Capital Investment

Plenary on 2013-06-05
Session date: 
June 5, 2013
Question By: 
Stephen Knight
Liberal Democrats
Asked Of: 
Professor Tony Travers (Chair, London Finance Commission)


Can you expand on the benefits of allowing local and regional government to make greater use of prudential borrowing to finance capital investment?


Answer for Capital Investment

Answer for Capital Investment

Answered By: 
Professor Tony Travers (Chair, London Finance Commission)

Professor Tony Travers (London Finance Commission): Yes. I think one of the things we were convinced of is that the prudential borrowing regime that has emerged in recent years is an extremely effective way of regulating local authority, and indeed GLA, borrowing for capital investment. In effect, at its simplest, the prudential borrowing regime for those who do not spend day and night studying it, which would be reasonable, simply ensures that sub national authorities, the GLA and the boroughs, are restricted in what they can borrow by their capacity to make repayments and by their existing level of indebtedness and other indicators that are effectively all to do with the capacity of the local authority concerned to be likely to make repayments on any borrowing.

With that in mind, I think one of the underlying things that we discovered or were convinced of in the Commission is that the current relatively tiny tax base, which is capped, makes it much more difficult for authorities to envisage capital investment than they would if the tax base were bigger and if there were greater freedom to set local tax rates and indeed to generate more income by doing so. In that sense we see the prudential borrowing regime as a good thing, but that the constraints on overall spending in effect inhibit the use of it. So, although it is not put quite like this in the report, I think we in the end, by very heavy implication, drew the difference between borrowing to fund capital investment for assets that will produce a long-term benefit to the city and simply borrowing for all other purposes by Government.

So, yes, we do strongly recommend the increased use of prudential borrowing and investment in order to generate productive assets that would allow the city to grow.

Stephen Knight (AM): Thank you for that answer. I wonder if I can pursue this issue in terms of, first of all, what local government and the GLA itself can do at the moment in terms of borrowing. Secondly, I suppose, on the Economy Committee here we have recently been hearing that capital construction costs are perhaps 30% to 40% lower than they were in 2008. We obviously have very low debt borrowing rates in the public sector at the moment, and we have about 150,000 unemployed construction workers; so all the parts of the formula are there and if you couple that obviously with the dire housing shortage, which leads to great economic and social problems in the capital. I suppose my real question is, given that the GLA's own borrowing limits are set, not really over and above the prudential code, are set not in statute, but merely by the settlement letter from the Minister [the Secretary of State for Communities and Local Government Eric Pickles MP], would you say that the Mayor [of London, Boris Johnson] was a big enough political figure in his own right, if you like, to stand up to Ministerial dictat and say, 'The law says I am allowed to prudentially borrow more, say to fund affordable housing or something else, on behalf of Londoners that is what we need to do, therefore we should do it', and challenge the Government to fight him on that? Because the Mayor has the biggest political mandate in Europe, arguably, and ministerial dictat perhaps should not be as strong as his mandate.

Professor Tony Travers (London Finance Commission): Let me try and answer that. Our report was definitely about the way in which the GLA and the boroughs both approach, among other things, prudential borrowing. As far as the GLA is concerned, partly because of the very significant level of capital investment by Transport for London (TfL), I think I am right in saying that the GLA has moved from its early days of having relatively little outstanding debt today to having pretty substantial outstanding debt and the issue of what would be prudential borrowing by the GLA group, I think it has gone further faster than the boroughs collectively in growing indebtedness, partly to invest in exactly the way we are suggesting.

That is not to be critical either the previous Mayor or his predecessor, but to say that the scale of investment, particularly in transport, has, I think I am right in saying, moved the GLA group from being relatively under-indebted to being towards the higher end of indebtedness in a relatively short period. Now, that being the case, it does not mean however that the GLA and the boroughs had a wider tax base and a greater propensity to make repayments on any new debts they incurred by borrowing to fund new infrastructure, they could not convince the markets that prudentially they could borrow.

So I think there are good arguments and elsewhere in the report we make the point about the housing revenue account reform, which was intended originally to allow sub-national government, boroughs and the GLA, to build more housing. I think that is what the whole purpose of it was to deliver, but in the end, after the reform, the amount that councils could spend was capped; so in a sense it did not work quite in the way as originally intended. So we are, in the report, without question, challenging and pretty directly making the point that there is a risk with the current arrangements that the GLA and the boroughs will not be able to get involved in as much capital investment as otherwise they might because of existing restraints or constraints on capital expenditure because of public expenditure constraints.

So we in the Commission were certainly suggesting that there needed to be some lightening up on central Government's capital controls. Whether the GLA and the boroughs would then use that freedom, if it were offered, would be a matter of political decision-making at that point.