I have noted a report in the Guardian this morning which suggests that Southwark Council is seeking to raise £6 million of crowd-sourced funding over the next six years, which it will use to fund climate change-related investments in its borough. It is offering to pay 4.6% interest on the sums it is borrowing at present, which is a lower rate than it would have to pay HM Treasury to borrow the same money. It is, apparently, one of nine councils undertaking such arrangements at present and secured £50,000 of funding within hours of its new scheme being open.
It is, perhaps, unsurprising that I find much to applaud in this arrangement, albeit that I despair at the current approach adopted by HM Treasury, which is penalising councils for seeking to borrow to achieve such vital objectives. Twenty-one years ago, Colin Hines and I wrote our first ever report, working with Alan Simpson, who was a Labour MP at the time. It was called People's Pensions and was published by the New Economics Foundation. It suggested that pension savings should be turned into the capital required by local authorities and other public administrations to fund the investment required in their communities. Local authority bonds were to be the instrument of choice for this radical transformation.
I have never given this theme up. We live in a country where there is reported to be £8,100 billion of financial wealth and a simultaneous desperate shortage of investment. That is because almost none of that financial wealth represents sums actually available for constructive use within the economy. It is instead either money sitting out of circulation in bank accounts or sums saved for speculative purposes, much of it represented by the ownership of shares in quoted companies or the ownership of second-hand buildings.
The old economic idea that saving had anything to do with investment, which claim provides the logic for the UK government still giving £70 billion of tax relief to those saving money into economically dormant or socially useless ISA or pension accounts, has been shattered in a wholly financialised economy where doing something as unseemly as actually using saved funds to provide capital for real economic activity never appears to occur to anyone in so-called financial markets.
I applaud Southwark for trying to re-establish this relationship between a saver and the constructive use of capital within a local economy. It is entirely appropriate.
What I find disheartening is that those saving in this way will not enjoy a government guarantee on the funds that they make available to Southwark when that guarantee would be provided if they put the money, uselessly, into a bank deposit account.
What I also find unacceptable is the fact that this proactive funding will not enjoy the tax subsidy that either ISAs or pension investments do.
That is precisely why I have suggested that in future, all existing types of ISA accounts should be withdrawn and the only option available for those wishing to save an ISAs should be that the funds in question be used to invest in the green economy, either by buying bonds to be issued by a Green National Investment Bank, the return on which would carry an implicit government guarantee, or by investment in shares and bonds issued by banks, public or private companies, all of which would be required to prove that the money that they had entrusted to them was used to provide capital for investment in new economic activity intended to assist the UK's transition to becoming a net – zero economy.
 I have also, repeatedly, over 21 years, suggested that part of all new pension contributions should be used for the same purpose as a condition of the tax relief provided on such sums to those making pension contributions.
Currently, £70 billion a year goes into ISA accounts and sums well in excess of 100 billion go into pension arrangements. The combined cost of tax relief on these sums is £70 billion a year, a figure in excess of the UK defence budget. In exchange, there is no obvious return of any sort to society, but enormous benefit does arise to the city of London and to those who are already wealthy, who are the inevitable beneficiaries of this largesse from the state, which they zealously seek to preserve whilst criticising all those who claim any form of benefit.
Until we join up the obvious dots in the economy and require that savings be reacquainted with investment and that tax relief only be associated with the achievement of a social purpose, we are not going to tackle the immediate issues that plague us, whether they be a shortage of gainful employment, massive under-employment, a lack of investment, or our failure to tackle the climate crisis. Rebuilding the relationship between saving and investment in a way that tackles all these issues is an obvious way to go forward, but to date no political party has shown willingness to adopt this approach, which I find deeply discouraging. However, Southwark and other councils do appear to be showing the way. I welcome that. The rest of the country needs to follow the path that they are blazing the way because unless we put the UK's wealth to work for social purposes we really are in very deep trouble.
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Very good post. AGREE 100%.
“What I find disheartening is that those saving in this way will not enjoy a government guarantee on the funds”
But we can’t have that, that would open the flood gates, disintermediate gov (in terms of it being able to decide what councils can & cannot do) & the neo-cons in the treasury. That is why is is not happening now & will not happen under a LINO gov. But it has to happen – which begs the question: given “pretty please” does not work, given current “electrola arrangements” will not reflect what people want/need – what needs to be done? This is not intended to be negative, rather a question – how to get to where we (the UK) needs to be.
I wish I knew the answer to that
………………..and the bankers get what seems like an unending line of free credit plus interest from the Government in the CBRA for their high risk deals and to underpin their bonuses as well.
