• Home
  • About
  • Subscribe
  • LATIF
  • Conferences
  • Dashboard
  • Edit My Profile
  • Log In
  • Logout
  • Register
  • Edit this post

Room 151

  • 151 BRIEF

    What's New?

  • EAPF criticised for water company investments

    August 10, 2022

  • Welsh pension fund confirms £50m investment in clean energy

    August 10, 2022

  • Inflation ‘disastrous’ for local services, warns LGA

    August 10, 2022

  • Consultation opens into care charging reforms

    August 9, 2022

  • ADASS survey: ‘worst fears confirmed for adult social care’

    August 5, 2022

  • GMCA to unlock funds for home energy-efficiency upgrades

    August 4, 2022

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews
  • Briefs

Expert Panel: Deflation question

0
  • by Editor
  • in Treasury
  • — 16 Feb, 2015

The Bank of England has revealed it expects inflation to become deflation later this year. Some commentators have warned of the dangers while others have suggested a short-lived dose of deflation will be good for the country. In December UK inflation was reported at 0.5%. That is expected to drop again when January figures are reported.
Room151 commentators* offer their view of UK deflation for local government.

Mark Carney, governor of the Bank of England

Mark Carney, governor of the Bank of England


Frank Wilson

I’m not too sure what all the fuss is about. For councils with reserves low inflation means reduced investment returns but then low cost inflation should offset this loss.

Multi-year pay freezes when inflation was running at around 3% had a severe effect on real local government pay, and this is now starting to bring its own problems with recruitment and retention issues in some services.

Should inflation stay around the 1% mark then further pay restraint should avoid leading to a further deterioration in real pay. I think I would be more concerned if inflation was running at 4% again as there would be no way a government would allow public sector pay to keep pace.

In revenue generation terms can cuts in real council tax income be reversed? I think that more likely in a low inflation environment than high inflation environment. For those levying a 2% rise this year then at least it is a real terms increase.


Trevor Casteldine
Long-term low inflation means a degree of predictability of costs, meaning that hopefully budgeting will be more stable. However, when overall budgets stay constant, reallocation of priorities are hard to hide.

Choosing between the different demands on the treasurer’s funds will have to be explicit and well-explained. More bravery will be needed by all involved. Another problem with long-term low inflation is that it is likely to mean low long-term interest rates, so the 2016 actuarial valuation of pension liabilities will be shocking.

That could impact amounts needed to be collected from admitted bodies significantly, possibly catastrophically. And a low-inflation-low growth environment could mean that unless managed imaginatively, pension fund assets won’t be able to grow themselves out of the problem.


Stephen Fitzgerald
The debate on economics tends to be cast in a negative light. The good thing about low inflation for local government is that baseline cost increases for goods and services are constrained.

In an environment where central government contributions to local government are falling and council taxes are all

but frozen, an inflationary situation could prove crippling. However, every day of the year local authorities have large amounts of money held in cash deposits.

With low inflation and low interest rates, risk-free rates of return are low, which is making it difficult for treasury managers to achieve significant income from liquid cash. Linked to understandable risk aversion, following the cataclysmic Icelandic banking collapse and the fall in the rating of many financial institutions, local authorities have limited scope for the placing of deposits.

The challenge is for innovative treasury managers to seek better returns. Money market funds can present a viable alternative to cash deposits as do bonds. But it is important to know the risks thoroughly. Expert advice is an essential investment.

*Frank Wilson is strategic director for resources at West Oxfordshire District Council and Cotswold District Council.

Trevor Castledine is head of investment at Lancashire County Pension Fund, one of the largest of its kind in the UK.

Stephen Fitzgerald is a management and financial consultant working in the local authority sector.

Share

You may also like...

  • Guarded welcome to Prudential Code revisions 28th Jan, 2022
  • Room151 teams up with Arlingclose to explore Prudential and Treasury Codes in webcast special 27th Sep, 2021
  • 151 officers must remain at the top table 22nd Jun, 2021
  • Treasurers back multi-asset funds and property but pessimistic about yields 28th Jan, 2021

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • 151 BRIEFS – WHAT’s NEW?

