I have noted some of my concerns about tax devolution on this blog, as I feel there are real risks inherent in the process for macroeconomic stability because of the relationship between tax and money. That said I have made clear when done in the right way and with the right taxes tax (properly taxes and employer's national insurance being the right starting points) devolution can make sense and reinforces local government.
There is another, at least as powerful, way to achieve that. That is giving local government control of investment in housing, some infrastructure, local energy supply and more. The FT features this issue this morning:
The new leader of Birmingham city council wants to create a “West Midlands sovereign wealth fund” that will invest the region's public sector pension funds in new homes and infrastructure.
John Clancy, elected at the end of November, said he wanted to take the £11bn West Midlands local government pension fund, the third-largest local authority fund in the UK, and pour it into Birmingham and the surrounding region.
“I want to anchor those funds better into the region by investing that wealth in the region,” said Mr Clancy in an interview, adding that he had already met Greg Clark, the communities and local government minister, to discuss his ideas.
He also raised the prospect of Birmingham turning to the capital markets, selling so-called Brummie bonds to fund projects
I approve. And as a result I note another report in the FT this morning with disappointment:
The dream is for local authorities in Britain to tap the global bond markets to counter the deep cuts imposed on them by the government.
The Local Capital Finance Company, a municipal bond agency, was set up in 2014 and was due to sell its first bond last April, with annual issuance forecast to quickly reach £3bn.
Number of bonds sold to date? Zero.
Why has that happened? Because it would seem that the Treasury have decided to price local bonds out of the market. I think that is deliberate and a mistake. And I have done so for a long time. As the Localise West Midlands web site mentioned late last year:
City councillor John Clancy, who once worked in the venture capital market,explains in a Chamberlain Files article, [accessed via the Brummie], that ‘Brummie bonds' can provide much needed investment and kick-start building by local councils and housing associations across Birmingham.
Some readers will remember that the Brummie Bonds concept was incorporated in the 2003 People's Pensions Proposal, informally presented to MPs, an MEP and NGOs by a London colleague Colin Hines (co-founder of Localise West Midlands) with co-authors, accountant Richard Murphy (now of Tax Justice fame) and MP Alan Simpson. Read on here.
The recollection is entirely correct: it was the first ever campaigning report I co-authored. And the authority we spent more time with working on the issue than any other was Birmingham. The name we used was a Brummie Bond. It would be great to see them finally happen. And it would be even better for the West Midlands, and elsewhere,
The world has moved on a but since 2003, but that report is still worth reading, I think.
And some things don't change. Colin and I were with Andrew Simms, who wrote for foreword for NEF last night.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Two questions:
1. How can a bond be priced out of the market? They are normally issued through an auction process, so are simply issued at whatever yield investors are willing to buy them at.
2. These bonds are going to be used to fund investment in physical assets – and I have no problem in principle with that. What I don’t know, and it hasn’t been made clear from your article, is how these assets are going to be used to repay the coupons and principles on the bonds issued. Can you clarify this please?
Obviously, if there is no underlying plan to secure payments for the bonds, and the bonds themselves are not secured against assets, then they are near worthless.
Bonds are priced out by the government’s own Pubic Works Loan Board that underprices anything that an issue would require to cover costs
Repayment comes either out of yield (housing, energy, innovation investment) or future taxes (education, NHS, etc)
Vastly cheaper than PFI
So if the government is already doing these things, and doing it cheaper, why do we need the local bonds in the first place?
You haven’t really answered my question as to how the bonds would be repaid. How are these investments actually monetised? In other words how do you extract monetary value from that infrastructure investment? As an investor, I would want to see a cash return.
I’m not sure you can “tax” the NHS or education. Nor could general UK taxation be used to pay for local bonds. Are you suggesting that local taxes should vary for the purpose of repaying these bonds?
There are plenty of local and municipal bonds markets out there arund the world. There is also a reason that most of them trade at a deep discount to the underlying government bonds. They have a tendency to default – not least because politicians are in control of the issuance and repayment, and tend to be more concerned with getting re-elected than anything else.
I have precisely answered the question
Of course education etc is not taxed: it is paid for by tax and tax pays the return and society gains from health and educated people
And UK tax does pay for local activity: much of it
And why local bonds? Because there are occasions when local knows best
Please don’t waste my time with such questions again
You haven’t at all explained how the local bonds will be repaid. You have simply stated that local bonds will be issued to fund “investment”, mostly in infrastructure, and then stated that this “investment” will make enough of a return to repay the bonds. A lot of the things you are talking about actually don’t provide a direct cash return – which is what bondholders want – not the more general positive return to society you are talking about.
I want to know exactly how an investment in local housing or energy supplies will repay the local bond raised to fund it.
UK tax pays for local activity. Sure. But you are saying there should be local bonds, which UK tax should not be paying for. And the main local tax at the moment is council tax. Are you saying that more tax powers should be devolved to local areas?
TAX
That’s how bonds are repaid
If they are repaid (and in the UK government debt is usually rolled over)
And local authorities are currently heavily tax subsidised
And in future will have more tax e.g. Local business rates devolved to themn
So it is tax repays these bonds, if that is the aim
Or they are rolled over with interest paid if not – as is the case now the PWLB loans
It’s really not rocket science
So you are saying that the government would have to subsidise these bonds?
Or are you saying that these bonds would have to be repaid out of the money that central government gives to local government?
