Local Government Finance and its Dangers Part 2

Following up on my previous Blog about Local Government Finance, and my doubts that it will be implemented in as full-blooded way as some seem to be expecting or hoping, I thought I would add a few more thoughts.

Spain seems to be another place where borrowing by local government is causing problems. Some municipalities are taking up to 9 months to pay suppliers, whilst others have failed to meet interest payments. Others have not paid the fuel bills for their police cars so the suppliers refuse to sell them any more.

Madrid’s debt is over 150% of its expected revenues and is expected to remain so for some while.

Some local authorities are selling bonds direct to the public because the commercial market will not touch them. You have to wonder if the ordinary people who are buying them are aware of the risks, and what happens if the local authority does default.

Many Local Authorities have kept their debt hidden and not included it in their official accounts, and some own public companies which have significant debt which is likewise not reported.

If this were to happen in the UK would the Government refuse to step in, and what would be the reaction of the local tax payers be if they did refuse?

Perhaps this is why one of George Osborne’s aides said that he would be very reluctant to see councils raise their own finance from bond markets, but allow to them to only use the Public Works Loan Board presumably so Government can keep close control on borrowing.

I think central Government would find it very difficult to walk away from local government debt, no matter how much they might like to. So, this is part of the reason why I can’t see local government actually getting much freedom in raising its own money.

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