In a surprise move, the Treasury has increased the cost of
borrowing from the Public Works Loan Board (PWLB) which is likely
to impact on some councils' plans for investment in new
housing.
The increase was announced in a letter to council chief finance officers dated 9
October 2019, in which the Treasury said the move to add
1% to the interest rate for borrowing from the PWLB followed a
substantial increase in some councils' borrowing from the PWLB in
recent months.
It said the increase would apply to all new loans with immediate
effect. Before the change, the government charged a rate of 0.8%
above its own costs of borrowing and this has now been increased to
1.8%.
However, the increase in interest rates was also accompanied
alongside a £10bn increase in the total limit on how much councils
can borrow through the PWLB, taking it from £85bn to £95bn.
ARCH Chief Executive John Bibby comments:
"Having abolished the HRA borrowing cap, the Government's
decision to increase the interest rate charged on borrowing from
the PWLB is disappointing and some of our member councils will see
it as "giving with one hand and taking away with the other". It is
likely to affect different councils in different ways depending on
the assumptions they have made on future interest rates in their
Housing Business Plans."
"We must not forget that councils' future rental income has
been significantly curtailed by the 4-year mandatory rent
reductions imposed by the Cameron Government and this increase in
interest rates will require all stock retained councils to reassess
their Housing Business Plans and Housing Investment Programmes. Put
simply, if borrowing costs go up then councils may not be able to
afford to borrow what they had originally planned and may therefore
need to reassess plans to invest in building new council housing.
There may also be knock-on effects for the investment plans of
Local Housing Companies set up by some councils."
"However, the fact that the Treasury have allowed for an
overall increase in the lending limit suggests that the Government
are committed to the long-term strategy of allowing councils to
borrow in line with the Prudential Code."
"If the Government is still committed to enabling councils
to build a new generation of council housing, then there is a case
for treating investment in new build as infrastructure and applying
a differential lower rate for PWLB loans taken out for investment
in new council housing and we will be making the case for this to
HM Treasury."