Ten years on the treasury landscape has been reshaped, writes David Green, as borrowing, investments, interest rates, regulation and accounting rules have all gone through change.
As Room 151 celebrates its tenth anniversary this month, I’m reminded of all that has happened in the world of local authority treasury management over that time.
Total borrowing by English authorities has nearly doubled from £56 to £107bn in a decade. Of that £51bn increase, the council housing self-financing reform in 2012 accounts for £7bn, while property investments are allegedly another £8bn according to the Public Accounts Committee. Of the remainder, £23bn is apparently yet to be spent, with cash investments having doubled from £22 to £45bn, leaving “just” £13bn spent on local public services—a quarter of the cash borrowed. The big picture hides much complexity at individual authorities and across the years.
PWLB has seen most of the increase in borrowing, up £29bn, while money market funds have benefited most from the growth in investments, up nearly £9bn. Lending between local authorities has also increased substantially; too small to have its own category in 2011 it is now a £14bn market. Short-term borrowing from all sources is now 9% of total borrowing, up from just 1% ten years ago.
The main losers have been financial institutions, continuing the trend seen since the 2008-09 crisis. Banks and building society deposits now account for just 29% of local authority investments, compared with 68% a decade ago.
Regulation
That huge increase in borrowing has led to various changes in the regulatory frameworks. From CIPFA we’ve had new Prudential Codes and Treasury Management Codes in 2011 and 2017, as well as a code update and risk management toolkit in 2012, guidance notes in 2013 and 2018, advice on prudential property investment in 2019 and of course detailed consultations on new codes for 2021.
The PWLB itself was abolished as a public body in 2020 and is now just a facility operated on behalf of HM Treasury. Loans have variously been available at 0.1%, 0.6%, 0.8%, 1.0%, 1.8%, 2.0% and 2.2% above the government’s cost of borrowing depending on the latest policy announcement. With rates now changing twice a day for 100 time periods and six types of rate, they have published three million interest rates in ten years, despite having made fewer than 8,000 loans.
There have also been substantial accounting changes, often with much uncertainty over the implementation date. IFRS 13 Fair Values finally took effect in 2015 having previously been announced for 2013 and 2014; IFRS 9 Financial Instruments was adopted on time in 2018; while IFRS 16 Leases has variously been due to start in 2019, 2020, 2021 and 2022.
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Some accounting changes have even been announced months after they took effect—the adaptation on LOBO loans published in May 2018 took effect from April 2017, while new rules on debt restructuring starting in 2018 were announced in March 2019.
By comparison, government has been rather restrained in changes to it guidance over the same period. We’ve had just one new version each of investment and MRP guidance, updated in 2011 in Northern Ireland, 2018 in England and 2019 in Wales; and new guidance on the loans fund in Scotland in 2016. But then we have had 21 sets of capital finance and accounting regulations issued as well.
Rates
By comparison, a few things have remained pretty constant. The Bank of England base rate has changed just five times and remained in the 0.1% to 0.75% range—a far cry from the previous decade with 22 changes and rates ranging from 0.5% to 5.5%. And I think the last ten years have seen a growing realisation that interest rates will remain low in the coming decade too; that bounce back to 5% that many expected in the immediate post crisis years now seems unlikely.
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Local authorities are also realising that it isn’t that easy to spend money faster than you receive it. The austerity driven drop in headcount is one reason behind that. So, if you have lots of cash you can’t spend wisely before the next big government grant comes in, and base rate is going to stay low, then long-term borrowing and short-term investing is unlikely to be the best treasury management strategy.
Government statistics still don’t properly capture investments in property or in pooled funds, so we can’t be sure, but the limited evidence available suggests big growth in these asset classes. Long-term investing to receive income to support local services and allow capital values to keep pace with inflation over the long-term, while accepting some volatility in the short-term, is now the investment strategy of choice for cash-rich authorities, just as it has always been for their pension funds.
David Green is strategic director at Arlingclose Limited.
All my Room 151 articles from the past decade are available on the website here.
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