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T O P S E C R E T
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No....4.3
C . F . ( 5 5 ) 131
20th S e p t e m b e r , 1955
CABINET
C A P I T A L FINANCE FOR L O C A L A U T H O R I T I E S
M e m o r a n d u m b y the C h a n c e l l o r of the E x c h e q u e r
U n d e r the p r e s e n t s y s t e m the l o c a l a u t h o r i t i e s can c h o o s e the s o u r c e
f r o m w h i c h they b o r r o w t o m e e t a p p r o v e d c a p i t a l e x p e n d i t u r e .
T h e r e is no
l i m i t to the amount that t h e y r a i s e f r o m the E x c h e q u e r through the P u b l i c
"Works L o a n B o a r d ( P . W . L . B . ) and the r a t e s a t w h i c h t h e y b o r r o w a r e in
l i n e with G o v e r n m e n t c r e d i t .
2.
I p r o p o s e t o change the s y s t e m in t w o r e s p e c t s
( i )
( i i )
­
t o l i m i t the d e m a n d s on the E x c h e q u e r by a s k i n g the B o a r d t o g r a n t l o a n s o n l y when i t i s s a t i s f i e d that the a p p l i c a n t has m a d e an e f f o r t t o b o r r o w e l s e w h e r e , i . e , in the s t o c k and m o r t a g e m a r k e t s , and cannot r e a s o n a b l y d o s o ; t o p r e s c r i b e r a t e s f o r the P . W . L . B , b a s e d not on G o v e r n m e n t c r e d i t , but on the c r e d i t of l o c a l a u t h o r i t i e s of good standing in the m a r k e t . 3.
T h e p r e s e n t s y s t e m dates f r o m 1945, when the l o c a l a u t h o r i t i e s
w e r e c h a r g e d with a p r o g r a m m e of r e c o n s t r u c t i o n and housing f a r in e x c e s s
of the c a p a c i t y of the stock and m o r t g a g e m a r k e t s .
F o r s e v e n y e a r s the
l o c a l a u t h o r i t i e s w e r e in e f f e c t denied a c c e s s t o the stock m a r k e t .
hi
1952 they w e r e g i v e n back t h e i r f r e e d o m t o g o to the m a r k e t if t h e y w i s h e d .
But the G o v e r n m e n t d i d not t a k e the f u r t h e r step of l i m i t i n g t h e i r a c c e s s
t o the P . W . L . B .
T h e l o c a l a u t h o r i t i e s s t i l l had a b i g p r o g r a m m e of
c o m m i t m e n t s a u t h o r i s e d by the G o v e r n m e n t ,
P a r l i a m e n t w a s told that in
this situation the a u t h o r i t i e s m u s t be g i v e n a c c e s s to a l l the s o u r c e s of
f i n a n c e , and that it w a s not the G o v e r n m e n t s p o l i c y to f o r c e l o c a l a u t h o r i t i e s
into the s t o c k m a r k e t ,
4,
T h e p r e s e n t s y s t e m has t w o d i s a d v a n t a g e s ,
5,
F i r s t , the a u t h o r i t i e s have l o s t the habit of c o n s i d e r i n g b e f o r e
t h e y incur c a p i t a l c o m m i t m e n t s how the m o n e y t o m e e t t h e m w i l l be found ­
s i n c e the t a p i s open f r o m w h i c h they can d r a w the m o n e y when the
commitments mature.
T h e i r s e n s e of f i n a n c i a l r e s p o n s i b i l i t y is a l s o
w e a k e n e d if they b o r r o w at r a t e s which r e f l e c t not t h e i r own c r e d i t but the
c r e d i t of the G o v e r n m e n t ,
7 ^
6.
S e c o n d , the s y s t e m i s unhealthy f o r the E x c h e q u e r .
