the economy passed exclusively to the national government. But it is equally obvious that the energy crisis and climate change will now begin to demand greater self-sufficiency and local sourcing. Indeed, it is central government itself that notoriously began to neglect such traditional virtues as we lost control of nearly all our strategic industries apart, of course, from our now partly discredited financial services.

    But this is not to suggest that each local authority can start turning the clock back and take complete control of economic environment, total local sourcing and all the rest of it! But it does mean that local government could begin to resurrect and realise one of the objectives of the 1969 Wheatley Commission in Scotland. This proposed a level of joint resource planning between the then proposed new Scottish local authorities and the central government, within which localities could themselves play an objective part in determining not only their slice of the national cake but the actual size of the cake itself.

    But, alas, the Treasury then regarded all Scotland as merely a pile of aggregates some hundreds of miles to the North. So, in spite of some very inspired staff work by Scottish Office officials, Ronald Dingwall-Smith and his men, the whole idea died the death.

    Nevertheless, it is time that a greater level of serious objective interest was taken in such a grown-up concept such as joint resource planning with the centre – and in England that means getting out from under a relatively peripheral Whitehall department such as Communities & Local Government. Not easy! But there it is – a new local government system that is organised to take a structural interest in the economic environment through joint resource planning with the centre.

    That in turn should certainly attract special funding such as Chris Leslie’s new bonds – except now to achieve maximum rating the Treasury could agree to float these as tax-exempted bonds! Now that – as the Americans used to say – is ‘really cooking with gas’!!

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