There is an investment shortfall of £1bn a year in London. Councils must be given the autonomy to make up the deficit
With the general election looming, and the prospect of spending-cut speculation turning rapidly into spending-cut reality, there is real concern among London’s local authorities that their already hard-pressed capital budgets will be battered even further. December’s Pre-Budget Report projected a 50% cut in net investment by 2014/15, so it would seem that their fears are well founded.
London Councils commissioned LG Futures to research the full picture in response to mounting evidence that capital finance in London was under pressure.
What it shows is that the picture across London is, of course, complex, with differences in the level and timing of investment. For instance, whereas inner London boroughs spend collectively 16%–49% above the national average, the outer boroughs spend some 11%–25% below. But most disturbing is evidence of some £1bn a year in unmet capital investment need – particularly on housing and education.
So what is causing this? After all, a recent CBI report showed that every £1 spent on construction increases gross domestic product by £2.84.
There are the obvious constraints, such as decreasing levels of capital receipts, falling property prices and reducing private sector contributions.
Added to these is the fact that 24 London authorities are on the grant floor and see very little if any of their notional supported borrowing grant. In other words, a lack of funds available to service capital loans is acting as a major brake on investment.
Unfortunately, we see the government adding yet more layers of bureaucracy. The benefits of the public and private sectors working together in partnership for the good of communities are widely recognised. Examples include Croydon’s urban regeneration vehicle – a £450m scheme to rejuvenate the town centre. It is a 50:50 partnership between the council and developer John Laing, with the council providing the land, and the developer the cash for investment.
Sadly, rather than encouraging partnership working by granting greater flexibility, the government’s response appears to be to recommend an approach that would slow investment, transformation and economic recovery.
The draft guidance on joint ventures published by the Treasury last October is a triumph of bureaucracy over localism. Far from added restrictions, councils need greater autonomy to provide much-needed regeneration.
Action in three distinct areas could make a difference. First, the government needs to push ahead with Tax Increment Financing. In general terms, the idea of Tif is to define an area, and allow the projected increase in tax revenues flowing from the regeneration – business rates, stamp duty, council tax – to pay off debt from the initial investment. But the PBR tells us: ‘The government will continue to examine the framework that would be needed to implement Tax Increment Financing and consider the primary legislation that would be needed if schemes were to be introduced.’ In other words, Tif is in the long grass and will stay there for a long time yet. This cannot be acceptable at a time when local government needs every tool it can get.
Secondly, ministers should return to making adjustments for authorities on the funding floor to ensure that increases in notional capital financing actually feed through to grant.
Finally, there should be greater flexibility around the capitalisation of procurement costs and a new form of capitalisation order that will allow the deferral of revenue costs from affecting the revenue account for a defined period.
As we all look towards recovery, capital investment is vital. It generates jobs and economic activity and will ensure that our infrastructure is in good shape as we go forward.
The government, whoever that might be after the election, must do all it can to support the work of local authorities and their public and private sector partners.