It seems that what you are not saying is that there should be new local taxes, or that the capital investments themselves will generate returns to directly repay the bonds used to fund them.
Which suggests to me that if a local council was let off the leash financially by being allowed to issue bonds the local politicians would simply do so to build as much infrastructure as possible – typically a nice vote winner. Then they would leave the financial mess for later politicians or central government to clear up when they run out of money.
Which is pretty much exactly what has happened in a lot of the US states where muni bond markets exist.
I think you need to go and learn a lot about local authority funding
“John Clancy had already met Greg Clark, the communities and local government minister, to discuss his ideas.”
Surely if it is Brum’s pension fund he doesn’t need to discuss it with central government – can’t he just do it? Or is its management is forcibly contracted out?
Anyway the idea is so obviously good for localism that it would surely be difficult for the government to try to prevent.
The pension fund might claim it should not invest locally as that concentrates risk
Of course, but if that comprises the sole argument for not investing in social housing in Britain’s second city than we really are all doomed!
I’ve always thought the German Sparkassen model with some tweeks would suit Scotland’s needs fairly well
http://www.civitas.org.uk/publications/the-german-sparkassen-savings-banks/
It could at community level
Richard-if the bond money is used to finance housing then isn’t expecting a return on housing going to exacerbate the housing crisis? Housing prices can’t tolerate being milked or sweated anymore without causing more economic/human damage.
Oh come on: 3% is within the boundaries of possibility
After inflation it is likely to be close to zero
Where do you get this 3% from? Looking at other muni bond markets around the world suggest that the interest rates would be a lot higher.
But they would not need to be here
I’m sorry I don’t understand your answer to my question of where you get the 3% level from.
UK gilts are yielding around 1.7% in the 10 year area, and any local bond would by definition have a higher yield. Looking at evidence from other muni bond markets, the spread would be a lot higher.
So where did you get this 3% number from? Have you done any analysis or did you just pick a number out of the air?
It’s a highest end estimate
It may be a little too high
But not overly
Call it judgement. I exercise it
With the delete button too
Richard-are you really saying that it’s still possible to ‘sweat’ housing for more returns even 3% which is significantly above inflation?
How can ‘sweating’ the housing market be useful at this point as a local authority revenue raising exercise?
I don’t get it.
I don’t think 3% need be sweating
Rents are paid – and will be – so returns will be made
Is 3% fair? It may be a little high – but presuming no return is also wrong
What i’m saying is that the yield on such a muni bond will be well over 3%, given what comparable muni bonds trade at around the world. So saying that 3% is a high estimate seems like a number you have just sucked out of thin air – a suitably low one to make your argument.
In reality, muni bonds would likely trade at significant spreads over government debt – as they do everywhere else in the world.
That’s nonsense
Bond markets all differ
Look at Transport for London bonds and you will see what you are saying is wrong here
You are the one guilty of making things up
Transport for London bonds trade about 60bps (0.6%) above UK Gilts. TFL has a dedicated income stream to pay for those bonds, and there are a relatively small amount of them out there. So they are a best case scenario.
There are plenty of Muni bonds out there – especially local government bonds – which trade much higher than their government counterpart. Very few trade as tight as 1% or so above government.
For example, California bonds trade over 3% above US treasuries, and Florida over 5% above. Those states have dedicated local taxes – which the UK does not have to anywhere near the same extent.
Of course, this is all pretty immaterial as local government can already raise debt through the Public Works Loan Board (75% of their debt is already done like this) and soon also the Local Government Association Municipal Bonds Agency.
Fine
So you agree UK bonds do not trade at the margins you suggest required
And that UK local authorities can and do borrow and repay
So what are you trying to say?
That because US states can go bust so will UK local authorities
Except it has never happened, ever
So you have just watsed my time
As I understand, and please correct if wrong, 11 million people have been roped into the Nest pensions, you can opt out otherwise the person is roped in. Do these pension payments get sucked into the City casino so that the money men can put this into play, and fmanagers skim off their fees apart from the financial advisors. Investments for many is jungle and a gamble which many might feel happy to be freed from.
State and municiple backed bonds and cooperative type Withdrawable shares might be an option, a bit dull but steady and investing into things we all need. This could have some democracy worked in. Mutual trusts backed by the government with citizen stakeholding can then replace the PFIs. Why pay rents to capitalist corporations often foreign and not just back to ourselves, so having a more direct ownership of our NHS and municiple services.
I am appalled by the Nest model and always fault the TUC wrong to back it
You describe what I call People’s Pensions. Look my version up on NEF
As a Birmingham resident I was very encouraged to read about John Clancy’s proposal, but when I raised it with a local (Labour) councillor he suggested it was a non-starter because existing rules prohibit investing more than 5% of a local government pension fund in any one investment vehicle. Your People’s Pension paper in 2003 made the point that a lot of rules around these funds would need changing, as well as new rules having to be created, in order to make the scheme work. Would that still be the case now? And would that include the 5% rule, if such a thing actually exists?
Osborne is planning a change in rules
Are you referring to Osborne’s announcement in October:
the existing 89 Local Authority pension funds will be pooled into half a dozen British Wealth Funds, each with assets of over £25 billion. … The new funds will develop the expertise to invest in infrastructure.
https://www.gov.uk/government/news/chancellor-announces-major-plan-to-get-britain-building
or is he planning something else?
If he does that the intention will be to release funds as Birmingham wants
Thanks for the clarification.
I’m hoping to get more detail on this from John Clancy at a CLP meeting next week.