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
