As the FT has reported this morning:
Cash-strapped UK local authorities are to group together for the first time to raise hundreds of million of pounds of debt to shore up their finances during the coronavirus pandemic.
A group of up to 30 councils, including Westminster City in London and Barnsley borough in Yorkshire, plans to issue three bonds this year through the UK Municipal Bonds Agency, an entity set up five years ago to develop a municipal bond market in the UK.
As they add:
The new set of bonds follows the government's decision late last year to raise the interest rate sharply on its own local-authority loans, granted by the Public Works Loan Board, inspiring councils to look elsewhere for new and cheaper sources of funding.
The MBA will issue three bonds on behalf of dozens of local authorities, ranging from 10- to 45-year maturities, with the aim of raising at least £250m with each. They will be seeking yields lower than the PWLB rates.
I am pleased. Colin Hines and I did a lot of work on the need for a market of this sort in the 2000s. We saw it as a key component of pension reform so that people could invest locally. We still think it a part of the funding mechanism for the Green New Deal. And we saw it as an essential component in localism.
I hope this works.
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This is good news indeed if it means a reversal of the vandalising of local authorities since the 1980s. The real British disease is excessive centralisation with the idea that the “man”in Whitehall knows best.
Municipal bonds were a major facilitator of good local government works, such as the major council housing projects after WW2. However, it was, am I not correct, the rental income from those council houses, generally built to relatively high standards, that serviced the bonds.
What will do that today?
Still, a very welcome development, in my view.
I have very mixed feelings about this.
It may be that I do not fully understand it but I just hope that the LA s go into this do it properly.
It is still a form debt funding and more real cash from central Government would be better.
This seems ridiculous to me ,councils have no way of raising income from tax,it all goes to central government to redistribute(badly). What we really need is more real fiscal power to local government,people may the actually start to take an more interest in local democracy at the moment no one really cares about it. a local authoririty with real budgets might would be a great thing. Until local councils get real tax raising powers this is pushing the problem elsewhere.
I recall reading a houisng report a few years back,to my amazement the UK was the most centralised nation in the OECD. 95 % of UK tax revenue goes to Westminster,and a few crumbs go back to the regions,since most of that stays in the SE of England. We are worse than supposedly bureaucratic France and worse than the old East Europen block memebers who only took 80 % !.
Where is the income coming from to pay the interest. As far as I can see it can only come from the ratepayers. Its possible to finish up with more interest to pay than the council can raise. It will also deplete the spending power of the population and therefore reduce demand. Additional funds can only come from central government.
This isn’t right.
Local authorities have commercial operations too – rental (commercial) properties, leisure centres, wholly-owned businesses. Money borrowed can be invested in them and can create income to pay back the loan – and profit to support services.
Don’t forget also that bond money can’t pay directly for services, only for infrastructure investment. The key is to do that investment so that it supports service provision, or reduces need for services, or makes some money.
Thanks
I have made the same or similar points
But those things are never going to open again.
Several thoughts on this – some already expressed already regarding lack of local revenue raising powers to service the debt.
I just have some technical points.
What rate will the Local Authorities have to pay? They are borrowing small amounts (in bond market terms) so the issues will be illiquid and thus attract a higher rate.
Will they carry a central government guarantee (explicit or implicit)? This will have an impact on the rate they pay.
Will interest and principal be secured against revenues and assets? If so, which revenue and which assets? For example, if money is borrowed to build houses, are the bonds secured only against those houses and their rental income (which is OK) or will the bond holders have recourse to other LA assets/revenue in the event of a shortfall (NOT OK).
Despite those issues I welcome any effort that permits long term borrowing for long term investment – particularly as this route might be more responsive to local need.
Of course, the better way to do this would be to have the Central government borrow (at 0.35% for 50 years, currently) and then lend to the Local Authorities at (say) 0.5% for 50 years. Central government is already set up to do this and duplicating it in dozens of Local Authorities would be a waste of resources. I accept that there will be an overwhelming urge by the Treasury to “back seat drive” what the Local Authorities spend on but surely this can be overcome. Anyone who mentions National Debt levels and Debt/GDP ratios as barrier (and there will be some) should get out a bit more.
