Public Finance - Jan/Feb 2021

THE JOURNAL FOR THE CHARTERED INSTITUTE OF PUBLIC FINANCE & ACCOUNTANCY JANUARY / FEBRUARY 2021 PUBLICFINANCE.CO.UK 01 COVER_Jan-Feb 2021_Public Finance.indd 1

BIG SPENDER Cat Little, UK Treasury director-general of public spending, on controlling the costs of Covid-19 WASTE TRAP China’s rejection of the West’s recyclables poses hard questions CASH COW Does modern monetary theory remove the need to repay pandemic debt?

Sub-zero The impact of negative interest rates on public sector money management

16/12/2020 11:13

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10/12/2020 11:58

EDITORIAL

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COLIN MARRS

@public_finance_

New year, new hope

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I

n the Chinese calendar, 2021 marks the Year of the Ox. The animal’s character, according to tradition, shares much with that of a good accountant. It is respected as a reliable, stoic and methodical creature. Serious and quiet, the Ox shuns the limelight, working hard behind the scenes to ensure the show stays on the road. Such attributes are likely to be more vital than ever during the coming year.

Global debt was on track to hit $277trn (365% of GDP) by the end of 2020, up $15trn from 2019, according to an estimate by the Institute of International Finance. In the midst of a global health emergency requiring large parts of the world economy to be put into cold storage, this response was unquestionably correct. As Cat Little, director-general of spending in the UK Treasury says in our p30 interview: “Fundamentally, now is not the time to think about the medium term.”

Little says that, contrary to public perception, her department’s controls for individual spending decisions have remained intact throughout the crisis. However, the overarching fiscal rules that govern the UK’s spending decisions went out the window at the beginning of the crisis. The Treasury says it will not set out further details of

a medium-term fiscal strategy, alongside a new framework to support its delivery, until the current level of uncertainty recedes.

The rollout of vaccines could mean that 2021 is the year that clarity starts to emerge. Public finance directors and accountants will be at the heart of assessing the size of the task ahead, as well as shaping the response. Our cover feature on p22 explores whether negative interest rates could help stimulate growth, while, on p60, we highlight new guidance that can help government bodies formalise their attitude to risk as the new fiscal landscape emerges.

Some, however, argue that additional Covid-19 debt is not the problem that orthodox economists believe. Our feature on p44 looks at modern monetary theory, a radical idea that claims countries in control of their own money supply need not worry about repaying their borrowing.

However, sceptics argue that there is no such thing as a ‘free lunch’, warning policymakers to be wary of the theory’s lure.

Whatever approaches emerge this year, public sector finance officers will need to call on ox-like reserves of strength to help them navigate the demands on their budget strategies.

Public finance directors and accountants will be at the heart of assessing the size of the task ahead

COLIN MARRS Editor colin.marrs@publicfinance.co.uk PUBLICFINANCE.CO.UK 3

03 Welcome_Jan-Feb 2021_Public Finance.indd 3

16/12/2020 11:14

'SPN SFTJMJFODF UP FYDFMMFODF &YQFSU OBODJBM HVJEBODF BOE JOTJHIU UISPVHI $*1'"ˏT LFZ QVCMJDBUJPOT As well as being the accounting standard setter for local government CIPFA helps ensure excellence in ǛŠîŠČĿîŕ ŞîŠîijĚŞĚŠƥ ƥĺƑūƭijĺūƭƥ the public services. Our range of titles stretch beyond accounting to provide key guidance that address ēĚDŽĚŕūƎŞĚŠƥƙ îČƑūƙƙ ƎƭċŕĿČ ǛŠîŠČĚȦ • Code of Practice on Local Authority Accounting in the United Kingdom Guidance Notes for 2020/21 Accounts • A Guide to Local Authority and Public Sector Asset Management Practical guidance for those responsible for the effective oversight and management of public sector assets.

• Planning to Deliver Good Value in Demand-led Services (social care) For those involved in service îŠē ǛŠîŠČĿîŕ ƎŕĿŠijȡ ĿŠČŕƭēĿŠij ČūŞŞĿƙƙĿūŠĚƑƙȡ ǛŠîŠČĚȡ ƎĚƑIJūƑŞîŠČĚȡ îŠē ƙĚƑDŽĿČĚ ŞîŠîijĚƑƙ and directors.

• Coming soon: Code of Practice on Local Authority Accounting in the United Kingdom: Disclosure Checklist for 2020/21 Accounts • Coming soon: Service Reporting Code of Practice for Local Authorities 2021/22

Get the standards, the updates and the help you need visit cipfa.org/publications Alternatively contact customer services email customerservices@cipfa.org call 020 7543 5600

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10/12/2020 12:00

CONTENTS

JANUARY/FEBRUARY 2021

58

22

NEED TO KNOW 7

Catch up

PWLB rate cut; Biden trade policy; audit deadline missed 10 News analysis

Spending Review 14 Big picture

China’s resurgence 16 Talking points 17 World in numbers

36 China crisis

Far East waste policy causes recycling issues 44 No limits

OPINION

Can modern monetary theory cancel out debt?

48 Better safe than sorry

12 Tightening outlook

Spending Review implies cuts for some services

36

Skimping on cyber security is a big mistake

19 Bond picture

The UK has changed its mind over green gilts

IN PRACTICE

20 Green future

Sustainable accounting

48

27 Minus points

Pension funds can weather negative rates 41 Packing a punch

30

Packaging reforms set to help waste authorities 53 Under attack

Dealing with the fallout from a cyber hack

55 Learn from…

West Berkshire’s community bond launch 57 Expert Q&A

Scenario planning 58 Ethical dilemmas

Reputational damage of Section 114 notices; addressing unintentional policy outcomes 59 Transformation

Out-of-office benefits

IN DEPTH

60 Strategic planning

22 Big issue

61 Five-minute guide…

Could negative interest rates boost economies?

30 Interview

Baptism of fire for the UK Treasury’s new directorgeneral of public spending

The benefit of risk appetite statements Learn about SONIA 64 Events 65 On account

CIPFA chief executive Rob Whiteman looks ahead 66 Where next?

PUBLICFINANCE.CO.UK 5

5 Contents_Jan-Feb 2021_Public Finance.indd 5

16/12/2020 11:14

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10/12/2020 11:59

N E W S / A N A LY S I S / O P I N I O N / D E B AT E

p10

p16

p19

SPENDING REVIEW Scale of economic damage from Covid-19 laid bare

INTEREST PIQUED Swaps deal triggers memories of 1980s ‘Wild West’ period

GREEN SHOOTS Thawing of frosty Treasury attitude towards eco bonds

The UK Municipal Bonds Agency has now abandoned a planned eight-year sterling issuance with Warrington Borough Council

BORROWING

PWLB cut narrows interest rate gap

By Oliver Rudgewick

A

one percentage point reduction in the Public Works Loan Board rate announced at the Spending Review has narrowed the gap with alternative funding sources.

The cut reverses the October 2019 hike in the rate, which prompted UK local authorities to move away from

Photography: Alamy

07-09 Upfront_Jan-Feb 2021_Public Finance.indd 7

the PWLB to explore more affordable alternatives, including bonds and interest rate swaps.

The announcement of the new rate led to the UK Municipal Bonds Agency abandoning a planned eightyear sterling issuance with Warrington Borough Council in the middle of its marketing to potential investors.

As part of the rate cut, the Treasury told councils they will now be expected to demonstrate that their capital plans do not include any borrowing to buy assets purely to produce a yield.

June Matte, managing director of PFM, UKMBA’s managed service provider, told PF:

PUBLICFINANCE.CO.UK 7

16/12/2020 15:27

NEED TO KNOW OECD: GLOBAL GDP RECOVERY ‘TIED TO VACCINE SUCCESS’

CATCH UP

“I think no one had the time to really digest the rules to understand what they would mean, for both investors and borrowers.”

