Paying for Local Investment: New Finance Mechanisms for Local Government

Author: Richard Murphy   |   01/03/2005

This report has been prepared because of our concern about three issues. The first is that, for decades, central government has denied local authorities autonomy over both raising capital finance and capital expenditure in their local areas. There is little doubt that this has contributed to the decline in the quality of schools, housing, local transport, and other services. Central government has denied responsibility for this decline by saying the duty to invest is that of local authorities. However, local politicians have been unable to act because they have neither the funds nor the authority to do so. This impasse has not ended with the creation, in April 2004, of the new system of local authority funding called the ‘Prudential Code’, and as such still needs to be tackled. The proposals we make would restore appropriate decision-making power to local authorities. They are designed, in association with the revenue finance system recommendations in our previous joint report Nothing to lose but your chains: Reforming the English local government finance system, to provide local authorities with the means to fulfil their plans for local investment.

The second reason for this report is our concern that the new Prudential Code system of capital finance is poorly conceived and will lead to serious errors in decision-making by local authorities. Vital changes to this system are required. These involve the use of a wider base of lending sources than at present, when almost all local authority capital borrowing is from central government. We are convinced that any additional cost of such borrowings will be more than covered by the discipline required for properly implemented investment appraisals, both in terms of project selection and project planning. Again, these changes will be facilitated by the recommendations we have already made to provide local authorities with more control over their revenue sources.

Finally, we want to re-invigorate the local economy by giving local authorities access to the money markets and by encouraging people to save for the long term by investing in local authority bonds. These were once commonplace in the UK financial scene, and they still are in many countries, especially in the USA. At a time when saving is such a crucial issue, linked as it is to private pension provision, we believe it is an appropriate moment for people to be given incentives to save locally. This could fund the infrastructure improvements that they want to see in the short term, and from which they might benefit in their old age. As such, we promote the creation of a local authority bond market in the UK.