Devolution poses threat to council credit profiles
0The government’s devolution drive could lead to a weakening of councils’ credit profiles, according to ratings agency Moody’s.
In a briefing on last week’s Queen’s Speech, the agency said the government’s accelerated devolution programme would weaken the links between regions and sovereign.
However, it said that more clarity was needed from ministers before it could fully judge the full fiscal implications.
The briefing said: “Devolution will mean the creditworthiness of regional government will become more underpinned by individual credit features rather than the support of central government.
“This, combined with continued austerity, may encourage local authorities to undertake less tried and tested ways of revenue generation and reducing costs, which would change their credit profile.”
It called for the government to be clearer on the extent of any new tax raising powers for devolved nations, whether devolution would be accompanied by changes in how funding is allocated across the UK, and what oversight will be attached to the funding.
Speaking to Room151, Roshana Arasaratnam, vice-president and senior credit officer at Moody’s Public Sector Europe, said: “Clearly the proposals in the Queen’s Speech give local authorities more autonomy. What is not yet clear is whether the level of oversight will remain the same. Broadly it has remained the same so far – the government is still intervening where they think it is necessary but we will be monitoring the situation.”
Arasaratnam added that there were lessons to be learnt from the European experience of devolution.
“We downgraded several Spanish regions after they experienced financial distress during the financial crisis,” she said. “The Spanish government did step in there and put in place a liquidity scheme. However, the more governments devolve, the more difficult it can be to monitor regional governments, and they can be less willing to intervene. We would consider that a weakening of the institutional framework.”
Suresh Patel, director of public services at accountancy firm Mazars, said: “The devolution of budgets and increased control over funding for local authorities comes at the same time as changes to the regime for local public audit including the new ability of authorities to appoint their own auditor.
“These changes are likely to be relevant to the market’s view on the creditworthiness of local authorities.”
And Paul Dossett, head of local government at accountancy firm Grant Thornton, said: “There are a whole series of risks attached to devolution, in addition to the benefits.
“You need to put the right governance structures in place in a viable geographical area. The current governance framework has not just grown up overnight.”
