The power to borrow

I’ve emphasised the importance of the power to borrow, and I’m going to take the opportunity here to explain that further now.    One of the immediate reactions I’ve heard when I make the argument is that the last Scotland Act (2012) increases borrowing powers.  Not quite.  According to the government website,

Under the powers enabled by the Scotland Act 2012, from 2015-16 the Scottish Government will be able to borrow up to an overall limit of £2.2 billion for capital spending by way of loan from either the National Loans Fund (part of the UK Government) or from commercial banks. By borrowing through the National Loans Fund, Scottish Ministers will have access to what is likely to be the most competitive form of finance available, benefitting from the UK’s low borrowing costs.

That says two things.  First, the borrowing is allowed only on terms that mean the Scottish Government really must  borrow it from the Treasury.  Second, it’s capped, and capped tightly.  £2.2 billion may sound a lot, but  the estimated cost of upgrading the A9 from Perth to Inverness is £3bn. This is not, then sanction  to undertake the kind of major works that Scotland needs, for example in transport, energy, housing and urban development.

Long ago, local authorities in the UK raised money by issuing bonds, which were sold to a variety of purchasers at a fixed rate of interest.   This is how they built roads, housing, water supplies, energy companies and much else .  Central government gradually restricted that power, requiring ‘loan sanction’, then imposing caps on total expenditure, and finally stopping it happening almost completely.  The reason for imposing those controls was initially a desire to control borrowing in the economy overall, then a desire to limit the “Public Sector Borrowing Requirement” (a term which wasn’t in use when I started studying economics), and at the end a desire to limit total public expenditure.  This progression makes no sense.  If the aim is to limit overall borrowing in an economy, it’s essential to limit private sector borrowing (as we used to).  Once you can’t do that, limiting nothing but public sector borrowing – and even permitting activity as long as it’s kept off the public sector books – stops being about economics.  It’s about politics – rolling back the frontiers of the state – and there is no good justification for it.

There are two main arguments for local borrowing.  One is that, so long as it is used for capital  projects rather than to support current spending,  it stimulates local economies, directly and immediately.  Second, it makes it possible to spread the cost so that people who get future benefits meet a proportion of the costs as they arise.  Allowing public authorities to issue bonds is the standard way of raising cash on these terms, and that is what should be permitted.

Update, 3rd February 2015:  According to the Financial Times, 48 local authorities in England have now formed  a municipal debt agency to issue bonds, expected to raise £2bn-£3bn every year.  It’s not clear from the report whether or to what extent the Treasury has subjected this to limits.

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