Yes I agree. That does look like a sensible approach and one which I was thinking about the other day in relation creating a fund to provide income for the state pension in future.
To paraphrase…. “this is a terrible idea – except for all the others”.
Allowing councils (that have limited revenue raising powers) to borrow is dangerous. It is also unclear what maturity the borrowing is which could raise the risk further. Hypothecation is also difficult = easy to raise money for “nice” schemes… but what happens when you have to crowd fund salaries, building maintenance etc..
Having said that, if it is the only way to get these things done then perhaps it is not such a bad thing. Let’s hope that the incoming Labour government will be bounced into sorting out the unsatisfactory parts of this to leave us with a net gain.
All your points about mobilising tax advantaged savings are spot on…… but will take time.
Whether local authorities are the best institutions for issuing local bonds is unclear, given that some 20% of England’s local authorities claim to be close to bankruptcy.
Southwark as an authority, like many others, has an unenviable record in terms of relations with private sector redevelopment, and raising £6m through a bond issue is a bit of a joke, given the context.
Some twelve years ago, the 22 acres of the 1974 Heygate estate at Elephant and Castle were sold for £50m, to an Australian based global development company, with the Council having already spent over £65m relocating the 3,000 residents and in development planning.
Given that an adjacent 1.5 acre site was sold for £40m on the open market just 2 years prior, the residents of Southwark may well have been deprived of a sum of c.£536m pro rata.
That is some £530m more than the benefits of the current crowdfunding scheme might achieve.
There has obviously been some suggestion of skullduggery in the Heygate transaction, but it is extremely difficult to know whether cockup or conspiracy is involved.
Even worse, is that the 1200 residences on the estate were in pretty decent nick, and it had been recommended that rehab would provide a cost effective extension to their useful life just a few years earlier. So the demolition involved a resource management as well as financial management failure.
In 1974 the new 1200 homes on the estate were entirely social housing, yet the 21stC Elephant redevelopment only involves 82 units of social housing, thus feeding into the current housing crisis.
Profit before people is the watchword.
Definitely Corbusian in concept, most residents did seem reasonably content there, and the flats were highly prized in the 70s, when the housing waiting list was 20,000 plus. We had one very disturbed tenant who rang us up every Monday and threatened to jump from the tenth floor if he wasn’t transferred to a ground floor flat when I worked in LBS Housing Allocations in the mid 70s, but it was not until much later that the neglect of maintenance and repairs created multiple problems.
The estate really could have been a continuing beacon of successful 70s urban redevelopment.
This salutary tale in mismanagement is not to detract from Richard’s main point that the vast sums of money locked up need to be released for investment, or that we need practical vehicles to achieve that.
Of course taking large sums of money out of circulation is what tax is for, and tends to be deflationary, and under MMT is there to balance money with the capacity of the economy, so putting wealth to work effectively is a crucial macroeconomic priority.
However, such investment schemes need proper appraisal on resource management circular principles…… HS2, Crossrail and Hinkley are hardly jewels in the crown.
UK property development and speculation often has a poor record for public projects, and improving the capacity and skillset in the UK to deal with infrastructure both large and small, has to parallel the ability to source and raise the funding for the projects we desperately need to transition to net zero and sustainability.
I did some work on the Heygate estate in the 1990’s. I worked for nearby Westminster City council and we were shipped in to do some consultation work as the estate did not even have or could not be bothered to have a proper estate regeneration team working on it by the LA.
It did not look too bad – the views were tremendous from the upper levels but is was not the highest block in London. It was obviously in need of some work in the communal areas but could have been done up rather nicely. Compared to some of Westminster’s blocks, it was paradise. It was bright and airy to me, with fewer areas where people could congregate and get up to mischief.
I reflected on that week spent there that the site was in a prime location and I was not surprised to see it start to go. Something underhand has happened on the Heygate estate and there should be an investigation. And whatever has cracked off is based in greed I can bet you.
“…. all existing types of ISA accounts should be withdrawn and the only option available for those wishing to save an ISAs should be that the funds in question be used to invest in the green economy, either by buying bonds to be issued by a Green National Investment Bank, the return on which would carry an implicit government guarantee, or by investment in shares and bonds issued by banks, public or private companies, all of which would be required to prove that the money that they had entrusted to them was used to provide capital for investment in new economic activity intended to assist the UK’s transition to becoming a net – zero economy.”.
This is a good idea, but on the guarantee, I think it should be the equivalent of the commercial bank £85k guarantee; given on the whole ISA investment, up to a given ceiling. I say this because I believe ISAs are chosen not just because they are tax efficient; but are safe, risk-free investments. However well planned, some green investments (carbon capture, tidal etc.) will not be risk-free. Currently these areas are under-invested because private sector, market=driven business do not invest because they do not like the risks (proof again that big ticket typically new ideas need public support). Small investors will not wish to find the risks of innivation fall on them.
