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Capital investment should not be neglected

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The ability of the local government sector to find ways of sustaining capital investment, particularly in growth-spurring infrastructure during a period of unprecedented austerity will be a significant part of meeting Government objectives for a revitalised and rebalanced economy.

NLGN’s major new research project, Capital Futures, aims to help the sector redesign its approach to capital investment, mapping out new ways of borrowing to finance development and the freedoms and powers councils will need to drive investment locally.

The scale of the opportunity for local government to redesign its approach to capital finance is only just becoming apparent. The funding shortages facing local capital investment have been the subject of debate and anxiety for some time. However, what was not as clear up until now was how fundamentally the foundations of local capital investment were changing at the same time.

This period of flux, from a heavily centralised system towards a more localist configuration, presents a rare opportunity for the sector to reshape in its own terms the capital finance landscape through which they must provide much-needed infrastructure. This is vital not just for a more sustainable approach to local development, but also for the prospects of strong national economic growth.

Change is occurring in capital investment in four key ways.

  • The profile of investment is changing, from an emphasis on addressing historic backlogs in social infrastructure, towards the investment that will underpin future private sector growth and local economic development.
  • The dynamic of investment is shifting, towards locally-driven development, through the increase in local revenue streams heralded by Tax Increment Finance (TIF) and planned business rate growth retention.
  • The primary sources of capital finance are also changing, with indications that prudential borrowing will naturally replace central grant as the main artery of development as fiscal consolidation is carried out.
  • The decision to increase the rate of borrowing from the Public Works Loan Board (PWLB) has set in train supply-side reform of the sources of local borrowing.

These changes are not in themselves the answer to the capital finance challenge facing local authorities. While they may present some solutions, for instance by conferring TIF freedoms councils will have new revenue streams against which to borrow development finance, they leave more questions than answers.

Most notably, many questions are opened by the shift to alternative sources of borrowing. Work is needed to understand the mechanisms that will be needed to access finance from capital debt markets, and the powers councils may need to use financial instruments, possibly including derivatives, to get the best deals for their taxpayers.

Most fundamentally of all, it opens the question of how the sector can make capital finance sustainable, crucially not dictated by booms and busts in the national economy. Our forthcoming research will bring the sector together to answer these questions and challenges.

Capital Futures will map out a new localist capital finance framework, including alternative sources of borrowing and the ‘tool-kit’ needed by local authorities to sustain development during a time of austerity.

The lessons of the past tell us that capital investment should not be neglected in times of fiscal tightening. We aim to make sure that the sector is equipped to maintain momentum of investment, spurring local growth and revitalising communities.

Tom Symons, senior researcher, NLGN

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