In November, prior to the rate rise, the London Borough of Sutton issued a £250m bond through the European Primary Placement Facility, a fully digital European bond issuance platform.

David Whelan, managing director of public sector treasury at Link Group, which advised on the deal, told PF that the bond, priced at 1.732%, was 0.9% percentage points lower than the equivalent 2.6% rate available from the PWLB at the time.

An interest rate swap deal agreed in October by Plymouth City Council (see Talking Points, p16) beat the equivalent PWLB rate by two percentage points, according to the advisers behind the deal.

Both deals followed the August launch of UKMBA’s second bond on behalf of Lancashire County Council, priced at 0.8 percentage points lower than the equivalent rate from the PWLB at the time.

Despite the narrowing of the interest rate gap owing to the Spending Review cut, David Blake, strategic director at treasury adviser Arlingclose, said: “It should still be possible for alternative funding sources to get inside the PWLB rate, so there should still be choice available for councils.”

The world economy is expected to grow by 4.2% during 2021, although performance will depend on how quickly Covid-19 vaccines are rolled out, according to the OECD’s latest economic outlook. Global GDP is projected to rise a further 3.75% in 2022.

US

Biden prioritises internal recovery over trade deals

By Colin Marrs

U

S president elect Joe Biden says the focus of his economic policy will be on domestic investment, ruling out any international trade agreements in the short term. Biden is set to be confirmed as the 46th US president on 20 January after defeating incumbent Donald Trump during the November elections. In an interview with The New York Times, he dealt a blow to countries, including the UK, which harboured hopes of an early trade deal with his country.

Biden told the paper: “I want to make sure we’re going to fight like hell by investing in America first. I am not going to enter any new trade agreement

President elect Joe Biden: investing in America first

with anybody until we have made major investments here at home and in our workers.” He listed energy, biotech, advanced materials and artificial intelligence as priority areas for largescale government investment.

Biden added that he would seek to raise corporate taxes to pay for a generous economic stimulus. “There is no reason why the top tax rate shouldn’t be 39.6%, which it was in the beginning of the Bush administration,” he said. “There is no reason why 91 Fortune 500 companies should be paying zero in taxes.”

Without control of the Senate, however, Biden will face a struggle to get tax hikes onto the statute book. But ratings agency S&P said that even if he is successful, the US’s credit rating is likely to be unaffected.

It said that “while the change, if enacted, would have mixed consequences on our adjusted ratios, we don’t foresee ratings changes solely due to an adjustment of the tax code”.

Biden has nominated Janet Yellen to serve as secretary of the Treasury.

If confirmed, she will be the first woman to lead the Treasury department in its 231-year history, and the first person to have served as Treasury secretary, chair of the Council of Economic Advisers, and chair of the Federal Reserve.

8 PUBLIC FINANCE JANUARY/FEBRUARY 2021

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16/12/2020 11:15

IN BRIEF Hostile coverage forces strategy shift

A ‘system-wide solution’ is required as the regulatory environment grows more complex

LOCAL AUTHORITY ACCOUNTS

Audit target missed despite extension

By Oliver Rudgewick

M

ore than half of local authority audit opinions for 2019-20 missed the extended 30 November deadline, according to oversight body Public Sector Audit Appointments. Of the 486 local authorities in England, 265 opinions (55%) were not published by the deadline – a 12 percentage point rise on last year, when 43% of opinions were delayed beyond the 31 July deadline. PSAA said that Covid-19 has posed practical challenges for bodies in producing accounts and working papers, and for auditors carrying out their testing.

CIPFA chief executive Rob Whiteman said: “A decade of austerity, cuts to audit fees and changes in the regulatory environment have meant that while local audit has become more complex, the pool of expertise available to complete timely, high-quality local audits – and the ability of councils to pay – has reduced. This requires a system-wide solution for both auditors and audited bodies.”

Photography: Getty

07-09 Upfront_Jan-Feb 2021_Public Finance.indd 9

The audit deadline was pushed back to November by the government in order to give councils more flexibility through the pandemic. However, PSAA said audits took more time to complete this year, as auditors and finance teams had to ensure the financial stability of authorities affected by the pandemic. It added that both council and audit staff worked remotely throughout the period, and the second national lockdown came at a critical point in the audit cycle.

Paul Dossett, head of local government at audit firm Grant Thornton, said: “The increasing complexity and risk of local government finances, compounded by the challenges brought on by the global Covid-19 outbreak, have, in some cases, resulted in additional time being required to complete our audits this year.”

However, Tony Crawley, chief executive of PSAA, said the results were further evidence of the “serious and pervasive” issues facing local audit.

A UK local authority has changed its borrowing strategy after critical articles in the press. Thurrock Council’s director of finance, Sean Clark, said: “Every time there has been negative press coverage on the council’s borrowing and investments, some bodies that have lent to Thurrock over a number of years have removed Thurrock from their lending list.” The council has borrowed more than £1bn from other councils in recent years.

Failings found on Covid-19 purchasing The UK government failed to meet standards of transparency on its emergency Covid-19 procurement, according to the National Audit Office. The spending watchdog uncovered cases with inadequate documentation on how the risks of procuring without competition had been mitigated, and where contracts had not been published within the 90 days recommended by government guidance. Prime minister Boris Johnson defended the government’s performance.

Green Book issues result of ‘misreading’ A Treasury review has rejected the claim that it puts too much emphasis on the benefit-cost ratio when deciding on funding bids. The review said misunderstanding of its Green Book – not the methodology itself – has hampered ‘levelling up’.

It announced guidance to make it clear that the BCR has always been just one part of the assessment.

PUBLICFINANCE.CO.UK 9

16/12/2020 11:15

NEED TO KNOW

NEWS ANALYSIS

SPENDING REVIEW

Chancellor delivers small taste of pain to come The single-year Spending Review implies future cuts to unprotected departments, while tax rises seem the only option to pay down Covid-19 debt

By Oliver Rudgewick

T

he Spending Review was dominated by breathtaking statistics – record borrowing, eye-watering Covid-19 spending and high-debtGDP ratios. With promises of more expenditure for areas including levellingup, defence and health, chancellor Rishi Sunak seemingly stood by his

pledge not to return to austerity. However, a number of experts suggest Sunak has shown he is already looking to rein in some of this year’s runaway spending.

Figures buried in the Office for Budget Responsibility’s forecast, which accompanied the Spending Review, suggest planned departmental

spending increases are to be cut by at least £10bn per year from next year until 2025, compared with the March Budget.

Protected departments include the NHS, schools and the Ministry of Defence, with the Institute for Fiscal Studies forecasting these departments will receive £223bn (57%) of the £397bn

available for departments in 2022-23.

This will result in a disproportional hit on unprotected departmental budgets, leaving local government and other services with “tight settlements”, according to James Smith, research director at think tank the Resolution Foundation. He told PF: “Non-protected departments, including local government, will have to take a bit more of a hit.”

Between 2021-22 and 2022-23, unprotected departmental budgets are expected to drop by around 0.3%, according to the Institute for Fiscal Studies.

Ben Zaranko, IFS research economist, said: “Even if it is not a return to the cuts that we were seeing in the years after 2010 – these are

10 PUBLIC FINANCE JANUARY/FEBRUARY 2021

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16/12/2020 11:16

Rishi Sunak needs to start laying out tax rises or spending cuts before the next election, say experts

Departmental budget cuts do not create a positive outlook for the local government sector, given that councils are expecting demand to rise

Public sector net debt as % of GDP

Crucially, it added that tax rises or spending cuts of between £21bn and £46bn – 0.8% and 1.8% of GDP – would be required merely to stop debt rising relative to GDP by 2025-2026. Many experts believe that tax rises are more likely than spending cuts, but stress the timing is important to prevent stifling the UK’s economic recovery. Smith said: “When the time is right to do a bit more fiscal consolidation, they are going to have to do it through tax as they cannot do it through

Photography: HM Treasury

10-11 Upfront - Analysis_Jan-Feb 2021_Public Finance.indd 11

cutting spending. People are tired of austerity. It is extremely unpopular, and the government has been elected on this mandate of reversing austerity, or at least bringing it to an end. It would be very difficult politically to achieve around £30bn of spending cuts, basically meaning that taxes are pretty much the only option.”