The deficit
b e l o w the l i n e this y e a r includes £193 m i l l i o n s of c a p i t a l a d v a n c e s t o l o c a l
a u t h o r i t i e s m a d e in s i x months c o m p a r e d with a Budget e s t i m a t e f o r the
w h o l e y e a r of £320 m i l l i o n s .
T h i s d r a i n i s n o t due t o any i n c r e a s e in the
c a p i t a l f o r m a t i o n of l o c a l a u t h o r i t i e s w h i c h i s , in f a c t , tending to f a l l .
It
i s due t o the f a c t t h a t , when i n t e r e s t r a t e s h a v e b e e n r i s i n g , the l o c a l
a u t h o r i t i e s h a v e c h o s e n t o c o n c e n t r a t e t h e i r b o r r o w i n g on the P . W . L . B .
A s a d i r e c t r e s u l t , the E x c h e q u e r has b e e n o b l i g e d t o r a i s e t h e s e l a r g e s u m s
b y i n c r e a s i n g the F l o a t i n g D e b t , and this i n c r e a s e has d i m i n i s h e d the
p r e s s u r e on the l i q u i d i t y of the banks and added t o the d i f f i c u l t i e s of
credit control.
7,
W e n o w h a v e an opportunity t o a d o p t a m o r e h e a l t h y s y s t e m .
L o c a l a u t h o r i t i e s c a p i t a l e x p e n d i t u r e m a y be e x p e c t e d to f a l l in the n e x t
18 months or s o , f o r i t i s p r o b a b l e that the r e d u c t i o n in housing e x p e n d i t u r e
w i l l continue w h i l e , if the l o c a l a u t h o r i t i e s s u c c e e d in c a r r y i n g out the
G o v e r n m e n t s r e q u e s t in the r e s t of t h e i r p r o g r a m m e s , t h e i r o t h e r c a p i t a l
e x p e n d i t u r e w i l l b e no l a r g e r than it w a s l a s t y e a r .
T h i s contraction of
e x p e n d i t u r e p r o v i d e s the opportunity f o r a change in the l o c a l a u t h o r i t i e s
a r r a n g e m e n t s f o r r a i s i n g the c a p i t a l f i n a n c e .
T h e f a c t that t h e i r c a p i t a l
r e q u i r e m e n t s w i l l tend t o f a l l m e a n s t h a t a g r e a t e r p r o p o r t i o n of t h e m can
b e m e t f r o m the s t o c k and m o r t g a g e m a r k e t s .
M o r e o v e r , we are moving
into a situation i n w h i c h the l o c a l a u t h o r i t i e s w i l l h a v e a s o m e w h a t g r e a t e r
d e g r e e of f r e e d o m t o d e c i d e f o r t h e m s e l v e s the s i z e o f t h e i r c a p i t a l
e x p e n d i t u r e s - p a r t i c u l a r l y on housing - and this c a r r i e s with it a g r e a t e r
d e g r e e of i n d e p e n d e n c e and f i n a n c i a l r e s p o n s i b i l i t y f o r the l o c a l a u t h o r i t i e s .
1
1
8.
T h i s d e v e l o p m e n t c a l l s f o r a c o r r e s p o n d i n g m o d i f i c a t i o n of the
s y s t e m of f i n a n c i n g , f o r the a u t h o r i t i e s w i l l no l o n g e r b e under such
c o m p e l l i n g p r e s s u r e f r o m the G o v e r n m e n t t o e m b a r k upon s p e c i f i c
p r o g r a m m e s of c a p i t a l e x p e n d i t u r e .
9.
I t h e r e f o r e p r o p o s e that the E x c h e q u e r should r e s u m e the r i g h t
t o g r a n t o r withhold a d v a n c e s t o l o c a l a u t h o r i t i e s .
T h i s step d o e s not
require fresh legislation.
It can be done b y a r e q u e s t . f r o m m y s e l f to
the P . W . L . B . w h o , under the p r e s e n t l a w , h a v e f u l l p o w e r to g r a n t o r
withhold a d v a n c e s ,
10.
