Borrowing to rise with control of business rates

The new devolved business rates regime could lead to an increase in council borrowing, according to sector experts.

The comments came as ratings agency Standard & Poors estimated that outstanding local authority debt rose by 1.2% from £85.3bn to £86.3bn at the end of 2015.

The agency also predicted that the sector’s total debt will rise by 2% annually in 2016 and 2017.

The S&P briefing said: “We anticipate bond issuance will continue to be driven up by the Greater London Authority (GLA) and Transport for London (TfL), and most likely, also by limited issuance by other local authorities.”

It said that last year’s increase in debt was attributable to a £400m “green bond” issued by TfL in May to finance local infrastructure, GLA borrowing for the Northern Line extension, as well as borrowing from the Public Works Loan Board.

Paul Dossett, partner and head of local government at accountancy firm Grant Thornton, said that future borrowing by councils could be fuelled by fully devolved business rates.

He questioned whether the new regime would create significant additional revenues for local authorities to spend.

“I am not convinced extra business rates will limit the need or desire for borrowing and, in fact, the infrastructure and growth focus of devolution will probably increase the level of local government borrowing of which the Municipal Bonds Agency may start to form an important part.

“Another question might be, given the reduced capital funding in health and increased partnership working between the two sectors, might we see increased LG borrowing to support that capital expenditure?

“It is probably a bit too early to tell and very small in scale at the moment.”

David Green, client director at treasury adviser Arlingclose, said: “Increased business rates income is more likely to lead to increased borrowing, since it makes the loan repayments more affordable.

“In simple terms, borrowing allows infrastructure to be provided today, but paid for with future income.”

S&P added that it is assuming the bond agency will issue its maiden bond this year and tap capital markets in 2017.

“We note that for some local authorities–cities with directly elected mayors–additional revenues from fully devolved business rates could limit the need of external funding to cover capital expenditure in the future,” it said.