On Monday, Nick Clegg announced new powers for councils to borrow money against projected upturns in business rates from investment in new capital and infrastructure (known as Tax Increment Financing). Councils can already borrow against their overall revenue stream. But, until now, borrowing against business rates has been verboten. In a sense, then, Tif is just a logical extension of existing powers.
The deputy prime minister reflected this mood when he said his announcement ‘won’t set pulses racing’. I’m not so sure. This new revenue stream will be absolutely vital to transforming some of our most deprived communities. There are, however, enormous risks associated with borrowing against future growth. Councils, which of course will be eager to back their communities with extra money, could find themselves getting in to hot water if ambitious projections for growth fail to deliver.
Of course, I’m not alone in this concern. In July is was reported that central government’s answer to Eeyore, the Treasury, was signed up to Tif in principle ‘so long as it got final approval on each project’. The Treasury is concerned that, motivated by the additional leverage that they’ll be able to secure, councils will back over-inflated growth projections.
This caution is welcome. It must be said, however, that the Treasury has not covered itself in glory in assessing the wisdom of investment in infrastructure. In fact, it seems pretty happy for councils to over-extend themselves, so long as they’re in hock to HMT. As the Local Government Information Unit pointed out last year, councils nationwide owe £18bn to the Treasury from old loans to build council housing. Councils are raising £6bn a year from council house rents, and spending more than £1bn repaying debt.
Independent challenge to the prudence of local government borrowing could be a far better bet. In the US, where Tif is well-established, this is the norm, as Liberal Democrat activist Nicolas Webb has pointed out. Chicago, for instance, has recently had its bond rating downgraded by ratings agency Fitch because the city had used returns from infrastructure investment to pay for operations.
That’s not to say, however, that councils shouldn’t give Tif a warm welcome. If done properly, the need to deliver growth provides a useful discipline that should drive value for money investments. But, if done badly, Tif threatens councils with investments that could be a drain on resources for generations.
Laurie Thraves is policy manager at the Local Government Information Unit