A t l e a s t f o r the p r e s e n t , I would not p r o p o s e t o r e v e r t to the p r e - w a r
s y s t e m under which the B o a r d w e r e i n s t r u c t e d not t o l e n d ( e x c e p t f o r c e r t a i n
s p e c i f i e d s e r v i c e s ) t o l a r g e a u t h o r i t i e s (defined a s a u t h o r i t i e s with a
r a t e a b l e v a l u e of m o r e than £200,000 a y e a r ) .
The l a r g e r authorities a r e
r e s p o n s i b l e f o r about half the p r e s e n t a d v a n c e s f r o m the P . W . L . B . - s a y
£150 m i l l i o n s a y e a r .
T h e r e can be no a s s u r a n c e that the s t o c k and
m o r t g a g e m a r k e t s w i l l find a d d i t i o n a l f i n a n c e of this amount.
But I
b e l i e v e it w i l l be f e a s i b l e to h a v e a s e l e c t i v e and f l e x i b l e s y s t e m .
I
p r o p o s e to a s k the B o a r d , b e f o r e t h e y g r a n t any a d v a n c e s in f u t u r e , to
s a t i s f y t h e m s e l v e s that the applicant has m a d e an e f f o r t t o r a i s e the
finance on its own c r e d i t in the stock and m o r t g a g e m a r k e t s , and only t o
lend f r o m the E x c h e q u e r i n s o f a r a s , in the B o a r d ' s j u d g m e n t , the a p p l i c a n t
could not r e a s o n a b l y r a i s e the m o n e y e l s e w h e r e .
11.
But I do not think this change w i l l b e f e a s i b l e unless the i n s t r u c t i o n
to the B o a r d i s supported by a f u r t h e r s t e p - a change in the b a s i s on w h i c h
the T r e a s u r y c a l c u l a t e s the l e n d i n g r a t e s o f the B o a r d .
A t p r e s e n t the
r a t e s a r e b a s e d on G o v e r n m e n t c r e d i t f o r l o a n s of c o m p a r a b l e p e r i o d s .
T h e r e s u l t i s that - u n l e s s an authority d e c i d e s t o pay m o r e f o r the
f l e x i b i l i t y and p r e s t i g e of a m a r k e t loan - i t i s t o the f i n a n c i a l advantage
o f the l o c a l a u t h o r i t i e s t o b o r r o w f r o m the B o a r d a s opposed t o the
market.
T h e y w i l l c e r t a i n l y c l a i m when it suits t h e m that i t i s t h e i r duty
t o do s o : and the B o a r d w i l l be g i v e n a v e r y d i f f i c u l t task in d e c i d i n g how
f a r t h e y can p r e s s an applicant t o go b a c k t o the m a r k e t when the applicant
c l a i m s that the m a r k e t s t e r m s a r e u n r e a s o n a b l e .
12.
I b e l i e v e that the r i g h t solution i s to p r e s c r i b e lending r a t e s f o r
the P . W . L . B . b a s e d , not on G o v e r n m e n t c r e d i t , but on the c r e d i t of l o c a l
a u t h o r i t i e s of good standing in the m a r k e t .
T h i s a g a i n does not r e q u i r e
l e g i s l a t i o n , as the T r e a s u r y has full d i s c r e t i o n to p r e s c r i b e w h a t e v e r
r a t e s they think f i t under the e x i s t i n g l a w .
13.
C l e a r l y c e r t a i n s a f e g u a r d s a r e n e e d e d b e f o r e the n e w s y s t e m can
b e put into o p e r a t i o n .
T h e m a i n points t o be s a f e g u a r d e d a r e ­
(a) the m a r k e t p r o s p e c t s ;
(b) the e f f e c t on l o c a l a u t h o r i t y c r e d i t ;
and
( c ) the a d m i n i s t r a t i v e a r r a n g e m e n t s t o a v o i d
d i s l o c a t i o n of l o c a l a u t h o r i t y f i n a n c e .
