A new borrowing arrangement for local Councils is key to funding a Just Transition

Sean Fearon is a Just Transition Researcher. He is writing in a personal capacity. 

It will be no surprise to anyone that the COVID-19 public health emergency has reshaped the economic and public finance environment in Ireland, as around the world. Once upon a time the British and Irish governments, in lock-step with the European Commission, championed deficit-reduction and savage austerity programmes as a most noble and urgent economic crusade. As of May 2020, these same actors now run historic peace-time spending deficits to prevent outright economic collapse, funded by a cocktail of quantitative easing, monetary financing, and debt sales.
The point here is that ‘affordability’ now has a new meaning, and the purely political nature of austerity has been laid painfully bare. Borrowing is here to stay, as it should be – for both the Irish and British governments, debt has never been cheaper, and finding cheap debt has rarely been easier.

It is no surprise, then, that calls are mounting to ensure this period of unprecedented borrowing and deficit spending is also used to tackle the greatest threat of our time. Now is the time to make the long overdue economic transformation needed to stave off irreversible climate breakdown, while raising living standards and rooting out social injustices – in other words, a Just Transition. The scale of this challenge is unprecedented, as are the sums of funding required to finance it. From central government, down to local government and households, a bold and effective financing strategy is urgently required.

Better borrowing for local Councils

Due to a total lack of any meaningful fiscal or financial powers, the options for this financing in the North of Ireland are extremely limited. In contrast to the Assembly, however, local Councils have the ability to borrow-to-invest, albeit a problematic one.

Councils in Britain borrow primarily through the Public Works Loan Board (PWLB). Though mixed with some private finance, some two thirds of local authority debt in England, Scotland and Wales is borrowed through the PWLB, who in turn sources this finance from gilt (sterling denominated bonds) markets, with a meagre marginal interest tacked on top. In this way, local authorities are capable of public borrowing at a very favourable rate, and close to the extremely low interest environment in which we now live.

Councils in the North are treated differently, to what seems like their evident disadvantage. The North can’t access the PWLB – instead, local authorities borrow from the Department of Finance (where lending is passed through), and from commercial lenders. As a result, Councils here are, on aggregate, paying interest at around 4 or 5% on their existing debt finance . By stark contrast, loans passed through the PWLB for British Councils in April 2020 bore interest rates of 1-2% , with Councils having full autonomy on how this funding is put to use . For some Councils in the North, 2018 expenditure statements show that more than £1 in every £10 spent in 2019 wasn’t spent on service provision or regional investment, but was instead used to pay down local authority debt .

When compared the almost zero, and in some cases negative, interest rate environment agreed by governments and central banks across the world to finance now yawning fiscal deficits, this is jarring. When considered against the urgent need to provide low-cost finance for a rapid Just Transition to a net-zero carbon society, it simply isn’t credible.

The opportunities of local green finance

Living through a COVID-19 reset of policy horizons, we are presented with an opportunity to both tackle the climate crisis and expand the long-term income-generating assets owned by our local authorities. But Councils need a new borrowing framework to unleash this potential, with access to long-term and as-close-to-zero interest financing as possible.

The obvious solution is to extend PWLB access to Councils in the North. But the same objective could be better advanced through the establishment of a separate green facility to pass-through near-zero interest finance to Councils across the North.

The cost of this finance is one thing, how it is used is equally important. Greater access to cheaper investment capital can be used for any number of green infrastructural investment initiatives, from greenways and new active travel infrastructure, to income-producing assets like wind farms and solar panels. Not doing so stifles the economic potential of Councils and local communities, while discouraging urgent climate action.

Borrowing to construct authority-owned onshore-wind, providing long-term Council revenue as the wind blows, is an open and shut case for investment and urgent climate action. Better yet, this borrowing could instead act as seed capital to reduce financing costs to allow citizens to get in on the act, through joint-ownership Council-community energy cooperatives. Drumlin and Carntogher community energy groups are flourishing local examples of this model, and, on a smaller scale, emulates the world-famous German success story of community energy – 42% of all renewable energy generated in Germany is owned by local communities, groups of individuals, or farmers, lowering their energy costs, and providing a stable income to invest in their local community . Crucially, access to low cost finance through the German Sparkassen model has been a catalyst of this success.
These are fairly meagre reforms which, if implemented, profoundly enhance the ability to Councils and local communities to tackle climate breakdown, while driving our own inclusive and sustainable economic and social development.

Soapbox

This is a guest slot to give a platform for new writers either as a one off, or a prelude to becoming part of the regular Slugger team.