Carl Emmerson, deputy director of the IFS, said: “Tax rises look likely, but should wait until recovery is well under way. As part of the [consolidation]

120

2 .0

110

1.5

100

1 .0

90

0. 5

PUBLIC SECTOR NET DEBT VS DEBT INTEREST

0

80 2019-20

2020-21

2021-22

2022-23

2023-24

2024-25

2025-26

Debt interest as % of GDP

[comparatively] fairly modest in scale – it effectively means baking in the cuts made since 2010.”

CIPFA’s local government policy manager Joanne Pitt said: “Departmental budget cuts do not create a positive outlook for the local government sector, given that councils are expecting long-term public service demand to rise as a result of the pandemic.

The true impact on local authorities is still unclear, as councils receive funding from more than one central government department, but it is unlikely that funding gaps will be met. Regardless, cuts to departmental spending will surely concern many within the local government sector and must be factored into councils’ future plans.”

An analysis of the Spending Review by ratings agency Moody’s said: “This squeeze on expenditure could prove politically challenging, given promises of the death of austerity against the backdrop of real cuts to expenditure in many areas over the past decade.”

The UK government is forecast by the OBR to borrow a record high of £394bn this year. The figure is more than seven times the £55bn forecast at the March Budget, a huge rise caused by the need to fund the response to the Covid-19 pandemic. Borrowing is expected to remain above £100bn for each of the next five years, with the debt-toGDP ratio also predicted to stay high, reaching 105% by 2025-2026, the OBR said.

package, I would like to see the chancellor take the opportunity to tidy up some of the parts of our tax system that are relatively weak, and then we could do tax rises that are a bit less damaging than what they would otherwise be.”

He added: “Things that people have been talking about include improving capital gains tax, and the way we tax pensions in terms of lack of National Insurance contributions on employer contributions, and targeting of the taxfree lump sum.”

Thomas Pope, senior economist at the Institute for Government, said: “At some point before the next election, he [Sunak] and the prime minister will have to start laying out what tax rises or spending cuts will be needed to fill this hole and return to a sustainable fiscal position.

If the government wants to borrow only for investment – as the fiscal rules set out in the Conservative manifesto would require – the chancellor will need to find net tax rises or spending cuts worth around £25bn a year.”

Pope added that £40bn of consolidation would be needed if the government wanted to restore the headroom against the fiscal targets that it had back in March. Overall, the OBR forecast that the UK economy will be around 3% smaller in 2025 than was predicted in the March Budget. GDP is not expected to hit prepandemic levels until the end of 2022.

PUBLICFINANCE.CO.UK 11

16/12/2020 11:16

OPINION

SPENDING REVIEW AMELIA CHONG

Health kick Increased funding for the NHS and Department of Health & Social Care is welcome, but is not enough to cover the impact of Covid-19 or transformation plans

A

t the start of the pandemic, the government made it clear that the NHS would get whatever it needed to deal with Covid-19. The Spending Review went some way to delivering on this commitment. An extra £3bn was allocated to the NHS for next year: £1bn to begin tackling the backlog in planned care, while the overall Department of Health & Social Care capital budget has been increased from £7bn in 2019-20 to £9.4bn in 2021-22.

However, these continue to be uncertain times for the NHS. What the Spending Review has not done is provide funding for the ongoing costs of treating people with coronavirus, or the knock-on financial effects of the pandemic on the NHS – for example, the loss of income that trusts would normally have earned from other sources. This is an ongoing discussion, with the government saying it will agree further funding with the NHS next year. When extra money is allocated, it is vital that it accounts in full for both direct and indirect costs, and that it reaches all parts of the NHS provider sector that need it: acute, ambulance, community and mental health trusts.

As the NHS moves out of the pandemic, it will find money is tight.

The Office for Budget Responsibility forecasts that the UK economy will shrink by 11.3% this year and not reach pre-crisis levels until the end of 2022. It is therefore not surprising that the NHS core revenue budget (which excludes Covid-19 related costs) is not getting a boost. In line with the original longterm settlement, set out by then prime minister Theresa May in June 2018, the core budget will increase by 3% in real terms next year. While that is generous compared with other public services, it is likely to prove insufficient to fund the recovery and transformation aspirations outlined in the NHS long-term plan.

On capital, extra funding announced is welcome. But it should be remembered that much of the additional money has already been earmarked for specific purposes: £325m next year for new diagnostics equipment, such as MRI and CT scanners, and £165m to replace mental health dormitories with single en-suite rooms.

There is not yet enough money budgeted to fund the government’s full hospital building programme, and there are no clearly expressed expectations of what should be delivered in the first five years. More investment is certainly needed for mental health trusts, which have so far not received an adequate share of this

When extra money is allocated, it is vital that it accounts for direct and indirect costs

12 PUBLIC FINANCE JANUARY/FEBRUARY 2021

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AMELIA CHONG is policy adviser for finances at NHS Providers

pot, and many providers have large backlogs of maintenance work that need addressing.

The government announced that existing public health grants will be maintained and that local authorities will be able to access more than £1bn in additional funding for social care next year. No specific long-term commitments have been made.

Given overall public expenditure pressures and the economic uncertainty ahead, the Spending Review was a pragmatic response to the challenges the NHS faces. Trusts welcome the investment in tackling the planned care backlog and rapidly escalating mental health demand caused by Covid-19. For those looking to invest in diagnostics equipment, eradicate mental health dormitories or make progress on their hospital building plans, the increased capital budget may offer new opportunities.

However, Covid-19 funding must be kept under review and, until the longterm settlement is revisited or the government reassesses its priorities for the NHS, there will continue to be a tension between the two.

Photography: Getty

16/12/2020 12:00

BEN ZARANKO

Tough times ahead The Spending Review might not mark a return to full-blooded austerity, but unprotected service areas are facing a financial squeeze after next year

T

his year’s Spending Review was really two rolled into one. The first focused on the exceptional economic and fiscal costs of the pandemic. Public services have now been allocated £113bn in 2020-21 in response to Covid-19, including an astonishing £22bn for Test and Trace services, and a £25bn reserve as an allowance for further costs. The Treasury will undoubtedly be hoping that any costs between now and April can be met from this, avoiding further top-ups.

Next year, public services have been allocated £55bn to help deal with Covid-19. After that point, nothing. This means that the provisional spending totals that underlie the government’s

BEN ZARANKO is research economist at the Institute for Fiscal Studies

official public finance forecasts assume precisely zero spending on things like Test and Trace in 2022-23 and beyond.

That is certainly possible – but it seems rather optimistic.

Concurrently, the chancellor conducted a ‘business as usual’ Spending Review, with a full set of departmental allocations for the 2021−22 financial year.

To the Treasury’s credit, departments’ core (non-Covid-19) budgets were laid out transparently, separate from any pandemic funding. Here, Rishi Sunak was a little more parsimonious, cutting £10bn from core budgets in 2021-22, relative to his March plans.

Funding for public services will still increase between this year and next, but

not by as much as previously planned.

Some departments will have been left with a less generous settlement than they had been expecting. Some – the Department for Work & Pensions, and the Foreign, Commonwealth & Development Office – will actually see a real-terms cut to their core budget between 2019-20 and 2021-22.

This was ostensibly a one-year Spending Review, and full departmental allocations were made only for 2021-22.

But some multi-year commitments had already been made (to the NHS and English schools) and others received new multi-year settlements (the Ministry of Defence). Together, the budgets for the NHS, schools and defence come to almost 60% of total public service spending.

