By Tash Shifrin
20 August 2009
Local authorities’ borrowing from the government has fallen by more than a third in one year, while deposits with the Treasury’s Debt Management Office are rocketing after the Icelandic banking fiasco.
The 2008/09 accounts for the Public Works Loan Board – the government body that lends money to councils – revealed that lending fell from £10bn in 2007/08 to just £6.36bn last year.
Meanwhile, new figures provided for Public Finance show that the amounts placed by councils with the DMO’s Debt Management Account Deposit Facility have increased around 15-fold in a year.
Figures for the first four months of 2009/10 show that between £12.4bn and £15.2bn was placed by local authorities with the government deposit facility each month. In the same months in the previous year, total deposits ranged from £838m to £1.09bn.
PWLB secretary Mark Frankel told PF that the collapse of the Icelandic banks in October last year had had ‘a major effect’ on the way councils managed their money. A total of around £1bn of local authority funds is still frozen in Iceland.
Frankel pointed to three factors influencing the falling level of PWLB loans to councils. ‘Local authorities are restructuring [their debts] less, taking fewer loans and paying back more loans.’ When councils restructure debt, it makes it ‘look like actual lending is going down’, Frankel said.
But councils’ borrowing has also been reduced. ‘I think there is less lending,’ he said. ‘The main reason is that local authorities have accumulated a lot of cash and find they don’t need to borrow any more for capital programmes.’
Department for Communities and Local Government figures released in November last year showed that the level of council reserves had more than doubled since 1997.
Frankel said the councils that were ‘sitting on quite substantial amounts’ were now repaying debt rather than investing with commercial banks. ‘They’re not getting a lot of interest on investments,’ he added.
Councils have also shifted their investment policy away from banks. Mike Heiser, senior policy consultant at the Local Government Association, said rising deposits with the DMO marked a ‘flight to safety, post-Iceland’.
The PWLB lending figures showed ‘councils are structuring their capital borrowing in a prudent way’, he added. ‘If councils still want to do capital spending... and they don’t finance it through borrowing, they can finance it using reserves or by taking it straight from the budget upfront.’
Mark Horsfield, director of independent treasury management advisor Arlingclose, also identified the Iceland crisis as a turning point. ‘Post-Iceland, local authorities are more interested in running down their balances.
‘Instead of borrowing to generate cash for capital assets, they are running down investment to finance it instead.’
It would be some time before the ‘risk appetite’ of councils for investing in banks was restored, he predicted.
CIPFA assistant local government director Alison Scott noted that there was ‘still a cost’ to councils that repaid PWLB loans early rather than invested their money.
But she added: ‘When you look at the big drop in interest rates, it’s still worthwhile.’
Earlier this year, the Commons communities and local government select committee called for an ‘urgent review’ of the cost of making early repayments to the PWLB. Frankel said the agency was working on its response to the call.
See Risk without reward
20 August 2009
Local authorities’ borrowing from the government has fallen by more than a third in one year, while deposits with the Treasury’s Debt Management Office are rocketing after the Icelandic banking fiasco.
The 2008/09 accounts for the Public Works Loan Board – the government body that lends money to councils – revealed that lending fell from £10bn in 2007/08 to just £6.36bn last year.
Meanwhile, new figures provided for Public Finance show that the amounts placed by councils with the DMO’s Debt Management Account Deposit Facility have increased around 15-fold in a year.
Figures for the first four months of 2009/10 show that between £12.4bn and £15.2bn was placed by local authorities with the government deposit facility each month. In the same months in the previous year, total deposits ranged from £838m to £1.09bn.
PWLB secretary Mark Frankel told PF that the collapse of the Icelandic banks in October last year had had ‘a major effect’ on the way councils managed their money. A total of around £1bn of local authority funds is still frozen in Iceland.
Frankel pointed to three factors influencing the falling level of PWLB loans to councils. ‘Local authorities are restructuring [their debts] less, taking fewer loans and paying back more loans.’ When councils restructure debt, it makes it ‘look like actual lending is going down’, Frankel said.
But councils’ borrowing has also been reduced. ‘I think there is less lending,’ he said. ‘The main reason is that local authorities have accumulated a lot of cash and find they don’t need to borrow any more for capital programmes.’
Department for Communities and Local Government figures released in November last year showed that the level of council reserves had more than doubled since 1997.
Frankel said the councils that were ‘sitting on quite substantial amounts’ were now repaying debt rather than investing with commercial banks. ‘They’re not getting a lot of interest on investments,’ he added.
Councils have also shifted their investment policy away from banks. Mike Heiser, senior policy consultant at the Local Government Association, said rising deposits with the DMO marked a ‘flight to safety, post-Iceland’.
The PWLB lending figures showed ‘councils are structuring their capital borrowing in a prudent way’, he added. ‘If councils still want to do capital spending... and they don’t finance it through borrowing, they can finance it using reserves or by taking it straight from the budget upfront.’
Mark Horsfield, director of independent treasury management advisor Arlingclose, also identified the Iceland crisis as a turning point. ‘Post-Iceland, local authorities are more interested in running down their balances.
‘Instead of borrowing to generate cash for capital assets, they are running down investment to finance it instead.’
It would be some time before the ‘risk appetite’ of councils for investing in banks was restored, he predicted.
CIPFA assistant local government director Alison Scott noted that there was ‘still a cost’ to councils that repaid PWLB loans early rather than invested their money.
But she added: ‘When you look at the big drop in interest rates, it’s still worthwhile.’
Earlier this year, the Commons communities and local government select committee called for an ‘urgent review’ of the cost of making early repayments to the PWLB. Frankel said the agency was working on its response to the call.
See Risk without reward
