Osborne's aide calls for council borrowing restrictions

6 Oct 11

An aide to Chancellor George Osborne has said that he would be 'very reluctant' to see councils raise finance from the bond market.

By Richard Johnstone | 7 October 2011

An aide to Chancellor George Osborne has said that he would be ‘very reluctant’ to see councils raise finance from the bond market.

Greg Hands parliamentary private secretary to the chancellor


Speaking at a fringe event on local government finance at the Conservative party conference in Manchester, Chelsea & Fulham MP Greg Hands, who is parliamentary private secretary to the chancellor, said councils should not have borrowing powers above the use of the Public Works Loans Board.

The PWLB is ‘the best place’ for local authorities to borrow, he said, adding ‘there must be restrictions on local government borrowing’.

His call comes as the Local Government Association has confirmed it is examining plans for local authorities to borrow from the bond market. The move follows increases in the PWLB loan rate for most transactions – although it has been lowered for Housing Revenue Account buy-out finance.

Hands, who stressed this was his personal view, cited Hammersmith & Fulham as the ‘most obvious case’ of how councils using the financial markets can go wrong. In the late 1980s, the London borough entered into a series of derivatives contracts, betting that interest rates would fall. When they rose instead, the council faced a massive bill, which it was spared only because the government argued successfully in court that the authority had acted outside its powers in agreeing the deals.

Hands, a former Hammersmith & Fulham councillor, added that ‘having got rid of Gordon Brown and Ed Balls the last thing we need is local Gordon Browns and Ed Ballses’ who increase local borrowing from the markets.

In response to a question from Public Finance on the increase in the PWLB loan rate, which councils say has made it potentially cheaper for them to borrow using bonds, Hands said: ‘The PWLB needed to offer more proper market interest rates in any case.’

Tom Symons, a researcher with the New Local Government Network, said that Hands’ view was ‘contrary to messages sent out by the Treasury of where the borrowing should be’.

He said: ‘The move to increase the rate of PWLB was partly to reduce the level of borrowing but also to allow authorities to have a more diverse range of borrowing.’

He highlighted the Greater London Authority’s use of bonds to pay for part of the Crossrail construction. This had saved £65m because repayments were at a lower rate of interest than the PWLB.

‘The GLA bond issue was better value that the PWLB – and local authorities should base their decisions on the best value for taxpayers,’ he added.

Also speaking at the fringe on Monday, current Hammersmith & Fulham leader Stephen Greenhalgh called on the government to simplify its plans for councils to retain business rates, to ensure the new system provided incentives for growth.

He said that the Department for Communities & Local Government’s proposals, which include top-ups and tariffs and a levy on ‘disproportionate growth’, was ‘just as complicated as the [current] formula grant system’.

Greenhalgh said that the government was telling authorities: ‘If you grow too much, we’ll tax you.’

He accepted that such provisions were necessary for some councils. The central London City of Westminster, for example, would be very likely to experience a  large growth in business rates. But he said there were only about four or five similar cases.

‘For most authorities, the growth is fairly marginal. Allow us to keep the growth, don’t let the civil servants over-complicate it.’



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