Moody’s warns on fiscal impact of devolution drive

1 Jun 15

A leading credit agency has said that government plans to devolve powers to the nations and city regions could have an impact on the UK’s fiscal framework and credit rating.

Publishing a research note on the proposals in the Queen’s Speech, Moody’s said accelerated devolution, including extra powers to Scotland and Wales and implementing the Stormont House agreement in Northern Ireland, would ‘weaken links between regions and sovereign, but implications for fiscal settlement are unclear’. In addition, the legislative programme promised to devolve powers to cities with elected metropolitan mayors.

‘While this paves the way for further constitutional reform, the funding settlement which accompanies this hastened devolution programme still needs to be elaborated,’ the Sector in-depth report stated.

‘This includes clarity on the extent of tax-raising powers, if devolution will be accompanied by changes in how funding is allocated across the UK, and what ties and oversight are attached to this funding.’

The report highlighted there was currently strong central government oversight of spending by devolved bodies and local government, which was key to the strong creditworthiness of these institutions.
‘Devolution will mean the creditworthiness of regional government will become more underpinned by individual credit features rather than the support of central government,’ it stated.

‘This, combined with continued austerity, may encourage local authorities to undertake less tried and tested ways of revenue generation and reducing costs, which would change their credit profile.’

The analysis also indicated that localising additional powers to Edinburgh, Cardiff and Belfast would mean the devolved nations increasingly took their own stance on public policy.

‘Enhanced devolution will lead to institutional frameworks varying more widely across the UK,’ the report stated.

‘Already Scotland has taken its own route on welfare reform by not implementing the spare room subsidy, aka the bedroom tax, reducing the initial impact of welfare reform on Scottish housing associations. The Right to Buy for council tenants has already been rejected by the Scottish and Welsh governments, who wished to preserve publicly owned housing stock. In Wales the government is planning to abolish Right to Buy entirely, and in Scotland it will be phased out by August 2016. This may also contribute to widening the rating range across the UK public sector.’

Plans to extend Right to Buy to housing associations in England – coupled to welfare reforms that will cut the household benefit cap from £26,000 to £23,000 – increased the credit risks of these institutions, the report also highlighted.

‘The extension of Right to Buy to housing associations will fundamentally change the business model of traditional housing associations, from managing long-term social housing assets to a shorter term and more unpredictable social housing asset base.

‘Although the scale of the impact is unclear, and depends on actual take-up of Right to Buy, we believe that the risk for the sector can be absorbed.’

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