A Municipal Bond Agency would free up local authorities to invest in housing and other services, without adding to government debt. But some key reforms to the borrowing rules will be needed

The plan to set up a Municipal Bond Agency, announced last week, could be an important step not only to provide access to cheaper debt but also in supporting the case for changed borrowing rules. The Local Government Association announced plans to proceed to a more detailed phase of setting up the agency, now backed by 18 councils, and based on similar bodies in some other European countries.

LGA modelling suggests that the agency could offer interest rates that will be more attractive than those of the Public Works Loan Board. The announcement mentioned several other advantages to the proposal, such as the agency being in the hands of local rather than central government. However, one thing it didn’t mention was its possible role in paving the way for changed borrowing rules for housing and some other kinds of local authority investment.

The case for changing borrowing rules for council housing investment has been made several times here and was the subject of last year’s report Let’s Get Building, which the LGA endorsed. Potentially, a rule change to bring the UK into line with EU and other international measures would also benefit other aspects of local government investment, such as tram companies, airports and bus companies – and other municipal businesses financed mainly from the charges they make.  This is because many of these local authority businesses are not classified as part of local government, but as public corporations (controlled by local authorities). Under changed rules their borrowing would no longer contribute to UK government debt.

There are many obstacles to this reform, not the least of which is persuading the Treasury that the markets would not react adversely to such a change. But an important obstacle is also local government’s dependence on the PWLB.  At present, if (say) a tram company wanted to borrow to invest in new lines, and went to the PWLB as the cheapest source of new debt, it would inevitably add to government borrowing, no matter what status the tram company had.  This is because PWLB debt is part of the National Loans Fund (in effect the government’s lending pot). To avoid this trap, council services such as housing, which stand to benefit from any future rule change, need an alternative source of low-interest debt that isn’t from a body classified as part of government.

This is where the Municipal Bond Agency potentially steps in. It would need to be established in such a way that, though owned by local government, it can be classified as a public financial corporation.  If possible, its constitution and governance arrangements should avoid it being classed simply as part of local government itself, as for example the LGA is. If this could be done, its borrowing would not count as part of government debt. Given that nothing like this agency yet exists in England (although there are some similarities with the municipal banks that still exist in Scotland), I have no idea whether the criteria for becoming a public corporation could be met.

However, details may well be available of the status of the equivalent bodies that the LGA has looked at in Denmark, Sweden, Norway and the Netherlands, as well as the one that has only just been established in France. If they have been set up so as to be public corporations (which is a term defined in the European System of Accounts) then their organisational arrangements might provide a useful model to be followed in establishing a similar body for English local authorities. Alternatively, if they simply act as intermediaries so that the individual local authority still borrows from the market, then that too could work if UK borrowing rules were to be brought into line with the rest of Europe.

Of course, creating an agency on these lines would only be one the reforms necessary if some key local government services, including housing, were to be granted more freedom to invest. But it is an important one. This is an opportunity that the LGA should not overlook.

Original post and comments: Public Finance