Government tries to calm fears over borrowing
Danny Alexander, chief secretary to the Treasury, has moved to allay fears that councils will be slaves to the money markets when they borrow to meet the extra debt burden forced on them through self financing reforms.
Under the changes, local authorities will be able to borrow money from the Public Works Loans Board at a special one-off low rate to help pay off additional HRA debt, but a recent move that means councils can only apply to the PWLB on one day next March has led to uncertainty over the price of debt.
Introducing the Local Government Association’s annual housing finance conference, David Parson, chair of the LGA’s environment and housing board, warned that the one-day window could significantly add to the cost of borrowing.
‘We know that this is a concern,’ said Mr Parsons. ‘Councils will be at the mercy of the volatility of the markets on that one day, which seems a bit crass.’
Under self-financing, councils will take on around £29 billion of historic debt related to housing stock in exchange for the ability to retain rent income.
Last year, the price of PWLB borrowing was raised from 0.2 per cent over gilts – the rate of government borrowing – to 1 per cent. The Treasury has since allowed councils to borrow at the previous lower rate on a one-off basis to service HRA debt.
But instead of being allowed to tap the PWLB for loans at any point up to the introduction of self financing next April, the government has now said that councils have to take loans out on 28 March, meaning that fluctuations in the underlying gilt rates could adversely affect the overall cost of borrowing.
‘I don’t think the kind of risk that has been described,’ said Mr Alexander, responding to a delegate question on the subject. ‘The government stance is about keeping the gilt yield low.’
Mr Alexander also responder to concerns about the borrowing cap being imposed on councils as part of the HRA reform.
‘Most local authorities know they cannot keep borrowing beyond their means,’ he added. ‘There was always going to be a reckoning and that time is now.’