The relevant point is that the rate is much less than central government would charge them
The Public Works Lopan Board dominated lending to local authorities and has had its rate arbitrarily raised by 1%
This means these bonds will be cheaper
The whole problem is for reasons best known to itself the government is not doing what you suggest it would be wise to do
Just looked at the PWLB website and their rates. 2.65% for 50 years (versus 0.35% on UKT 50 year debt. Scandalous.
Precisely
And utterly absurd
No reason has been given as far as I know
My worry is the elected members.
There is so much received wisdom out there about these matters that I can things going horribly wrong as these laymen and women wrestle with the concept.
Who stopped L.As being able to issue bonds? About 50 years ago my charity used to buy one year bonds from its L.A. The value of the bond for an L.A. depends on how well they use the money. Our L.A. used the money to build Council Houses. The increased rent repaid the Bonds. I view with alarm Councils buying commercial property during the last year. They may well lose a bomb on this.
Thatcher
To control money supply in the early 80s
If these bonds are sued for speculation it would be a disaster
Many are already sitting on those
The speculative bit was my main concern, but public ignorance about fiscal debt – the same public where our elected members come from – is still my other concern.
Like some of the others who have replied above, I also worry about this and can see that the potential downsides could be massive and damaging. My main concern revolves around the fact that, in general, local government has no or little power over controling the issues which will determine their ability to pay back the loans. Local Councils don’t have enough power over the economy which will determine, in part, their ability to pay off the bonds.
If we had sensible central governments there would be no need for this sort of ‘innovate’ financing (and it is financing not funding) – and as we tend not to have sensible central governments we can’t trust them not to manoeuvre local councils they don’t like into financial difficulties.
These local bonds may have some limited use, but I can’t see them solving fundamental issues – and if they try to do so trouble will eventually arise.
If they are used for anything but capital spending these would be a big mistake, I agree
There are strict codes in place on the use of loan funds in local authorities that regulate use to prudent purposes
One hopes…
If that is so ,how do we end up with a situation like this? Councils seem to have become speculators.
https://www.thebureauinvestigates.com/stories/2018-12-04/councils-borrow-billions-to-buy-real-estate
I agree
This should never have been allowed
Councils could implement green taxes such as congestion charging and a work place parking levy. If they did this now people wouldn’t notice straight away very much as so many are working at home.
And they could cut spending on non-green things such as public lending libraries and lifestyle lecturing ( or call on the government to give them freedom on this as some things are compulsory to deliver ).
But they do need to borrow for capital spending and I do not see the two as mutually inconsistent
How many re-generations of town centres done by government do we really need?
We’ve seen in this crisis that it’s public parks that government does well and the public value.
And your point is?
@Haseley
I might be being stupid, but what’s the issue with public libraries? Or are public lending libraries something entirely different?
Whilst not explicitly green, I think your eagerness to further cut library services is misplaced, at best. Libraries provide significant function beyond simply loaning out books.
Completely agreed
What happens if the local authority defaults on its bond repayments?
There is no central government guarantee
It is possible for a local authority to default and not be bailed out – although they backed off in Northamptonshire
So the lender enforces any security, but can a local authority become insolvent and be wound up? Who then provides necessary services to the people who need them?
The government takes over the provision of basic services: there are statutory duties that have to be fulfilled
This is why they will not force the issue, I suspect
So, this will allow central government to further starve local authorities, with those in financial distress told to issue bonds to cover their spending commitments. The money paid in interest on these bonds, will be money almost entirely going outside of the area from which it has been taken. It’s a horrible idea.
This is not possible – see my earlier comment.
While I love Liverpool, the wonderful place that I live, I would never invest in Bonds from it as I really distrust our “Mayor” Jo Anderson. And that makes me sad. I’d love to invest in our lovely city (not that I have much to invest) but while this Mayor is in charge I wouldn’t touch anything from Liverpool with a barge pole.
Perhaps you might be interested in taking a look at how badly this City has been run for years now? My guess is it will really shock you. Too tired to bring up the associated companies now – memory gone too. Peel is one of them.
Let’s hope they stop the Airport expansion, that threatens to take out of public access a lot of the Mersey shore!
http://speke8.wixsite.com/oglet
We do not need an airport extension in Liverpool…
why not?
Again, I think that if this takes off, we need watch the MBA very carefully.
Who are the MBA accountable to?
A good question….