Coalition smoke and mirrors?

by | Oct 20, 2010 | Economic Intrigue, Just plain weird, Please fuck off., Righteous Wankers, UK Misery, Well I never.

Whilst the press is frothing about the spending cuts, the following snippet from an FT Alphaville is something I have not seen elsewhere and raises a couple of very interesting points :

For followers of UK debt markets, meanwhile, here’s an intriguing point made by Marc Ostwald of Monument Securities on prospects for local government financing under this review.

The central government is drastically cutting back ‘core’ grants on specific areas of spending to local governments, while also removing restrictions on what other grants are spent on.

It’s more ‘financial control’ — but that means local governments are left with the tough decisions of what to cut and what to save, and as Ostwald notes — what to borrow (links and emphasis added):

The huge cuts in govt funding of local councils and the devolution of financial controls to council, while increasing the cost of Public Loan Works Board to Gilts plus 1 pct, meant that once the 2011-12 council tax freeze has passed, there will have to be large increases in council tax, and sharp rises in the cost of other services, e.g. parking licenses, etc, and a lot of non-health/schools related services may face the chop. Councils will be able to borrow against a proportion prospective revenues, in effect shifting some Gilt issuance to local authority bonds, which could perhaps harshly be construed as a ’smoke and mirrors’ trick…

It looks to me as though the coalitions idea of cuts involves transferring the debt and funding problem down to local council level.

This leaves council tax payers having to pay the bills (including ever higher debt servicing costs) under threat of imprisonment rather than trying to persuade international markets to fund gilt issuance.

Anyone who expects their local council to make the necessary cuts will most likely be disappointed. The locally elected lot are even worse at making politically difficult decisions than the National lot, partly due to the local lot having to get re-elected every 2 years compared with 5 years for our Parliamentary masters.

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