David Green: Treasurers face a ‘future quite different from the past’

The summer is nearly over. David Green writes that treasurers can look forward to a conclusion on the PWLB consultation, government action on commerical investments, the impact of negative interest rates and virtual Christmas parties.

For me, summer holidays are always a time to take stock and look forward to the months leading up to Christmas. What did I see when scanning the treasury management horizon from my deckchair this year?

Most eagerly awaited is the outcome of HM Treasury’s consultation on PWLB future lending arrangements. How big will the discount be for “nice” borrowers? Will they still act as lender of last resort to “naughty” local authorities, and at what interest rate? Will there be an early Christmas present, or must we wait until April for the new regime to start? And will they allow loans to be novated or transferred between local authorities, saving money both for borrowers and repayers?

MHCLG’s response to the House of Commons public accounts committee report on commercial investments could also be pretty fundamental to the way we all work. CIPFA has already committed to a full review of the Prudential Code, and has requested that its recommendations are made legally binding. The committee also suggested putting minimum revenue provision (MRP) back onto a statutory basis, which could impact heavily on some authorities with novel MRP policies.

Code

The annual consultation on the CIPFA/LASAAC Accounting Code of Practice is due shortly, and for 2021–22 we’ll be looking forward to the adoption of the new IFRS 16 accounting standard for leases and PFI schemes. Or maybe we’ll have another delay when CIPFA/LASAAC and central government’s Financial Reporting Advisory Board (FRAB) put it off for the third time.

I’m not expecting the Bank of England to announce a negative base rate just yet; I think we will have to wait a little longer for that excitement. But the accounting and psychological challenges of negative interest rates may come sooner as market rates continue to fall below the official 0.10% level.

At least property funds never pay out negative income. Dividends have held up so far, but the cash distributed to investors recently will have been collected by the fund in March before the lockdown. Commercial property tenants tend to pay rent quarterly in advance, but funds tend to pay dividends quarterly in arrears. Many equity funds operate similarly. So, we have a keen eye on how dividend income from pooled funds will reflect coronavirus-related corporate cash flow problems.

Benefits

Wider issues in local authority finance may also impact on treasury management. This is the first recession where local authorities bear the cost of council tax benefit, which will no doubt rise sharply. Cash flow forecasts will also be greatly affected by government decisions on how and when to cover authorities’ lost income—grants and capitalisation directions have the same impact on the revenue account but cause much different cash flows. And of course we have the recovery and devolution white paper to come in the autumn, which could throw everything up in the air.

Having been stuck at home for five months, I’m also looking forward to returning to the office at some point and meeting colleagues in person. But video conferencing is working well enough that I’m moving to the Suffolk countryside and not expecting to ever again be in London five days a week.

We would normally soon start planning the culmination of the autumn term—the work Christmas party. But I can see the 2020 event being pared back to a few drinks and party poppers on the video software.

So, big changes are afoot, for borrowing, regulation, accounting, investment income and working practices. In so many ways, the future will be quite different from the past.

David Green is Strategic Director at Arlingclose.

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