14.
M a r k e t p r o s p e c t s . T h e s u c c e s s of the plan depends on an a c t i v e
m a r k e t in l o c a l a u t h o r i t y i s s u e s .
T h e Bank of E n g l a n d have b e e n c l o s e l y
consulted on this p o i n t .
N o a s s u r a n c e can be g i v e n of an i m m e d i a t e f l o w
of l o c a l authority i s s u e s or of c o n s i s t e n t l y f a v o u r a b l e m a r k e t s .
But
t h e r e e x i s t s a l r e a d y a l i s t of l o c a l a u t h o r i t y s t o c k s t o go on the m a r k e t ;
and t h e r e i s a r e a s o n a b l e p r o s p e c t of making s t e a d y p r o g r e s s with the
o r d e r l y flotation of t h e s e i s s u e s in the f i r s t p l a c e , f o l l o w e d b y o t h e r s on
w h i c h p r e p a r a t i o n s could s t a r t a s soon a s the new p o l i c y was announced.
S i m i l a r l y t h e r e a r e good p r o s p e c t s of an a c t i v e m o r t g a g e m a r k e t .
This
i s an e n c o u r a g i n g r e p o r t .
But I must e m p h a s i z e that it is conditional on a
n e w L o c a l L o a n s r a t e b a s e d on l o c a l a u t h o r i t y c r e d i t .
P r o g r e s s cannot
b e m a d e in e i t h e r s t o c k o r m o r t g a g e m a r k e t s if t h e y h a v e to c o m p e t e with
the P . W . L . 3 . lending at f i n e s t g i l d edged r a t e s .
15.
L o c a l authority credit.
It i s n o t intended that the p r e s s u r e of
the l o c a l a u t h o r i t i e s on the m a r k e t should d r i v e up t h e i r b o r r o w i n g r a t e s
t o penal l e v e l s .
T h e a u t h o r i t i e s a r e e n t i t l e d t o p r o t e c t i o n a g a i n s t that
risk.
T h e y w i l l g e t p r o t e c t i o n f r o m the lending r a t e s p r e s c r i b e d f o r
the P . W . L . B .
S o m e m a r g i n i s bound t o d e v e l o p b e t w e e n the full g i l t
e d g e d r a t e and l o c a l a u t h o r i t y r a t e s , and it is r i g h t that it should.
But
l o c a l authority c r e d i t w i l l continue to r a n k in the m a r k e t n e x t a f t e r
Government credit.
T h i s standing w i l l b e r e f l e c t e d in the l e n d i n g r a t e s
p r e s c r i b e d f o r the P . W . L . B . , who w i l l b e g i v e n guidance not to p r e s s
applicants t o b o r r o w in the m a r k e t at r a t e s s i g n i f i c a n t l y h i g h e r than the
3 o a r d ' s own lending r a t e .
16.
A d m i n i s t r a t i v e a r r a n g e m e n t s . I a m s a t i s f i e d that the P . W . L . B .
as at p r e s e n t constituted can c a r r y out the function now to b e g i v e n t o
them.
T h e y w i l l not be c o n c e r n e d in the m e r i t s of the c a p i t a l e x p e n d i t u r e ,
but with the m a r k e t p r o s p e c t s of the l o c a l a u t h o r i t i e s who c o m e t o t h e m .
In p r a c t i c e the B o a r d w i l l a c c e p t the s t a t e m e n t s of s m a l l applicants that
t h e y w e r e unable to r a i s e t h e i r finance e l s e w h e r e , and w i l l c o n c e n t r a t e
on the l a r g e a u t h o r i t i e s of known m a r k e t standing.
On t h e s e the B o a r d w i l l
be a d v i s e d b y the Bank of E n g l a n d who a r e in a p o s i t i o n t o r e p o r t . o n the
p r o s p e c t s of such a u t h o r i t i e s in both s t o c k and m o r t g a g e m a r k e t s .
