By Richard Johnstone | 27 October 2014
Local authority prudential borrowing rules will need to be reviewed if additional fiscal powers are devolved to town halls, a leading economist has said.
City Growth Commission chair Jim O’Neill said its proposal to allow combined city authorities to bid for ‘devolved status’, with greater control over taxes, could also lead to the creation of a municipal funding market in the UK.
The group’s Unleashing metro growth report proposed that combined authorities, such as Greater Manchester, submit bids for devolved status. These would be examined by an independent devolution committee, to check they met required governance standards. Following this, localisation of property taxes from Whitehall and long-term funding settlements would be agreed.
Speaking to Public Finance, O’Neill said this would need to be backed by increased freedom to borrow, including clearer rules on local authority bonds. The Local Government Association was developing plans for a municipal bond agency, but some authorities were ‘petrified’ of the risks of such issues, he added.
Existing rules, which allow local authority borrowing for capital projects, constrain authorities, O’Neill said. Greater financial freedom meant the regulations should ‘definitely’ be re-examined to reflect changes to the balance of risk.
‘It’s the whole issue of risk versus return. You have to loosen the rules [but] in a way that the borrower knows in advance – as we’ve seen in the global credit crisis – that they’re taking risk. You could not do it in a way that [said], “Go and do whatever you want and we’ll bail you out.” There’s no way you could do that,’ he told PF.
