How to Cheapen Local Loans
By NICHOLAS DAVENPORT
AFTER all this political drama it is pleasant to 'get back to a dull financial subject—local authority borrowing. At the Lord Mayor's feast for the City bankers and merchants last week, Mr. Maudling gave a preview of the White Paper, which, after pro- tracted debate, is to be pub- lished in a few weeks' time. As usual, it is a compromise -between the opposing views. It is proposed that temporary borrowing up to three months' loans should be limited to 15 per cent of a council's outstanding debt—as it is already in Scotland—and that temporary borrowing up to one year should be limited to 20 per cent. Local authorities are to have four years' grace in which to get down to these limits. At long last it is also proposed to give them all wider access to the Public Works Loan Board (as the Radcliffe Committee recommended), which is at present restricted to those unable to borrow in the market. In the first year in which the new arrangement operates all will be able to get 20 per cent of their long-term borrowing needs from the Board at Government rates; in the next year 30 per cent, and so on until a maxi- mum of 50 per cent is reached in the fourth year. On this basis Mr. Maudling estimated that the -Exchequer would have to find an additional £200 million in the first year and ultimately an extra £500 million a year. It. looks as if this Government, in the last few 'months of its life, is really turning over a new leaf—as. perhaps a condemned man should.
When. the Conservatives, on regaining power in 1951, decided to submit the country to the single discipline of dear money and credit squeezes because they did not want to apply direct controls, the stupidest thing they did was to apply that discipline without modification to the one body over which they already had direct control—the local authorities. This meant that local council housing would 'be saddled with rising costs through dearer money, that higher rents would inflate the cost of living and speed the claims for higher wages and that the whole social investment of the country would be much more expensive than it need be. The absurdity of this policy was shown up when Mr. Butler• eight years ago, as Chancellor, denied the local authorities automatic right of access to the Public Works Loan Board. The local treasurers were then forced into the mortgage market and in order to ease the burden of their rising in- terest bill they hzgan to make fuller use of the lower rate; charged for three to twelve months' skspLisits secured. on the rates. \\ hich were usu.,ll∎ a little ovei the Treasury bill rate. The sa%Ing was about 2 per cent over long-term borrov,ing. but trouble used to arise when there was a sterling crisis and Bank rate was raised to 7 per cent. 1 hen they had to pay over 61 per cent for these temporary loans. 'Hot' money poured in from abroad to take advantage of these high rates, with the ridiculous result that
the Treasury was in effect buying foreign sup- port for sterling and making the local councils foot the bill. With the fall in Bank rate to 4
per cent-'-:- the Treasury bill rate is now E3 I4s. 2d. per cent these temporary local loans have in- creased and at the end of June were no less than £1,300 million--nearly 25 per cent of the
councils' total debt. (In the case of the larger authorities this average is nearer 30 per cent.) And 62 per cent of this £1,300 million short- term debt is in the form of seven-day loans,
There is no doubt that a local authority should exercise some restraint in borrowing short to invest long and the White Paper proposal for a limit of 20 per cent for up to twelve months' loans is a reasonable compromise. The gradual open- ing of access to the Public Works Loan Board paves the way for the further reform of local authority borrowing which Mr. Harold Wilson intends to make if he assumes office after the election. The suggestion has been made by Lord Longford at a recent conference on the gilt- edged market organised by a Stock Exchange firm that Labour favours a two-tier system of interest rates---the market rate for ordinary com- mercial borrowers and a lower rate for specially protected borrowers like the local authorities and the Agricultural Mortgage Corporation. This is an idea which has been aired in these columns and referred to by Mr. Wilson in a speech or two, but there is nothing on record to show that it is yet official Labour policy. A lot of objec- tion has been raised to disguised housing sub- sidies and there would be some difficulty in the Public Works Loan Board operating a different rate of interest structure from the market. But most sensible Governments find ways and means of getting their public housing done at `cheap' rates of interest and I am sure that Mr. Wilson will not be left out in the cold.
The first' thing he will surely attempt to do is to bring down the market rate of interest gener- ally. That can be done by increasing the supply of bank money--which has never kept pace 'with the rise in the national income under the Con- servative r6gime --and by judicious operations in the gilt-edged market. There is nothing un- reasonable in such manoeuvres. The possibility of a 41 per cent long-term rate has been sug- gested by the NEDC for 1966. It could be reached much earlier if the Treasury would only give up its 'antiquated idea that the domestic rate of interest is an equilibrium rate which must be left to the market. Provided the Govern- ment plans and controls the savings-investment equation, as it should and could, the rate of interest is simply what the Government chooses to maintain. The next step, having brought down the `market' long-term rate of interest, is for the Treasury to lend direct to the local authori- ties for public housing and at the rate which it pays for short-term money, that is, on Treasury bills. This might then be done at, say, 3 per cent. This was the rate. I remember, at which the new towns borrowed direct from the Treasury when Dalton was Minister of Housing in 1948. (The rate went up temporarily to 7 per cent in 1957 and 1961, which was equivalent to increasing the rent of a 0,00( house by about 50s. a week !) This would involve no hidden subsidy. It would simply mean letting the local authorities have loans at the rate the Treasury have to pay for Nhort - lc rni money. It w ould involve the Treasury setting aside only about £300 million a year (that is, ex-
clusive of funding. if any). As Mr. Maudling told the feasting bankers, every £ the Exchequer
borrows for this purpose will be a £ less borrmked by the local authorities. It would make no difference to the saving.,-investment equation. And how wonderful it would be.to build more houses to let ar lower rents!
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