Higher spending on the NHS and schools in England also means a corresponding increase in funding for Scotland, Wales and Northern Ireland via the Barnett formula. And while the government will cut overseas aid spending from 0.7% to 0.5% of national income from next year, it will then need to grow in line with the economy (or perhaps even faster if the government wishes to swiftly return to 0.7%). In practice, this means that the path for a huge chunk of public service spending has already been largely determined, which limits the room for manoeuvre at next year’s Spending Review.

This is important, because as well as removing £10bn from his plans for 202122, the chancellor also cut back plans for subsequent years. £11bn was trimmed from previous plans for 2022-23, rising to £13bn by 2024-25. We won’t see a return to the austerity of the 2010s – overall public service spending is still set to grow over the rest of this parliament. But given the sums promised to areas like the NHS, schools and defence, there may be little left for everything else.

If we look at ‘unprotected’ budgets not covered by existing commitments, provisional spending plans imply a realterms cut to per-person spending after next year. For the perennially squeezed courts system, or cash-strapped local governments, they point to a tough couple of years ahead.

PUBLICFINANCE.CO.UK 13

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16/12/2020 11:17

NEED TO KNOW

BIG PICTURE

ECONOMIC GROWTH

China emerges

X

iangyang (pictured in December fog, right) is the second most populous city in Hubei province, central China, behind Wuhan, the epicentre of the Covid-19 outbreak. More than a year since the first case of coronavirus was identified, China is better placed than any other major economy to recover from the recession wrought by the virus, according to the OECD. A forecast by the organisation predicts China’s GDP will be 9.7% higher by the end of 2021 than it was at the end of 2019. This means its growth is set to wildly outpace advanced economies such as South Korea (1.6%), Indonesia (1.5%), Turkey (0.4%), Russia (0.2%) and the US (0.1%). Many rich countries’ economies are expected to contract during the same period, including many in Europe, with the largest declines being projected for the UK (-6.4%) and Argentina (-7.9%).

The Japan Center for Economic Research estimates that China’s economy will overtake the US to become the largest in the world in either 2028 or 2029, ending more than a century of American dominance.

The ruling Chinese Communist Party will begin its 14th five-year plan in March, guiding development until early 2026, reportedly with a focus on high-quality, rather than highspeed, growth. In November, the CCP announced it had eradicated extreme poverty from the country, a month ahead of its original target. The new plan’s goals are as yet unclear, but the CCP has said it wants Chinese GDP per capita to reach the level of ‘moderately developed nations’ by 2035.

14 PUBLIC FINANCE JANUARY/FEBRUARY 2021

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16/12/2020 11:17

The Japan Centre for Economic Research estimates that China’s economy will overtake the US to become the world’s largest by 2028 or 2029

Photography: Getty

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16/12/2020 11:17

NEED TO KNOW

TALKING POINTS TWITT

LETTERS

Swaps deal provides a blast from the past Your article on the first local authority interest rate swap deal for over 30 years brought a wry smile. I never thought I would live to see it. As former managing director at the London Borough of Hammersmith & Fulham, I was intimately involved first time round.

The late 1980s were e Wild West times. Every ry self-respecting London on borough had a ruse to o evade capital spending ng controls – flogging and nd leasing back everything ng from parking meters to town halls; councillhouse rent factoring; advance or deferred purchase of assets, etc. Swaps became Hammersmith’s thing. ng.

The era turned into oa feeding frenzy for local cal authority swaps. The market was huge, but there were only four real marketmakers. Hammersmith was blissfully unaware that it was one. When rates rose to around 16%, its offside position was about five times its revenue budget.

When the proverbial hit the fan, I was shoehorned in to sort out the mess.

Sorting out restitution with more than 100 counterparties was a most enjoyable time of my career. Hours in Parisian restaurants failing to convince French banks this was not some Anglo Saxon plot to evade liability; American banks’ aggressive litigation fund managers; the proverbial inscrutability of the Japanese banks; the shiftiness of the Aussie state banks and the German federal banks, which had obviously never been near a credit committee. Most frightening of all, the local authorities that had acted as intermediaries between banks and Hammersmith – for a ludicrously small fee, given the risk they took on.

Forgive the history lesson, but don’t forget it. There has always been a place for the straightforward vanilla swap in council treasury management, and it is a great shame the excesses of the 1980s denied local authorities that weapon.

It is a hedging tool, not a trading instrument or an income generator.

The margin savings you report might be impressive, but perhaps more to do with the artificialit artificiality of PWLB pricing.

Inform yourselves of In the th banks’ position. I never did master the n total to intricacies of swap sw pricing, but ask your yo broker to provide some insight into the so bank’s position and b margins it is taking. m Beware the snake oil B salesman who has a sa cleverer wheeze than c the th simple swap.

Above all, take your auditor with you. It a was w the auditor that stopped Hammersmith. But beware – auditors have a habit of being wise after the event and taking advantage of the ‘unknown unknowns’, to quote e former US politician Donald Rumsfeld. eld. I suspect the Prudential Code has enough ough areas that are open to interpretation for them to pounce once again.

ER

“Sadly, it and th is low-incom eir peo e coun ple highes t t price who will pa ries y the in To ove this pa rcome ndemic streng the c . t future hen their res risis and , they n ilience f eed m ore he or the lp now Kristali .” na Geo (@KG directoeorgieva), mrgieva anag r of th Monet e Internatioing ary Fu nal nd

Standards of transparency and documentation were not consistently met in the first phase of the pandemic Gareth Davies, head of the UK’s National Audit Office, on government procurement during Covid-19

Neil Newton, former MD of London n Borough of Hammersmith and Fulham am

FROM ONLINE

Comment from PublicFinance.co.uk I am a local authority fraud officer who has reported six-figure Covid-19 grant frauds to our local police force and nationally, yet nothing seems to be done. A very simple (albeit smaller) fraud reported two years ago is still “under investigation”. If the police are unwilling or unable to investigate, then surely we need someone else to take on this role. Ultimately, we need people knocking on doors, interviewing suspects and bringing people to court. Otherwise, it feels like we are wasting our time.

Comment by ‘Thoughtful’ on the potential loss of £26bn of Covid-19 loans to fraud

16 PUBLIC FINANCE JANUARY/FEBRUARY 2021

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16/12/2020 15:27

NEED TO KNOW

WORLD IN NUMBERS

15.5% The record GDP rise recorded by the UK in quarter three of 2020, according to the Office for National Statistics. This followed an

unprecedented contraction of 19.4% in quarter two.

1M 4.9%

The annualised rate of new US home sales from August to October 2020 – the strongest demand since 2006, according to US Department of Commerce figures.

Growth in Chinese GDP between July and September 2020. The figure compares with a 6.8% contraction during the first three months of the year.

$4.80 Return on every $1 spent by high-income countries on supplying Covid-19 vaccines to the poorest countries, according to research institute RAND Europe.

£14 BILLION

WORLD IN NUMBERS

The amount the UK could receive annually from capital gains tax if the levy was brought in line with income tax rates, according to the Office of Tax Simplification.

$1.2TRN Amount predicted to be borrowed by the US Department of the Treasury from private debt markets over the first quarter of 2021.

€500M The amount of EU funding given to the COVAX Facility global procurement platform to secure access to future Covid-19 vaccines in low- and middle-income countries.

The fall in the amount of money migrant workers are set to send home in 2021, according to World Bank figures.

$1.7TRN

The financing gap developing countries need to fill this year to keep them on track for the 2030 sustainable development goals, according to research from the OECD. PUBLICFINANCE.CO.UK 17

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16/12/2020 11:18

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11/12/2020 16:30

VIEWPOINT

GREEN FINANCE STEPHANIE SFAKIANOS

Environmental issue The UK Treasury’s change of heart on issuing a sterling green bond provides it with an opportunity to drive the transition towards a green economy

I

n November, UK chancellor of the exchequer Rishi Sunak announced his intention to issue a green bond in 2021. The gilt will join the 16 sovereign green bonds already in the global market, with a total outstanding value of $74bn.

