London Mayor Sadiq Khan aims to extend the Bakerloo line through a local government borrowing spree, potentially raising an extra £10bn in debt. The UK has a history of infrastructure funding via local borrowing, but funding has been centralized in recent decades. Khan believes Andy Burnham's plans for "fiscal devolution" - allowing regional governments to keep more local tax revenue - could revive this model.
This approach could increase investment without alarming gilt investors if managed carefully. One proposal involves tweaking rules for development corporations, which manage large projects like new towns. In the Netherlands and Germany, borrowing against future land value uplift does not count toward public sector debt targets.
In the UK, where this method financed Milton Keynes in the 1960s, it does count. Aligning with peers would allow corporations to borrow more without imperiling fiscal targets. Major gilt investors, Legal & General and Aviva, have encouraged such changes, suggesting markets would not be alarmed.
An even more impactful change would be developing a full-fledged municipal bond market, the local version of the $4.5tn US muni market. Decentralization does not allow the country to borrow more in aggregate, but it can improve efficiency, allowing local authorities to go directly to investors rather than coming to Westminster with a begging bowl for each project. Lloyds Chief Charlie Nunn says working with mayors is "one of the best ways of getting things done" in the UK.
Lacking US tax incentives, lenders would likely demand a spread over sovereign debt. Public investors can enforce discipline, and a small premium is worthwhile if it speeds up construction or enables new projects. The 2010s municipal bond attempt ended poorly, but fiscal devolution gives future efforts a better chance.
Get it right and Britain could revive the trend of actually getting things built.
Source: Financial Times Markets · Summarized by HeadlinesBriefing