By Richard Johnstone | 4 July 2014
Government changes to the interest rate local authorities pay to borrow from the Public Works Loan Board have become a barrier to councils making decisions to invest in economic infrastructure, the UK’s biggest council has warned.
Speaking to Public Finance after Birmingham City Council confirmed that it would invest £200,000 in the creation of a municipal bonds agency, deputy leader Ian Ward said it wanted to increase certainty over its borrowing costs.
The interest rate for the PWLB was increased to 1% over government gilts by Chancellor George Osborne in the 2010 Spending Review, but was subsequently cut to 0.8% above gilts following the 2012 Budget if town halls provided details on their borrowing plans for the next three years.
Ward told PF that Birmingham had chosen to back the creation of the agency, which was approved on June 16, so it had another borrowing option.
‘Potentially, it could give us the ability to borrow money at a low rate of interest, given the recent increase in PWLB rates,’ he said. ‘We’re always looking to borrow money at the most competitive rate we can.
‘We’re estimating that borrowing from the new route of a bond from the LGA would be about 0.2 percentage points lower than the rate currently available through the PWLB, so the fact that this is more a competitive way for us to borrow money is obviously attractive.’
Asked if the PWLB rate changes in this parliament had formed a barrier to investment decisions, Ward said: ‘Yes, because any uncertainty is not helpful when you’re looking to borrow large sums of money.
‘In that sense, yes, that uncertainty can be an impediment to us borrowing money for major infrastructure.’
