Local authority infrastructure financing

A complex system of local government has developed across the UK as a result of reorganisations and changes to funding regimes.

This section explores the various ways local authorities finance infrastructure projects, detailing the sources of funding available, as well as the difficulties and potential pitfalls of the system.

It begins with an overview of local government and infrastructure, before moving on to explore the different funding options available to local authorities. It then turns to the subject of credit risk and debt, before concluding with issues of localisation and devolution, and pension funds. 

This section is maintained by Robert Robinson of Bridgecourt and Company.

Key updates

Key updates include:

  • High rates of inflation and government restrictions on generating commercial revenue are putting additional pressure on local authority budgets.
  • Inflation, including pay demands, is forecast to add another £2.4bn to local authority budget forcasts for 2023/24.
  • Local authorities are being encouraged to bring forward proposals to introduce single unitary authorities in areas where two tiers of local government currently exist.
  • The COVID pandemic has had a significant impact on local authority finances. The response to the pandemic has put back the Fair Funding Review (now renamed the Review of Relative Needs and Resources) and the associated proposed business rates reset (which will now be delayed until after the next general election).
  • The government has prioritised financial stability across the local authority sector rather than reform the system of funding distribution.
  • The Local government finance settlement for England 2023/24 increased funding for local authorities by more than 5.8%, which is a larger increase than last year and the largest increase in over ten years.
  • The UK Shared Prosperity Fund has been established to replace the loss of EU grants received by UK local authorities.  
  • Local authorities are at the heart of the government’s ‘levelling-up plans’.  A £4.8 billion Levelling Up Fund was announced by the government, which is expected to stimulate the improvement of town centres and local infrastructure.
  • The Levelling Up Bill introduced in May 2022 proposes greater central government powers to monitor local authority risk and intervene in cases where debt level thresholds are breached.
  • Borrowing by UK local authorities is forecast to have increased by £0.9bn to £10.2bn in 2022/23. Capital grants provided by central government was the largest source of funding for capital expenditure is forecast to be £10.6bn in 2022/23.  
  • The UK government increased the total lending limit of the Public Works Loan Board (PWLB) from £95bn to £120bn. However, the cost of borrowing from the PWLB has increased significantly in line with the increase in gilts.
  • In October 2021, the PWLB issued its first loan on behalf of the new UK Infrastructure Bank (UKIB). The UKIB is to be given new powers to lend to local authorities. The UKIB now has a mandate to lend up to £4bn to UK local authorities.
  • The funding model for local authorities has undergone significant change in recent years with a switch away from central grant provision towards keeping a higher proportion of locally generated revenue. The government has delayed any move to 75% business rate retention and then to 100% retention
  • Some local authorities have seen their levels of reserves fall during the pandemic and have also seen pressure from inflationary costs, and the high cost of debt as interest rates increase in face of high inflation, which has increased the risk of financial failure and the issuing of section 114 notices.
  • There remains uncertainty around the financial sustainability of many local authorities. However, given the strong framework of support in which they operate, local authorities remain highly creditworthy and attractive borrowers for most lenders.

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