Taxing Borrowing? Mark Swallow

They say everything comes back into fashion and this seems to be the case in terms of the control of local authority capital spend.

Pre Prudential Code capital spend funded through borrowing was controlled by central government with support linked to credit approvals and funding provided as part of the Revenue Support Grant and other subsidy payments. The Prudential Code was seen as a change from a system of control to a system of self governance.

Central government still claim that there is an allocation towards capital funding in the annual Finance Settlement, but this is mainly in the form grant funding which can be used to finance spend on particular projects. Local authorities looking to fund other capital expenditure must do so using their own resources such as capital receipts, reserves, MRP and income generated from the asset itself and always with the Prudential Code in mind.

The PWLB will now only lend if a scheme is considered to meet one of the following categories: service delivery, housing, regeneration, preventative action, or treasury management with the purchase of assets for yield now off limits.

Recent announcements from DLUHC and CIPFA have made borrowing to provide assets to generate income and therefore support services harder, even if some of that income is used to fund the cost of capital (including MRP), but are there other ways for local authorities to fund borrowing using income streams without government support?

Some alternative methods have been trialled in the UK in the past, Tax Increment Financing (TIF) for example, a scheme that permits local authorities to borrow money for infrastructure projects against the anticipated increase in local taxation receipts resulting from that infrastructure.

TIF can be delivered in two ways, the first method would see borrowing undertaken against business rates retention whilst the second method would allow local authorities to borrow against the business rate revenue in a specific geographical area such as an Enterprise Zone.

To date, TIF has been fairly limited in its application, however it is mentioned in the 2020 Freeports bidding prospectus and some of the funding for the Northern Line extension has come from TIF. The Scottish Futures Trust manage a number of TIF schemes in Scotland but that is the current limit of its use.

Beyond TIF there are limited examples of other forms of innovative funding schemes. Back in 2012 “New Development Deals” were announced which gave powers to the Secretary of State to designate geographical areas that would sit outside of the Business Rates Retention Scheme. Newcastle, Gateshead, and Sheffield benefited from this scheme but the amount that was available to be “borrowed” via these New Development Deals was limited to £150million so the impact was minimal.

Another option, again announced back in 2012, were “earn-back schemes” linked mainly to transport infrastructure improvements. The Manchester City Deal included such a scheme whereby £1.2billion was to be invested in transport improvements funded through increased fare income. This scheme was short lived and in 2014 was replaced as part of the Manchester devolution deal but earn-back is still referred to in the “National Local Growth Assurance Framework” aimed at Mayoral Combined Authorities and Local Enterprise Partnerships, so it is obviously still in the current government’s mind but its application is clearly linked to regional devolution rather than local service delivery.

The UK Infrastructure Bank has also been set up with the aim of providing £22billion of infrastructure finance to support regional and local economic growth, but it could be argued that the only benefit of this scheme is a 20 basis point reduction on the interest rates offered by the PWLB and that is about it.

It seems clear that all of the options discussed above are linked to the delivery of large scale infrastructure projects only. Looking forward local authority capital spend funded by borrowing seems to be limited to projects where either direct government support can be obtained (via grant), existing resources are available to meet the costs of borrowing or additional resources can be generated via TIF or other taxation retention schemes.

Local authorities remain best placed to know what their local area can support in terms of capital investment so should not be discouraged from looking to generate income to help support borrowing and the delivery of services if the scheme fits one of the “allowable” categories with Housing and Regeneration being the two stand out areas of activity to focus upon if they wish to continue to have some control over their capital ambitions.

As readers start to pull their capital programmes together for future years perhaps it’s time to start thinking at ways to use what little freedoms remain within the Prudential Code if you still need your capital plans to help support your revenue budgets.

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