Cities like London and Manchester need the freedom to manage their income before being allowed to take on debt
If a business wants to invest in new machinery or a new building, it goes to the bank and borrows money. The business then uses future income as a guarantee that it will pay the bank back. However, when UK cities want to invest in the local economy they are much more limited.
That is because UK cities raise very little money themselves: they get an allowance from Whitehall rather than earning a real income. With almost half of the Government’s budget cuts for councils yet to be implemented, this raises a lot of uncertainty for cities’ resources. In addition, cities cannot “earn” more money to invest and grow. Most additional taxes raised from growth accrue to the Treasury.
It is a very similar story for the devolved administrations in Scotland, Wales and Northern Ireland. With one major difference: Scotland recently received the power from HM Treasury to issue bonds.
Bonds allow government to raise money today from investors to pay for projects that will grow their economy. The Government then uses future revenue (i.e. additional taxes collected because of the growth in businesses and workers that has occurred) to pay back the initial money borrowed via the bond plus interest. This only works for Scotland because they have the power to raise additional taxes afforded through the Scotland Act of 2012.
Overall, this is good news for Scotland. It gives them more power to invest in the roads, schools, hospitals and homes that they need to grow their economy. But what does it mean for other places in the UK, particularly cities which represent over 90 per cent of net private sector jobs growth from 2010-2012? Could we see large cities with strong governance arrangements like Greater Manchester and Greater London receive the same powers?
London, Manchester, and the newly forming combined authorities in Leeds, Merseyside, Sheffield and Tyne and Wear are bumping up against the limits of growth. These city regions want to support their economies, but that requires investment in transport, infrastructure, schools and homes. As it stands, they have to ask HM Treasury and Whitehall departments for money for these things. But if, like Scotland, combined authorities had localised taxes and greater borrowing powers, this could empower them to invest in growth the UK needs so much. After all, if Scotland can be trusted with these powers, why cannot cities?
We have to be careful, though. Bonds are not the answer to all cities’ growth challenges, and not every city would likely want to use bonds. Bonds are only useful if they are a competitive means for places to borrow, which may not always be the case. The cost of borrowing for cities would likely be higher, at least at first, compared to borrowing from the Government. City bonds may be more risky because they are responsible for statutory services which they could not cut to pay back debt. In addition, any subnational debt (Scotland or cities) would likely have a lower credit rating or poorer liquidity than UK Gilts.
The real story with “Braveheart Bonds” is not that Scotland can borrow money: Scotland and cities already had the power to borrow. The issue is giving places the ability to manage their income locally to pay back that debt. This is where cities are currently held back. The combined authorities in the UK need to control their income as well as their debt to invest in growth.
I have been working on these issues for some time now, and will soon publish a report sponsored by Capita that looks at why local government needs to work together to invest in growth. In it, I will explain why combined authorities in particular are well suited to take on additional powers that put them in the driver’s seat for growth in their area. If you would like to learn more, please contact me on z.wilcox@centreforcities.org.
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