Mike Hedges says the Welsh Government urgently needs devolution of borrowing powers
When it comes to capital expenditure, Wales is treated by the Treasury as just another Westminster department. The smallest local authorities in Wales can borrow prudentially, be they Merthyr, Blaenau Gwent, Conwy or Ynys Môn. Their limits are set locally, as long as it is agreed that it is acceptable by the local council’s finance officer and stays within the borrowing protocol. It is based on an ability to repay over a period of time, normally 30 years. It is a decision taken by the council locally, based on its financial position. This replaces the old supplementary credit approvals that local authorities used to have and allows for local decisions based on the financial position of the council and priorities set by the local councillors.
The Welsh Government however, cannot borrow directly. There is some residual ability arising from when the Welsh Development Agency was merged with the Welsh Government, but which the Treasury has currently determined should not provide any net benefit. If the Welsh Government were to borrow using the former WDA’s powers, the block grant would be cut by exactly the same amount. This is a nonsensical position for the Welsh Government to be in.
The Welsh Government should have at least the same powers as local authorities and other devolved nations to borrow – that is, the ability to undertake prudential borrowing. An ICM poll for the Silk Commission released in March revealed that 66 peer cent of people were in favour of borrowing powers for the Welsh Government. So, the message has got through, and the informed response is that we need those powers and we need them as soon as possible.
We need the power to borrow for the same reason as local authorities do, to meet the needs of our area, Wales, and to improve our infrastructure by the building of roads, schools and hospitals. This lack of borrowing powers has become a major issue following the 40 per cent plus cut in the Welsh Government’s capital grant by Westminster. With such a severe reduction, there is an urgent need to acquire borrowing powers for the benefit of the people of Wales and the development of the Welsh infrastructure.
The principle is clear: the devolution of a mechanism such as borrowing powers would benefit Wales by enhancing budgetary flexibility. If it could be devolved in a way that strengthens the effectiveness of devolution, then it should be devolved. I support maximum budgetary flexibility for Welsh Ministers, consistent with a strong, well-functioning and developing devolution settlement. It is about devolving powers that will provide us with the financial levers we need to deliver our priorities for the benefit of the Welsh economy and our communities.
We have to accept that we would need to operate those borrowing powers within a prudent framework that is consistent with the UK Government’s legitimate interest in macro-economic stability. However, at a time when our capital budget is being cut by over 40 per cent in real terms, borrowing powers are especially needed to spend on capital projects.
We all know that borrowed funds have to be repaid. It is not free money but it would give the Welsh Government flexibility and would also allow major capital works to be undertaken, which would lead to the creation of new jobs. There has never been a better time to borrow with low interest rates and a high level of funding available for organisations that are operating successfully.
One question that arises is from whom should we borrow? The Public Works Loan Board (PWLB) would be the easiest source. It is used by councils as the lender of first choice and it has a fixed rate and a fixed duration for its loans. Of the other options, there are no legal constraints on local authorities raising bonds. However, it has not been encouraged by the UK Government since the 1980s and I have a feeling that it would not encourage the Welsh Government to do so either.
Nevertheless, an important precedent was set when the Treasury authorised Transport for London, itself a local authority in legal terms, to issue £600 million-worth of bonds as part of its borrowing to improve transport infrastructure in the capital. These bonds were snapped up by big investors. Negotiable yearling bonds can also be issued. The danger with issuing bonds is that they are usually used for a much shorter period than the borrowing needs and, as we have discovered, a bond market can be awfully volatile. Entering at this time with no record of repayment could and probably would give rise to very high rates.
While banks are a theoretical option, they would be expensive and subject to the fluctuations of interest rates and, again, no background of paying back might well cause problems. The European Investment Bank may finance a maximum of 50 per cent of the total cost of any project. Individual loans are available to promoters in both the public and private sectors, including banks. However, we would need to ensure that the borrowing and the repayment terms were set in pounds. We would not want to engage in some form of currency speculation of the pound against the euro, which could end up with us paying substantially more back than we intended and needing another means of borrowing to use as capital support. A further option would be for the Welsh Government to borrow from other public bodies. For example, Swansea Council has around £88 million invested, including loans to other authorities.
To judge the merits of each, we have to guauge the cost of borrowing. If we were allowed access to the Public Works Loan Board, it would give us certainty about how much we would have to pay back over any period of time and it has been found to be the cheapest way of doing it. That is what I would urge, for us to try to get access to that, as it has traditionally been the cheapest way of doing it.
Bonds always remind me of Greece and how the bond market can react and do tremendous damage to anyone who is in it. It is easy to borrow bonds at 4 per cent, but when they hit 10 per cent, all of a sudden, you are in huge financial trouble. Local authorities and the European Investment Bank need further investigation, and other means should also be investigated.
So how much is the cost of borrowing? It needs to be affordable; that is prudential borrowing. It will not solve all our capital problems, which have been caused by the substantial cutback that is taking place. However, I believe that it is a tool that should be made available to the Minister for Finance in the Welsh Government.
If I, when I was previously chair of finance and then Leader of Swansea Council, had the ability to engage in prudential borrowing, then it is ridiculous that the Welsh Government’s Minister for Finance does not have exactly the same powers. However, to quote a former Chancellor of the Exchequer, prudence is needed in borrowing. What is borrowed must be paid back. It will not solve all our problems.
Agreement has recently been reached between the UK and Scottish Governments for Scotland to borrow £2.7 billion starting in 2015, and of this £2.2 billion has been designated for capital projects. Northern Ireland has the power to borrow within defined limits. Such powers will urgently need to be devolved to Wales, and the sooner the better.