Local Borrowing
By NICHOLAS DAVENPORT
IT is pathetic that we have never tried to do our social
investment (public housing, schools, hospitals, etc.) at a separate and lower rate of interest. In constantly cam- paigning against our regime of excessively dear money (in- variably the mark of national
egregious folly. Not only has the inordinately steep rise in rents and mortgage rates added to the workers' claims for higher wages—and there- fore to the inflationary pressures—but it has turned the middle-class voter against the Con- servative Government• and made him ready to vote in by-elections for any cranky candidate. De-restriction of rents apart, I would say that Conservative dear money alone has added from 30s. to 40s. a week to the cost of working- or middle-class living. A simple building control or licensing system would have made such a sharp rise in interest rates unnecessary, but even with- out it there is no doubt that if local authority finance had been handled more sensibly some part of the rise could have been avoided. I am happy to find that the authorities are at last coming round to this point of view.
An official committee has been sitting and after discussions between the Treasury and local council representatives an agreement has been reached, according to the Economist, on three vital points: first, that the Public Works Loan Board should be re-opened to all local borrowers without restriction (as the Radcliffe Committee recommended); second, that PWLB rates should be exactly in line with government rates in the gilt-edged market; third, that temporary borrow- ings should be legally restricted to 15 per cent. of the total debt as in Scotland. The obnoxious 1955 rule that local authorities could not borrow from the PWLB unless they had tried, and failed, in the open market to raise money on reasonable terms has had two bad effects: local borrowing has become I per cent. to i per cent. more ex- pensive than Treasury borrowing and a vast amount of short-term debt has been piled up because Treasurers have been hoping that the silly rule would be reversed and that they would be able to borrow more cheaply on medium term later on.
In 1955 the percentage of local debt due for repayment in one year or less was only 5.8 per cent. By 1958 it had risen to 11.6 per cent. and by March, 1961, to no less than 21.4 per cent. The Radcliffe Committee called attention to this dangerous trend and said that this unfunding of local debt was 'clean contrary' to the funding policy of the monetary authorities. But the Treasury were obsessed with the idea of control- ing and restricting bank liquidity; they were fearful that, if they allowed the local councils unrestricted access to the PWLB, the Board's drawings on the Exchequer would result in awkward moments in the issue of more and more Treasury bills. What has changed the Treasury's view is that the gilt-edged market is now running into a boom and can easily absorb the issue of a medium-to-long loan from the PWLB. In
fact, if another issue with a twenty- to twenty-five- year maturity is not made very soon the fall in the long-term rate of interest may become too sharp for the Treasury's liking. Already war Loan has risen six points and the long-term rate has fallen from 6.35 per cent. to 5.8 per cent. since June. If the Treasury were to revive 3 per cent. Local Loans it would now have to issue it at 60 with a date, say, 1987-97 in order to provide some compensation for those poor patriotic fools who subscribed at par to 21 per cent. Daltons in October, 1946, and saw their stock fall to 351 by August, 1961. An issue of £200 million of a new Local Loans would enable the local authorities to bring down their short-term debt (now about £1,300 million) to around 16 per cent. of their total debt (now £6,840 million). Now the 1955 rule, denying free access to the PWLB, had one effect which the Treasury did not foresee at the time. The existing small market in mortgages on local rates developed into a huge and efficient money market competing Witt! Lombard Street. By offering higher rates of interest than Lombard Street with equal or even better security it attracted funds not only front the local residents but from the financial com- munity in London (mainly through two or three specialist brokerage firms) and from the foreign lenders of so-called 'hot money.' Its daily turn- over is now over £10 million—perhaps a fifth of the turnover of Lombard Street. For short- term money the Treasurers were able under the 1933 Act to issue Deposit Receipts without de- partmental sanction. These Deposit Receipts were not secured on the rates unless they were for more than one year and were not eligible for re-dts count at banks (that is, they were not good but being in anticipation of local revenues or a loan creation, and with the PWLB standurig, behind them, they were regarded as `gilt-edged and as they could be turned into cash on short notice they were held to be next to a bill and wit.la a higher rate of interest to compensate for their technical illiquidity. At the peak of the iritereyt bill seven-day money touched 71 per cent. to per cent. and three-months 7f per cent. to 72 1;`! cent. They are now down to 41 per cent. and 4tot per cent, respectively. So 'hot money' poured the mortgage market. In the first quarter of 19e4f net local borrowing increased by £202 million' of which £132 million was short-term. Half of this short-term money must have been 'hot mope', from abroad, for the merchant banks and 0,veolt seas banks lent £86 million. How much hot money' is invested in the total mortgage market is unknown but it must be over £250 t The suggestion has therefore been made tua,
n°
the Treasury will be unwilling to issue a local. funding loan because it will drive 'hot Mo
of
home and put sterling in jeopardy at a tint-his seasonal strain. I do not admit the force of,t, this seasonal If a funding loan is issued it winha because the gilt-edged market is strong and t
in itself will be sufficient to keep a good deal of foreign money employed in London. Besides, who worries about the seasonal strain on sterling when the dollar is under suspicion?
So I hope that when Mr. Maudling returns 'vont his holiday the first departmental business he Will do is to approve the terms of the sensible agreement on local borrowing worked out by this eesturnittee with the tough council men. If the rate of interest is not only to come down but to stay down (at, say, 51 per cent. for the time) it 15 essential for the local authorities to be put °aek under the PWLB umbrella.
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