All follow the international green bond principles, requiring the issuer to allocate proceeds of the issue to eligible green projects, and provide at least annual updates on how this has been achieved.

It is an open secret that there has historically been some resistance to taking this step in the UK, and, following the announcement, reservations have been expressed in some quarters. It is therefore worth considering why there seems to be a change of heart.

Part of the answer lies in a clearer Worries have been expressed that a expectation of cost competitiveness. relatively small and illiquid green bond A report published by French bank BNP could provide an inconvenient outlier Paribas on 17 November is just the latest on the government’s funding curve, that finds evidence of a “significantly potentially driving pricing higher. lower” new issue premium, now So acute is this perceived problem widely referred to as a ‘greenium’, that previous sovereign issuers have relative to a standard bond. This taken great steps to address it. France appears to apply to sovereign issuers as has insisted on its Green OAT bond well as corporates. The Bank of England being ‘the best of both worlds’ in terms noted this effect ahead of announcing of trading performance, through the its intention to issue. issuance of regular taps.

Another compelling Germany has adopted a concern, at a time when twin system through the Covid-19-related borrowing issuance of a parallel bond is high and rising, lies in with a matching maturity, the fear that the issuance into which exchanges can of a green bond might in be made in the event of a some way compromise the perceived lack of liquidity. government’s ability to fulfil The French approach is STEPHANIE SFAKIANOS its broader funding needs at clearly the simplest from is senior adviser at the the most competitive pricing. Green Finance Institute an administrative point

The UK Treasury now appears satisfied a green gilt meets its ‘value for money’ criterion on funding costs

Illustration: IKON images

19 Viewpoint Green bond_Jan-Feb 2021_Public Finance.indd 19

of view, and seems to be perfectly well received, given that they have raised close to €30bn.

The UK Treasury and Debt Management Office now appear satisfied a green gilt meets their mandated ‘value for money’ criterion on funding costs.

However, some non-trivial structuring costs need to be considered. Although direct costs, in the shape of an external review, are modest, internal management time and costs will doubtless be an issue in the current environment. However, the information requirements for a credible green gilt are no more than are required for the government to flesh out its sustainability plan on the legally mandated road to net-zero emissions by 2050. Projects need to be identified against measurable impacts, which is likely to require an unaccustomed amount of dialogue between ministries and with local government.

The announcement that the government plans to take on this task can only be good news for the UK market.

Although no one is in any doubt about the part the capital markets have to play in mobilising finance for the transition to a low-carbon economy, sterling is very under-represented, accounting for less than 5% of outstanding green, social and sustainable bonds. Since the government accounts for more than half of total issuance, it is uniquely placed to kickstart the market.

PUBLICFINANCE.CO.UK 19

16/12/2020 11:19

INSPIRATION, INNOVATION TALENT CELEBRATING

AND

IN PUBLIC FINANCE AND GOVERNANCE

ENTER NOW ENTRY DEADLINE:

18 March 2021 In 2020, more than ever we have been reminded about the incredible work that goes on in our communities every day. Winning an award is not just vindication that we are on the right course, but it spurs us on to push new boundaries and work every day on being better. <d VXfSc ec Q_^ŮRS^QS d_ PS recognised in this way and will only bNXcS dWS `b_Ů[S _T dWS 5_e^QX[ͨ dWS Y_P gS NbS R_X^V N^R dWS X^QbSRXP[i cdNŬ gW_ g_bZ T_b ecͥ

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11/12/2020 16:30

VIEWPOINT

ENVIRONMENT JOANNE PITT

A sustainable future for local government As thoughts return to the climate change crisis, CIPFA is exploring a green future for the public finance sector

A

year ago, it felt like forward 10 years to 2030, Brexit, the election and along with a commitment climate change were to provide charging-point all anyone could talk about. infrastructure and grants to The meteoric rise of activists help buy electric cars. like Extinction Rebellion While the current and Greta Thunberg put the pandemic is indeed a JOANNE PITT environment firmly at the pressing crisis, we at CIPFA is CIPFA principal adviser, front of our minds. However, are pleased to see the issue local government the emergence of Covid-19 of sustainability rising back wiped climate action from the to prominence. In many political agenda almost entirely. ways, it is the biggest and most complex As 2021 begins, thoughts are turning challenge we face – there is, after all, no back towards the threat facing our vaccine for climate change. planet. In November, the government Almost three-quarters (74%) of local unveiled a 10-point plan for a green authorities have already declared climate industrial revolution. It aims to emergencies and undertaken numerous support 250,000 jobs in clean energy, initiatives to help. But we have yet to transport, nature and innovative see a strategy to help the entire sector technologies. A ban on the sale of new move towards a sustainable future. petrol and diesel cars was brought CIPFA believes the UN’s sustainable development goals can provide a framework to not only structure the sector’s thinking around the climate but also boost social wellbeing and economic prosperity.

Substantial opportunities lie in SDG 12 – responsible consumption and production. Local services can involve complex supply chains, and Institute for Government figures show that procurement accounts for 47% of local government spending. Councils have a big opportunity to

Illustration: IKON images

21 Opinion - CIPFA_Jan-Feb 2021_Public Finance.indd 21

direct spending towards low-emission options. Transport, homes, agriculture and energy represent a massive 78% of total emissions.

Working with suppliers and communities, councils can support new technologies and processes to both protect the environment and deliver wider social and economic value. One such area is social housing – where another crisis faces local authorities.

The housing, communities & local government committee has said that 90,000 new social homes must be built every year to meet need.

However, each new home ‘costs’, on average, more than 50 tonnes of carbon to build. A programme on this scale using traditional methods would produce 4.5 million tonnes of CO2 each year. Using timber instead of steel could slash emissions.

Councils have a big opportunity to direct spending towards lowemission options I believe a collective way forward will be achieved. In the meantime, CIPFA is considering what a green future could look like for the public finance profession. Well managed and robust public finances are critical.

Key to reaching this future will be fresh eyes and a fresh perspective.

We know plenty of young people entering the sector today are doing so with a view to being a different kind of accountant. One who does things differently and explores how local authority finances can better support social and environmental ambitions at the local level.

CIPFA is ready to learn and grow with its members to build back better and leave the world a better place than we found it.

PUBLICFINANCE.CO.UK 21

16/12/2020 11:19

FEATURE

TREASURY MANAGEMENT

22 PUBLIC FINANCE JANUARY/FEBRUARY 2021

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16/12/2020 11:20

In the wake of Covid-19, central banks are once again asking whether cutting interest rates below zero could provide a lifeline to struggling economies W O R D S L AW R I E H O L M E S P H OTO G R A P H Y R I C H A R D G L E E D

D

uring the past decade, in response to the global financial crisis, central banks in several advanced countries cut their interests rates to near zero. However, a few went even further – taking their rates into mildly negative territory. In 2019, an International Monetary Fund working paper said “the zero lower bound is not a law of nature; it is a policy choice”. In the aftermath of another financial crisis, this time caused by Covid-19, policymakers are once again weighing up the pros and cons of the policy.

The theory is simple – rather than hoarding money, depositors – forced to pay banks to hold their savings – are likely spend or invest instead.

The policy’s main driver has been to stimulate investment in slowing economies, often along with large-scale injections in the form of quantitative easing. But do negative rates present an opportunity or a potential headache for finance directors in public sector bodies?

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16/12/2020 11:20

FEATURE

TREASURY MANAGEMENT In some quarters, negative rates are frowned upon as an unorthodox tool. However, they are a perfectly legitimate economic response, according to Antonio Fatás, professor of economics at business school INSEAD, whose work focuses on the study of business cycles. “They are a standard fixture in the monetary policy toolkit, and appropriate when the economy is asking for them,” he says.

