Devolution of business rates could see LA debt soar

Full devolution of business rates to local authorities could see council debt levels soar as they borrow to invest in business development.

According to influential credit rating agency Moody’s, its initial analysis of the impact of the Osborne’s plan to devolve full business rate growth to local authorities by 2020 would see council credit ratings “decoupled” from the sovereign rating of the UK.

To put this into a context; local government spending cuts, the ability of authorities to retain rates and to cut them from current levels, should be seen a positive. However, Moody’s also believe it is likely to “fragment” the creditworthiness of local government.

Moody’s actually highlighted Warrington Borough Council, which recently issued a £150m bond for a town centre regeneration project.

“For Warrington, much of the development risk is related to potential mismatches between debt liability and lagged revenue benefits,” said Danny Escobar, associate analyst at Moody’s Public Sector Europe.

“This highlights the duration of the project, which is not expected to generate revenue positive cash flows until 2025; the programme is expected to raise Warrington’s debt well over 100% of revenues, from 27.5% in fiscal year 2014 [2014/15]. Nonetheless, we expect other local authorities to follow suit.”

It looks increasingly like the transfer of powers over business rates to the local authorities, signals a move towards localisation of revenues – and don’t forget we are probably have one of the most centralised systems in Europe. It may give local authorities greater financial autonomy but the danger is that is makes their credit profile more dependent on their own characteristics rather than on their links to the sovereign – a riskier proposition all round.

We may well see some local authorities with strong potential to grow businesses benefitting while those unable to grab that business growth seeing a comparative disadvantage pretty quickly. Among the areas it already provides ratings for, Moody’s has projected that councils like Guilford Borough Council, currently given the second top rating of AA1, would benefit from the change, whilst areas such Cornwall County Council (also AA1) and Lancashire County Council (AA2) would be negatively affected.

Local authorities are likely to borrow more to support business growth, which would lead to higher revenues but these are very uncertain and can be costly.

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