Treasury looks forward to old issues with new challenges

David Green, Arlingclose

David Green scans the treasury landscape for the coming year and finds codes of practice, levelling up, new accounting standards and interest rate rises looming.

Happy New Year to Room 151 readers for 2022, but I suspect it will mostly be more of same old topics for treasury managers, rather than new avenues to explore. The clampdown on borrowing to invest, talk of interest rate rises and changes to lease accounting will all be quite familiar by now.

Codes of practice

CIPFA issued its new Prudential and Treasury Management Codes in December with a soft launch where authorities are encouraged to adopt the principles early, but these are only mandatory as 2023-24 strategies are written this Autumn. Early adoption might include quarterly reporting of prudential indicators, including the new liability benchmark, for those that don’t already.

The codes seek to further reduce opportunities to borrow money and invest the proceeds in property or other capital expenditure. CIPFA has clearly listened to authorities during the two-stage consultation process, and the new codes strike a decent balance between reducing high-risk leveraged investment and inadvertently preventing authorities continuing with normal treasury management activities.

Levelling up

Local authorities in England will be waiting for the levelling up white paper expected to be issued shortly by DLUHC (Department for Levelling Up, Housing and Communities). Rumours are that some of the funding streams will be tied to “voluntary” local government reorganisation, moving from county and district councils to combined and unitary authorities.

Few of us would chose to start from our current disjointed multiple-tier system, but the disruption of reorganisation is huge and inevitable while the benefits are often intangible and only to be realised many years in the future.

DLUHC is also actively reviewing the capital finance framework in England. A consultation on changes to minimum revenue provision (MRP) legislation was published in November to tighten up some loopholes, particularly around investment property.

There is a danger that the new rules could curtail loans and investments in local public services, so DLUHC has a tightrope to walk here to strike the right balance.

We expect further consultations to follow later in the year on the statutory investment guidance and the rules for imposing borrowing caps on high-debt authorities. This highlights a potential conflict between the levelling up white paper agenda on local authorities doing more and the capital finance agenda on them borrowing less. Unless of course Mr Gove can persuade Mr Sunak to turn the capital grant taps on, which seems rather unlikely.

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Rate rises

As has been the case nearly every year since the 2008 financial crisis, markets are pricing in interest rate rises for 2022. Some economists forecast a quarter-point rise in the base rate at every other MPC meeting taking us to 1.25% by December.

Rising inflation will likely mean at least one rise in the first half of the year, but with the Federal Reserve and ECB yet to move into post-pandemic mode, and social distancing restrictions still dampening economic activity, the Bank may feel unable to move at such a pace.

In 12 of the past 15 years, the official Bank rate ended the year lower than markets were forecasting at the start of the year, and I reckon 2022 will be no exception.
Lease accounting.

April 2022 sees the long-anticipated introduction of the IFRS 16 Leases accounting standard in the UK public sector. The start date has been delayed three times already and we are promised no further delays. While this has been a hugely frustrating time for proactive local authorities with advance preparation all but wasted multiple times, it has allowed us to learn some lessons from the private sector’s 2019 implementation.

Don’t underestimate the complexity of the project, the time it will take you and the assistance you’ll need from other departments. You’ll find services have numerous contracts to use assets owned by others but just don’t think of them as leases. And it’s not a one-off project, as the accounting changes every time the payments change or you revise the expected term of the contract.

A software solution is likely to be cost-effective and stress-reducing for anyone with more than a handful of leases, but don’t leave it too late to find one that works for you. And finally, keep your external auditor on side during the implementation; if they’re not happy with your approach you’ll be doing it all over again until they are.

Best wishes to everyone for a healthy and prosperous 2022.

David Green is strategic director at Arlingclose Limited, treasury advisors to UK local authorities.

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