With the budget due next week, one way that central government could help boost local growth in cities like Birmingham is by freeing up local councils to issue bonds. Such bonds could then be used to finance the building of new social housing, roads and other infrastructure projects as well as retrofitting older homes and business premises.
Such a move could also stimulate the creation of new jobs, especially for young people, and is something that John Clancy and myself here at the Birmingham Post have been pressing for in recent years. Now groups like the Local Government Association (LGA) are backing the idea given both national government austerity and the desire to reclaim powers to the local level. Maybe it could be part of a package of powers that a new city mayor could reclaim for Birmingham?
In fact, here in Birmingham the council has already actually issued “Brummie Bonds”.
The current Tory-Lib Dem controlled council, importantly with cross-party support, was given permission by the then-Labour government for a big bond issue back in 2005. This was for £215 million-worth of “Brummie EuroBonds” which financed a loanstock debt-swap, to refinance the future of the NEC.
So the city has already issued Brummie Bonds on the European bond markets with appropriate permission, but this was tied quite clearly to replacing existing debt rather than issuing new debt.
Nevertheless, the city should look to do this again, and I’d argue that a democratically elected mayor would have a better chance to negotiate enhanced powers in this area with central government.
The move could potentially unlock billions of pounds worth of investment, including from local authority pension schemes, thereby offsetting some of the impact of the Government’s austerity drive and helping to boost overall demand in the economy.
Indeed, the LGA last week suggested that by giving local authorities control over skills and transport funding and lifting restrictions on bond issuing, councils could work in partnership with the private sector in a “virtuous circle”, with investment boosting growth and job creation.
The LGA is calling for tax regulations that have the effect of discouraging foreign investors taking up municipal bonds to be scrapped, and for the Government to work with local governments to raise awareness among pension fund trustees of the opportunities for “prudent triple-A infrastructure investments”.
The idea recognises that here in the UK, a highly centralised system of government means that local authorities are effectively barred from raising new funding directly from the market. In contrast, the practice is common in the United States. The idea is that financial institutions would buy bonds from the city council and earn interest, and the council would then be able to use the money, for up to 20 years, before repaying the bond.
As I’ve argued before, local authorities in England and Wales often have better credit ratings than many European governments. A reactivated municipal bond market with councils offering AAA-rated bonds could make an attractive offer to investors seeking a secure home for their capital, especially given continued uncertainty in the eurozone. Meanwhile, the funds raised could help plug the gap in council infrastructure budgets which have seen grants from government cut almost in half.
But it could go further than that. Why not actually change the rules so that local authority pension funds, for example, are required to invest a small percentage of their funds in such local authority bonds?
Local authority pension funds alone had assets valued at £161 billion in 2010 (with Midlands’ funds totaling some £24 billion). If they had to shift over just one per cent of the value of their funds each year over the next five years into such bonds then that could raise some £8 billion for local economic development.