Magazine article Public Finance

Through a Lens, Safely

Magazine article Public Finance

Through a Lens, Safely

Article excerpt

with much recent publicity over households increasingly looking to payday lenders during difficult economic times, councils appear to be developing innovative finance solutions of their own. With less central government funding, authorities are diversifying their financial base and exploring new approaches to raising capital. But as I have previously noted, innovation comes with risks - so it is important for councils to view decisions through a long-term lens.

Wirral Borough Council, for example, currently loans out more than £30m of residents' taxes to other authorities in a series of low-interest loans. Interest rates typically lie at the 1% mark, which reflects the low-risk investment for the council, yet still allows for considerable returns.

Unsurprisingly, there is no shortage of demand for the service. The minimal interest rates offer considerable value for money in comparison to borrowing from other sources, and local authorities are keen to capitalise on the favourable conditions.

Municipal bonds also offer scope for financial innovation. While there is no collective municipal bonds agency in the UK, there are increasing calls to create an independent body to raise bonds for local authorities from the commercial market to reduce reliance on central funding.

But the borrowing market is just one tool local authorities are considering in view of declining budgets. Lord Heseltine's review argued for a rebalancing of responsibilities for economic development between central and local government, and offers good opportunities for increased innovation among authorities, which will allow for additional funding flexibility.

For instance, local enterprise partnerships empower local authorities through collaborative working. The European Structural and Investment Fund for England (2014-2020) will soon be available, and will enable councils to work with LEPs to win a share of the £5bn resource to invest into communities.

The latest round of central government initiatives has created another lever of financial control. The partial localisation of business rates was introduced in April 2013 to motivate councils to promote local business growth. Not only will authorities be better able to respond to the needs of the local economy, but they will also keep a share of increased business rate income. …

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