Public bodies may seek to take advantage of negative interest rates, at least in theory, for capital investment, says Nick Keeling, client director at UK local authority treasury advisory management firm Arlingclose. “If you are a public body that has been finding things tough in the Covid-19 environment, your borrowing is a priority,” he states. “So this tool is an attractive proposition.” However, he questions whether a move into negative territory would have a significant effect on public body borrowing. Sub-zero rates alone will not be the driving factor in spending decisions, he believes.

“Unless we go deeply negative, I don’t think you’ll see a negative bank rate spurring activity just by itself. It would need to feed through the yield curve,” he says. “All gilt yields would have to come down, so there would have to be some buy-in that it was a long-term policy. It might well be that the biggest incentive to borrowing for investment may be in statutory requirements for economic development, rather than a central bank taking 10 basis points off the interest rate.”

However, Keeling believes that being penalised to hold money in banks might have an unintended positive consequence on public sector operations – more effective cash management.

Public bodies are likely to face a need to introduce more efficient cashflow management systems, or change policies for paying bills and wages, in order to reduce the cost of holding excess liquidity, he warns. “This will require better communication between finance department leads and the head of treasury, so that they can be certain about how much cash is coming in at any time,” Keeling says.

“It might well be that the biggest incentive to borrowing for investment may be in statutory requirements for economic development, rather than the Bank of England taking 10 basis points off the interest rate” Nick Keeling, Arlingclose

SWEDEN

Local benefits Sweden’s municipal authorities – the third tier of government below regional level – were the main beneficiaries of Sweden’s foray into negative interest rates. Launched in 2009, the policy saw deposit rates reach a nadir of -0.5% by 2015. The policy was abandoned in 2019, when rates were raised to 0%.

Fredrik Andersson, associate professor in the department of economics at the Lund School of Economics and Management, says the country’s central government had little need to borrow at negative interest rates during that period because the national debt declined in the years preceding the coronavirus pandemic. However, some municipalities running Sweden’s cities have “borrowed a little too much”, he fears.

“It means that if the interest rate goes up a little bit, they could experience problems,” says Andersson. “But, so far, financial problems have been experienced by only a relatively small number of municipalities in northern Sweden. None of the major cities have got into difficulty.”

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It may be new territory for some countries, but for parts of the developed world, negative interest rates have been a fact of life for many years. In Japan, the policy has been a core part of a policy aimed at kickstarting an economy that has stalled for the best part of three decades. However, in a country where largescale public works programmes are the norm, negative interest rates have had limited effect in stimulating the economy, according to Robert Carnell, Singapore-based regional head of research, Asia-Pacific, at ING Bank. “Japan has proved that the impact of interest cuts below the 1% level are marginal, and may even possibly be having a negative effect,” he says.

Global experience During the decade following the global financial crisis of 2007-08, more prosperous European countries, along with the European Central Bank, moved rates into negative territory (see infographic, p29). Professor Thiess Buettner, head of the Independent Advisory Board of Germany’s Stability Council, believes, even more than its European peers, Germany has seen great benefits from the decline in interest rates on government debt. He says the national government has taken advantage of the ECB rate cut to facilitate a big debt expansion to counter the effects of Covid-19.

However, the impact on borrowing by subnational government bodies has been minimal, he says. “Most of the action is at the federal level, providing support to municipalities that have not had to take on that responsibility and risk or worry about the ramifications of a negative interest rate policy,” he adds.

In Switzerland, the central government is set to increase public debt as a result of the pandemic, says Dr Angelo Ranaldo, professor of finance and systemic risk at the country’s University of St Gallen. The impact for authorities that have taken on funding in the negative interest rate environment is, at present, unclear, he states. “I don’t think there is any municipality or canton that is in trouble. So far, negative interest rates haven’t really had a significant impact, and there hasn’t been a big change in borrowing or in investment at the municipality level.”

However, existing debt portfolios might be affected, particularly where hedging strategies have been undertaken. In 2016, the Association of German Cities warned local authorities they may be exposed to “theoretically unlimited risk”, according to a report in business

GERMANY

Federal response Although Covid-19 resulted in a huge expansion of public debt, it has been the federal government that has taken on the heavy lifting, rather than the states, says professor Thiess Buettner, head of the Independent Advisory Board of Germany’s Stability Council.

“Constitutionally, it’s the job of the states to provide assistance to municipalities,” he explains.

That has largely been made possible by a decline in recent years of annual interest payments on outstanding government bonds, as maturity yields turned negative, says Buettner.

“Germany’s 10-year bond yields started to get negative around 2016, and now the yield is at -0.6%.” he explains.

“This was a big windfall and

provided an incentive to issue more debt.”

The low number of municipal authorities facing financial stress in recent years means they have not had to cut back on spending, says Buettner. But that may change, he warns, because long-term receipts from local business taxes are likely to fall away.

So far, a couple of longterm investment funds made available to authorities remain largely untapped, says Buettner. “Municipalities are a bit hesitant to use the funding for their own investment activities,” he adds.

But in states where municipalities have been allowed to use debt to fund current expenditure, he warns that problems may lie ahead.

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16/12/2020 11:20

FEATURE

TREASURY MANAGEMENT newspaper Handelsblatt. Relations between municipalities and their banks turned sour when expected payments from banks became liabilities.

Banking challenge Such tests of the relationships between banks and public bodies are part and parcel of entering new territory – negative interest rates are as unfamiliar for the banking sector as for their depositors. In October, the Bank of England wrote to banks in an attempt to ascertain what issues their systems might face if rates were to turn negative in the UK. “Banks may find it difficult to deal with negative rates from the technology perspective, but it also might be a challenge in a conceptual sense, as we haven’t been here before,” Keeling warns.

“To help banks adjust, central banks have come up with tiered solutions,” says Fatás. In October 2019, the European Central Bank introduced a tiering system, which exempts a portion of deposits – currently set at six times a bank’s mandatory reserves – from paying more than 0%.

One argument employed against negative rates is that the policy exhausts central banks’ arsenals in a protracted war against the economic downturn, suggests Dr Nikolaos Antypas, lecturer in finance at Henley Business School.

“Loose monetary policy can eventually become incrementally ineffective, requiring larger and more frequent liquidity injections to stimulate the economy, if recovery has not yet taken shape. This creates the obvious threat of making monetary policy an irrelevant remedy, while at the same time risking the advent of hyperinflation,” he says.

But what of the prospects for more widespread adoption of negative interest by central banks around the world? As the Bank of England considers the possibility of cutting rates below zero, a number of other countries that previously stated they would not countenance the policy – including New Zealand – are also signalling they could change their mind, says Carnell. At the very least, they are using the policy “as a veiled threat to keep their currencies weak”, he adds.

Robin Jarvis, professor of accounting at Brunel University London, notes that while negative rates could provide a short-term solution to address the challenges posed by Covid-19, there is little appreciation of the impact over the long term. “As it becomes cheaper, local authorities and other public bodies will either borrow to spend money on services to enhance the public good or invest it,” he says.

“Both strategies could stimulate the economy. But the loan still has to be serviced. Governments and central banks need to look at the experiences of other countries, as they have different structures in place,” he adds.

“As it becomes cheaper, local authorities and other public bodies will either borrow to spend money on services to enhance the public good or invest it. Both strategies could stimulate the economy.”

Robin Jarvis, professor of accounting at Brunel University

And if economic conditions improve as vaccine programmes are rolled out worldwide, enthusiasm for negative interest rates might tail off. Fatás believes the world is unlikely to see mass adoption, because quantitative easing has proved an effective means of stimulating economies. “As long as economic conditions keep improving, central banks might want to avoid negative rates,” he says. But, if 2021 is as extraordinary as 2020, local authority finance leaders must assume that the likelihood of employing this controversial tool is not off the table.