    • Inflation ‘disastrous’ for local services, warns LGA
    • Consultation opens into care charging reforms
    • ADASS survey: ‘worst fears confirmed for adult social care’
    • GMCA to unlock funds for home energy-efficiency upgrades
    • Levelling up committee calls for urgent boost to social care funding
  • Room151’s LGPS Roundtables

    Biodiversity
    Valuations & Risk
    LGPS Women

  • Room151’s LGPS Roundtables

    Biodiversity
    LGPS Women
    Valuations & Risk
  • Latest tweets

    Room151 5 hours ago

    LATIF/FDs’ Summit ‘on course to be biggest yet’: Room151’s flagship event – the Local Authority Treasurers Investment Forum (LATIF) and FDs’ Summit – is on course to be the biggest yet, with more than 200 delegates expected. Combining[...] dlvr.it/SWSDrL pic.twitter.com/f8FXzcAdWB

    Room151 8 hours ago

    ‘Local government treated worse than any other part of public sector’: Clive Betts, chair of the Levelling Up, Housing and Communities Committee, talks to Mike Thatcher about lack of progress on levelling up, pork-barrel politics and why local government… dlvr.it/SWRk1L pic.twitter.com/Jpw0BsOsy3

    Room151 1 day ago

    Which LGPS pools and funds are attending the LGPS Investment Forum on Nov 2 & the LGPS Private Markets Forum on Nov 1st? Answer here: lnkd.in/eDHU8tuy pic.twitter.com/D3gd63Rh7F

    Room151 2 days ago

    LGPS and levelling up: nothing to fear but fear itself: There have been a number of objections to government plans for LGPS funds to invest 5% of their assets in local projects. But George Graham says these objections can be[...] dlvr.it/SWL7vt pic.twitter.com/ebwBEkZTy4

    Room151 2 days ago

    George Graham @SYpensions @bordertocoast channels his inner FDR in a call for local government pension funds to avoid the fear factor and embrace levelling up #LGPS #localgov room151.co.uk/local-governme…

    Room151 3 days ago

    Changes to rules on capital receipts raise wider questions: Stephen Kitching argues that DLUHC’s latest rule changes are part of a series following on from revisions to MRP guidance and the purchase of commercial property. He questions whether… dlvr.it/SWGqKC pic.twitter.com/Ycr5hWZDPk

    Room151 6 days ago

    ‘No ifs, no buts’: the Bank of England continues its battle with inflation: Partner Content: CCLA Investment Management’s Robert Evans discusses the MPC’s 0.5% increase in the Official Bank Rate and its ongoing commitment to the 2% inflation target… dlvr.it/SW7SNC pic.twitter.com/ryOzYRSNA9

    Room151 1 week ago

    DLUHC changes rules on flexible use of capital receipts: The levelling up secretary has written to all council leaders to amend the rules concerning the flexible use of capital receipts to fund transformation projects. In his letter, Greg Clark[...] dlvr.it/SW3jyX pic.twitter.com/KEhSSaMITl

    Room151 1 week ago

    Local audit and financial reporting: let’s take back control: Mazars’ Suresh Patel suggests three steps that auditors and council finance teams should take to help get financial reporting and local audit back on track. Following my recent appearance… dlvr.it/SW0PfV pic.twitter.com/miL7pjukce

    Room151 1 week ago

    The case for residential investment: income, impact and resilience: Partner Content: Emma Gullifer from Columbia Threadneedle discusses the options for pension funds looking to invest in residential property including the Build-to-Rent market.… dlvr.it/SVzKwN pic.twitter.com/hdgZ4zKt4H

  • Register to become a Room151 user

  • Previous story News Roundup: Scrutiny committees, Outsourcing values grow, Durham resolves £244m housing debt…
  • Next story Q&A: Amundi’s James Kwok on currency risk

© Copyright 2022 Room 151. Typegrid Theme by WPBandit.

0 shares