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'Councils must exercise caution with novel investments'

Nigel Wilcock
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George Osborne’s decision to axe the central government grant to councils entirely by 2021, whilst allowing councils more flexibility over council tax and 100% of business rates to be retained has caused local authorities to react in a number of different ways.

Many have opted to use reserves to create annuity funding streams, a measure made all the more attractive as interest rates are so low. Even in 2009 councils were trying to maximise returns in what they perceived to be low-risk investments and £1.05bn of council cash was at risk when the Icelandic banks failed, although in the end little was lost.

Roll on to 2017 and councils have pursued a number of altogether more imaginative schemes; everything from investing in infrastructure that will allow businesses to locate in an area and generate business rates, through to purchasing energy generation facilities and local shopping centres. Most of these schemes are being undertaken within the councils’ own boundaries to try to create a ‘double benefit’ of generating a financial return whilst also supporting economic activities in the area.

Of course, if councils are able to generate their own income streams, this must be considered a good thing; the list of requirements for that funding is not getting any shorter. The Institute of Economic Development certainly wishes all these schemes the very best of luck.

But there are two notes of caution to raise in all of this.

The first is that higher rewards are associated with projects of higher risk; this is a truism of all investment. Even seasoned private sector investment houses do not expect all schemes to succeed and there is a certain inevitability that for all those councils who succeed, there will be a number that fail. It also seems likely that if councils continue to limit their investment to their own areas, those with the economies that perform least well are likely to limit their potential returns – and these are often those areas with the largest draws on their funding.

The second concern is that councils always have a long list of funding demands and there is bound to be a pressure to defer the maintenance and renewal that comes with ownership of many asset classes. Without that maintenance and renewal, what originally appeared to be a long-term funding stream quite quickly starts to underperform and become a liability.

So, whilst the Institute of Economic Development is of course supportive of anything that improves the funding position of councils, we suggest caution before dashing into this market.

Nigel Wilcock, executive director, Institute of Economic Development

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