26 PUBLIC FINANCE JANUARY/FEBRUARY 2021

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16/12/2020 11:20

VIEWPOINT

TREASURY MANAGEMENT ADRIAN BROWN

Drop zone Moving into negative interest rate territory might be less significant than it sounds, but m sstill provides investors with food for thought

Contrary to expectations, depositors are happy to pay for the convenience of keeping their cash in the banking system

D

espite the respite provided by positive news on Covid-19 vaccines, downward pressure on bond yields remains a key theme for investors looking to the next few years. Gertjan Vlieghe, of the Bank of England’s monetary policy committee, has highlighted structural factors, including the savings glut produced by baby-boomers approaching retirement.

Others point to a need for fiscal repression to clear the historically high levels of public debt resulting from Covid-19-related stimulus. Analysis of experiments with negative interest rates in the eurozone and Japan suggests, contrary to expectations, that depositors do not withdraw their money when faced with negative rates, and are prepared to pay for the convenience of keeping their cash in the banking system.

So, what might the introduction of negative interest rates mean for investors (and pension providers)? One of the big uncertainties here is what happens with inflation, because the ‘real’ interest rate (ie, after inflation) is more important to investors.

One camp argues that the huge amount of monetary stimulus (quantitative easing) will result in higher inflation. The other believes the global economy has plenty of spare capacity and that deflation remains a risk.

Where inflation is already higher than gilt rates, the advent of negative nominal interest rates might represent more of a continuum than the sea change it might seem. Nonetheless, there are some important considerations for investors.

A further fall in interest rates will generally support prices of assets, since a lower ‘discount rate’ (linked to interest rates) increases the value of future cashflows.

With government bonds, this effect is very predictable, and explains their strong performance over the past decade. For

equities, it is less direct, but still a powerful positive effect for higher-growth, lower-yield stocks. Property falls somewhere in between.

Rising inflation, on the other hand, is very damaging for bonds, particularly if you start from the current low-yield position. In the short term, sharp rises in inflation can also damage equity valuations, but, longer term, equities are a ‘real’ asset, whose profits can inflate with the economy. Property and other ‘real’ assets, like infrastructure investments, often have their income linked to inflation, so can prove resilient.

Negative rates do make ‘safe’ assets unattractive – that’s the idea. With gilts yielding less than inflation, and the prospect of paying to hold cash, investors are hunting for assets that may offset equity risks. Some investors are turning to corporate bonds, which yield enough to keep pace with inflation, or higher-yielding illiquid assets, such as infrastructure or private debt.

Lastly, for pensions managers, low or negative rates and rising inflation can represent a perfect storm, as the current cost of paying future pensions (long-term, inflation-linked liabilities) soars. This is particularly true for any employers looking to insure their future pensions liabilities.

Pension schemes hold a mixture of asset classes. The typical UK local government fund holds 55%-60% in equities, with 20% in bonds, 10% in property and the balance in alternative sources of income. Only 1% is held in cash. They should be in a reasonable place to navigate the waters of the next decade, but their captains should be braced for some choppy seas.

ADRIAN BROWN is an independent investment adviser with asset management consultancy MJ Hudson PUBLICFINANCE.CO.UK 27

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16/12/2020 11:21

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DATA

TREASURY MANAGEMENT SW ITZ E RL A N D P O L I CY R AT E

EUROZONE D E P O S I T R AT E

SW E DE N R E P O R AT E

Jun 12

- 0. 2 % Dec 12

Jun 13 - 0.1 %

Dec 13

Jun 14 - 0.1 % - 0.0 5 % Dec 14 - 0. 2 % - 0. 5 %

- 0.1 % - 0. 2 5 %

Jun 15

- 0. 2 %

- 0. 7 5 % - 0. 3 5 % Dec 15 - 0. 3 %

Jun 16

Dec 16

Jun 17 - 0. 5 %

Dec 17

- 0.4 % - 0. 7 5 %

- 0.6 5 %

Jun 18 - 0.1 % Dec 18

*W I DT H OF B A R RE FL E C TS IN TER EST RAT E

Negative interest rates have so far been adopted by five central banks in response to the 2007-08 global financial crisis.

The first bank to take the plunge was Danmarks Nationalbank (Denmark) in 2012, followed by the Swiss National Bank in 2015. In January 2016, Japan reduced its base rate from 0.1% to -0.1%.

Strictly speaking, Sweden’s Riksbank had become the first central bank to introduce a negative rate in 2009, when it imposed a negative deposit rate for commercial bank holdings. However, the main policy rate (the repo rate) remained positive until February 2015, when the Riksbank then lowered it to -0.1%.

The European Central Bank set the interest rate on its deposit facility negative in 2014, since when it has stayed below zero. It is now at -0.5%, and the rate is charged on any bank that holds deposits at the central bank overnight.

This has only an indirect effect on interest rates charged by banks on their credit and on the interest on government bonds. Although the long-term rate set by the European Central Bank has never fallen below zero, the effects of the ECB’s quantitative easing programme of massive purchasing of government bonds in recent years (ramped up in 2020 to combat Covid-19) has seen the rate set by capital markets fall below zero. “The ECB’s main policy rate is zero.

But because it supplies money through QE, the deposit rate (which is negative) also becomes relevant for the banks, which are flooded with all the additional money,” says Fredrik Andersson, associate professor in the department of economics at the Lund University School of Economics and Management.

This effect is felt in countries such as Germany when the maturity yields on government bonds turn negative. “Lower ECB rates (negative or positive) improve financial conditions for all borrowers, including governments,” says Antonio Fatás, professor of economics at business school INSEAD.

JA PA N B A S E R AT E

Below the line

DE N M A RK C ERTIFIC ATE OF DEPOSIT RATE

N E G AT I V E I N T E R E ST R AT E S

Jun 19 - 0. 2 5 %

Dec 19

- 0. 7 5 %

- 0. 5 % Jun 20

- 0.6 %

Dec 20

PUBLICFINANCE.CO.UK 29

29 Infographic - Negative_Jan-Feb 2021_Public Finance.indd 29

16/12/2020 11:21

FEATURE

INTERVIEW

LITTLE

Cat Little had a baptism of fire after joining the Treasury in March 2020. From PPE purchasing to November’s Spending Review, controls have remained tight, she says

WORDS COLIN MARRS

I

n March 2020, as world stock markets tumbled, UK chancellor Rishi Sunak delivered a Budget speech somewhat different to the one planned. At that point, the economic impact that the emerging Covid-19 pandemic would wreak was unknown. Reading them now, Sunak’s words to the House of Commons seem studied English understatement.

“There is likely to be a temporary disruption to our economy. For a period, it is going to be tough.”

It would be another week before the UK locked down. For Cat Little, however, things got very tough indeed the very next day – her first in post as director-general of public spending at the Treasury. “It was seen as a really neat handover day, so my predecessor could do the Budget, with me taking over the day after,” she says. “I have to admit that day one was very much straight into the fray, designing economic schemes, working with

REST colleagues in other parts of the Treasury and looking at major spending decisions on personal protective equipment, health service capacity and supporting local government.”

Little speaks to me via video call from her wood-beamed home on Kent’s North Downs, shortly after the 2020 Spending Review, for which she was the lead official within the government. Once she settles her dog, which interrupts the start of our interview by barking excitedly at the arrival of her wife, Ruth, Little recalls the early pressures she faced: “There was a period when we had daily conversations with the Department of Health about everything they were dealing with. Almost week by week, we were changing our view about how much money might be needed for PPE, whether we were buying for the whole of the UK and how the distribution costs were going to work.

That was a really, really intense period.”

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FEATURE

INTERVIEW The financial year to date has seen 14 separate fiscal policy announcements, each equivalent to a substantial Budget in normal times, according to a recent report by the Office for Budget Responsibility. “It has had a massive impact on the workload,” Little says. “But the Treasury has been doing fiscal events for a very, very long time. Doing more isn’t necessarily an issue when you know you have got the fundamental processes to do them. What is challenging, however, is the constant adaptation.”