17.
A s f a r as the B o a r d and the Bank a r e c o n c e r n e d , this s y s t e m is
r e a d y t o b e put into o p e r a t i o n i m m e d i a t e l y .
F r o m the standpoint of the
l o c a l authorities, h o w e v e r , a transitional p e r i o d may w e l l be r e q u i r e d .
It
is the p r e s e n t p r a c t i c e of m a n y l o c a l a u t h o r i t i e s t o d e c i d e the amount and
s o u r c e of t h e i r l o a n s only when c o m m i t m e n t s m a t u r e fox p a y m e n t .
But
the new s y s t e m w i l l m e a n that l o c a l a u t h o r i t i e s m u s t w o r k out f o r w a r d
b o r r o w i n g p r o g r a m m e s , taking account o f t h e i r b r o k e r ' s a d v i c e on the
p r o s p e c t s of t h e i r s t o c k i s s u e s , e t c . b e f o r e t h e y can j u s t i f y the amount of
t h e i r p r o p o s e d b o r r o w i n g f r o m the P . W . L . B . It w i l l a l s o t a k e a l i t t l e
t i m e f o r the a u t h o r i t i e s and t h e i r m a r k e t a d v i s e r s t o o r g a n i s e the f l o w
of n e w i s s u e s i n the s t o c k m a r k e t .
C l e a r l y the B o a r d m u s t be r e a d y t o
m a k e such a d v a n c e s as a r e r e q u i r e d t o h e l p the a u t h o r i t i e s through this
transitional period.
I would propose to make these transitional a r r a n g e ­
m e n t s b y m e e t i n g the Standing C o n s u l t a t i v e C o m m i t t e e o f L o c a l A u t h o r i t y
A s s o c i a t i o n s i m m e d i a t e l y a f t e r the new p o l i c y w a s announced.
But t o
a v o i d f o r e s t a l l i n g , the n e w l e n d i n g r a t e s f o r the P . W . L . B . m u s t be
p r e s c r i b e d and o p e r a t e i m m e d i a t e l y .
Summary
18.
(i)
U n d e r the p r e s e n t s y s t e m , t h e r e i s no l i m i t t o the amount of
a p p r o v e d c a p i t a l e x p e n d i t u r e that l o c a l a u t h o r i t i e s can finance b y b o r r o w i n g
f r o m the E x c h e q u e r at r a t e s b a s e d on G o v e r n m e n t c r e d i t .
(ii)
I p r o p o s e that ( a ) the P u b l i c W o r k s L o a n B o a r d should o n l y
g r a n t E x c h e q u e r l o a n s s o f a r a s the applicants cannot r a i s e the m o n e y in
the stock and m o r t g a g e m a r k e t s ; and (b) the B o a r d ' s lending r a t e s should
be b a s e d not on G o v e r n m e n t c r e d i t but on l o c a l a u t h o r i t y c r e d i t .
(iii)
In o r d e r t o s u c c e e d , the n e w s y s t e m r e q u i r e s an a c t i v e
m a r k e t in l o c a l a u t h o r i t y i s s u e s , s a f e g u a r d s a g a i n s t p e n a l r a t e s f o r l o c a l
a u t h o r i t y b o r r o w i n g , and w o r k a b l e a d m i n i s t r a t i v e a r r a n g e m e n t s ,
p a r t i c u l a r l y to begin with.
A l l t h e s e points a r e c o v e r e d .
(iv)
If the s c h e m e i s a g r e e d , I would p r o p o s e t o announce i t on
27th S e p t e m b e r and to f i x the n e w L o c a l L o a n s r a t e s , b a s e d on l o c a l
a u t h o r i t y c r e d i t , on the s a m e d a y .
R.A.B.
T r e a s u r y C h a m b e r s , S. V/. 1.
19th S e p t e m b e r , 1955.