Accepted
Actually, I would only apply this to cash based deposits
Richard,
On Monday DESNZ consultation on Heat Network Zoning closed.
https://www.gov.uk/government/consultations/proposals-for-heat-network-zoning-2023
It proposes that delivery is primarily routed through the commercial sector because full roll-out over 25 years will cost £80bn and the Government does not have the money. A figure not unadjacent to the ones you have quoted going into ISA’s and pensions annually.
Possibly now is the right time to re-boot your People’s Pension concept??
The Taxing Wealth Report 2024 does that…
ISAs come in many forms, from safe ‘risk-free’ investments to highly risky equity products, providing capital to support growth for companies, including many which have strong green (‘ESG’) credentials.
So?
Justify why they provide A return to all in society on the sum expended on them.
Many decades ago all my student fees and accommodation for four years were paid for by Swansea Town Council (as it then was). I didn’t ask where the money came from, but recall seeing notices in the local Evening Post, from various councils around the country, including Swansea, offering bonds at various rates of interest. I’ve often wondered why they disappeared.
And this morning on the Today programme, the main topic at 8:10 was the funding of English councils. The interviewee representing County Councils made the fatuous aside, not challenged, that of course we must remember that this is taxpayers’s money we’re talking about…
Thatcher killed the local authority bond market that had been used to fund the creation of schools, hospital, housing, energy and transport.
Richard
With regards to the above, I continue to hear and read references to “taxpayer’s money”. I know you’ve explained a few times why it is wrong and does not exist, but would it be possible to add it to your glossary please?
I might do that soon.
Nag me if I do not.
PS Now done – and on the blog in the morning.
Typo in the last paragraph: we already do put the UK’s wealth to work for intended social purpose. There’s an array of taxes which come under the category of wealth and the revenue goes into government coffers to be recycled back out again. So we should add “more of” to that last sentence.
We could also argue that a lot of the climate spending done by government so far has been ineffective or done in stupid ways, burning wood chips, promoting diesel, food into fuel, most planting of trees, carbon capture. As all the stupid stuff has been done, the improvement from doing extra must be considerable.
Donald
Sorry – but tax literally funds not one penny of government spending.
Start here…. https://www.taxresearch.org.uk/Blog/2024/01/27/the-political-economy-of-money-and-tax/
Sorry Richard, but tax *is* collected in the United Kingdom. It passes through the Treasury at some point and then get recycled back into spending covering 90% or so of spending in the last decade.
There are monthly news items telling us what receipts and expenditure were by central government.
Occasionally the two numbers are similar – I believe you have called this balanced – it might not be desirable depending on your view but the concept is one every real macroeconomist is aware of.
With respect, no serious macroeconomist would agree with you.
I suggest you go and do a lot of reading, which you clearly did not do with the note I prevpusolly drew to your attention. Right now you are talking economic nonsense because what you suggest is technically impossible.
Richard, you are wrong. 5 year government bonds are at a 4% yield, which is less than 4.6%
I referred to the cost local authorities pay HMT.
You are wrong.
If it wasn’t for taxation (to control inflation, if nothing else) we wouldn’t be able to afford the government spending we make – our currency would be devalued so as to become worthless.
So whether taxation directly or indirectly impacts government spending, the end result is identical. Indeed, MMT confirms this.
The result is funfamentally different.
If you had actually read MMT you would know that.
You are right that this investment is not secure, but wrong about ISAs. If you invest through the Abundance platform, this investment can be included in an ISA. I know, I have done it, for this and other similar projects.
OK: I stand corrected. I was not aware of that.
I was about to reply likewise with respect to Abundance!
Note however that it’s an Innovative Finance ISA.
That provides a simple mechanism to implement the idea of directing tax-advantaged savings into positive (eg climate/GND-related) investment: shut down all future general ISA allowances and only allow tax-free income and capital gains within IFISAs, perhaps with some modification of their rules. To be more radical, require a transitional period over which all existing ISA funds are to be moved to IFISAs or lose their tax-free status?
I have great difficulty with economic discussions as I struggle to understand the language. However, a few years ago I responded to an appeal from Islington Council for investment in a fund to finance their environmental commitments. it seemed a great idea and that was done through Abundance. I put in a small amount and get an email every year that tells me I have earned a pound or two which is reinvested. Is this the same sort of scheme? If so, then perhaps Islington should publicise its action more, and raise more money directly.
I don’t know – but it sounds similar