Little has a wide-ranging role that she describes as “meaty”.

Within the Spending Review process alone, she wears three hats that would not look out of place in Brobdingnag in Gulliver’s Travels. The first involves making decisions on how to implement strategic policy, such as the levelling-up agenda.

Second, Little works with the civil service’s finance function to coordinate and deliver Spending Review bids from departments.

The third prong involves managing external relationships – with the prime minister’s office and permanent secretaries.

The process for this year’s Spending Review began in earnest in May, when the Treasury agreed a set of policy priorities – including levelling up, ‘building back better’, green issues, and capital investment – with Number 10. These, Little says, framed the templates that departments use to bid for cash, and how those bids were judged. For this year’s review, the Treasury introduced panels to appraise bids for capital spending, run in conjunction with the Infrastructure and Projects Authority and economists.

With Alex Chisholm, the civil service’s chief operating officer, Little also chaired dedicated panels on data technology and automation “to really test what we were trying to achieve through funding into technology”.

an additional 20,000 police officers. “It is by no means comprehensive yet, but we set up this helicopter view to see the impact system-wide,” she says.

Analysis and advice must be married with top-down political direction. “The most important part of being a civil servant is that you are presenting objective evidence and analysis [to politicians], and, ultimately, providing a recommendation on what that tells you,” Little says. “Our job is to present the trade-offs, the analysis, to help make really difficult decisions, and, critically, to outline the real-life consequences.”

All over the detail The exercise is iterative and symbiotic, Little says. “I like to think we bring ministers and stakeholders with us through the process. Our ministers are all over the detail – there is nothing they enjoy more than going through analysis and spreadsheets. By the time you get to that final point, you have been on quite a long journey – it is never as simple as ‘Here are three options’.”

The decision to scrap the original plan for a three-year Spending Review in favour of another one-year settlement caused frustration in parts of the public sector, crying out for long-term funding certainty. However, Little says the decision was necessary to focus on the immediate challenge of the pandemic. “Fundamentally, now is not the time to think about the medium term. We need to distribute the vaccine and see what the economy looks like the other side of the pandemic.”

That does not mean the department has been spending without any constraints. “Our spending controls and the managing public money framework have operated throughout the whole of the crisis,” says Little. “We have been quite innovative in how we have managed accountability, and with our decision-making to make it quicker. But spend control hasn’t really changed.”

On the morning of the Spending Review, the National Audit Office released a report into the supply of PPE by the Department of Health & Social Care during the Covid-19 pandemic. It found the department had paid £10m more for the equipment than it would have done a year earlier.

Little says the Treasury was “acutely aware” of the risks and set appropriate conditions before allocating funding to the DHSC. “We are right in the middle of a lessons-learned exercise on a number of specific areas,” she says, “and the Cabinet Office is working to look at how the commercial risks were managed in particular. But we always knew that we would have to pay above the historic average cost to secure the PPE that the frontline deserved.”

“Our job is to present the trade-offs, the analysis, to help make really difficult decisions, and, critically, to outline the real-life consequences”

Tough choices Because all departmental spending proposals are aimed at improving society, prioritisation can be tricky, Little says. “Is it difficult weighing up how much to invest in international aid vs how much more you want to put into the health system?

Yeah, it is really difficult.” Coordination between departments can reduce a degree of competition, Little says. “The problems we are facing can never be fixed by one department alone or by one individual, so we really encourage departments to team up to drive better outcomes.”

Little also points to work on emerging data analytics processes, allowing sophisticated modelling to show knockon effects of spending decisions to other departments.

Their fruits include funding to help the justice system cope with the extra work resulting from the decision to provide 32 PUBLIC FINANCE JANUARY/FEBRUARY 2021

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Photography HM Treasury/ HM Treasury / Government Finance Function

16/12/2020 11:23

Addressing the Government Finance Function conference back in February 2020, Little had no idea of the scale of the challenges to come PUBLICFINANCE.CO.UK 33

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FEATURE

INTERVIEW

CV

Cat Little EMPLOYMENT 2020 Director-general, public spending, HM Treasury 2017-2020 Director-general, finance, Ministry of Defence 2016-2017 Director of finance and planning, Ministry of Justice 2014-2016 Director of finance and performance, Legal Aid Agency 2013-2014 Deputy director, financial controller, Ministry of Justice

“When you boil down who works in the Treasury and the sort of leaders we have, very few of us reflect what people think that Treasury ‘type’ is” Little emphasises that a proportion of the £55bn allocated in the Spending Review to fight coronavirus has been dedicated to future resilience. As former director-general of finance at the Ministry of Defence, she draws a parallel with military planning. “We pay around £40bn a year to be prepared for the terrible, terrible situation where we might be at war. That sort of mindset of peacetime preparations for crises is something that government has invested a significant amount in as part of the pandemic this year.”

Little denies the oft-levelled assertion that the Treasury is an institutionally centralist organisation. Departments, she says, are given great freedom to make spending decisions within the framework handed to them by the Treasury when allocations are made. The former PwC senior manager says: “If you were to look at a private sector comparison, most companies would not delegate money until the very last moment. Spending would be much more tightly controlled by the centre.”

If Little’s spending responsibilities were not enough to keep her occupied, she is also accounting officer for the whole of government accounts and head of the Government Finance Function. The latter brings together more than 10,000 civil servants in finance-related professions across different departments and bodies. Work is ongoing to improve career paths and training for this cohort, she says.

“We have got people who do foreign exchange forwardpurchase contracts, major capital investment, commercial

2002-2013 Associate through to senior manager, PwC

EDUCATION 1998-2002 University of Birmingham BA (Hons) in History 1992-1998 Beaconsfield High School

complex finance transactions, balance sheet management.

It is a vast, exotic range of financial skills.”

Apprenticeships are an important tool that Little’s own department is using to improve its diversity, she says. “We have suffered from people thinking there is a Treasury ‘type’.

But the fact that we have got lots of fantastic apprentices who have worked their way up in policy teams in the Treasury, coming from completely different educational backgrounds and parts of society, is a really healthy thing.”

Tools for diversity The executive management team currently has a 50/50 gender split. “When you boil down who works in the Treasury and the sort of leaders we have,” Little says, “very few of us reflect what people think that Treasury ‘type’ is.” But she warns that there is no room for complacency and says current conversations are focused on improving social and racial diversity.

So does the high-flying CIPFA-qualified public official see herself as a role model for minority groups starting out on a public finance career? “As a relatively young, gay woman from an ethnically diverse background, I like to think that people see me as someone who does not look quite like their perception of someone who works at the Treasury. I know what it feels like to not belong and to feel a bit different. I can share a lot of lived experience with people who might be, you know, lacking confidence.”

34 PUBLIC FINANCE JANUARY/FEBRUARY 2021

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11/12/2020 16:31

FEATURE

ENVIRONMENT

MATERIAL CONCERN WORDS MARK SMULIAN

36 PUBLIC FINANCE JANUARY/FEBRUARY 2021

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Photography: Alamy, Getty

16/12/2020 11:24

With developing countries increasingly rejecting waste from the West, local authorities face mounting financial challenges on meeting their recycling targets

E

vents on tropical shores more usually fill finance directors’ dreams rather than their spreadsheets, but one beach in Malaysia has managed to disturb the ledgers. So indeed have everything from poisoned eggs in an Indonesian village to the deliberations of the Chinese Communist party. These countries no longer want the West’s waste – including the material local authorities collect for recycling – and hundreds of containers are heading straight back.

There are not enough plants in most developed countries to reprocess this now-unexportable material, leading to gluts that could see councils – far from being able to sell recyclables – having to pay contractors to remove them. Any normal business would stop collecting materials it could not sell. However, local authorities must collect recyclables, regardless of end markets, as they have government targets and environmental pressures to meet.

Such targets mean public bodies around the world urge citizens to recycle more, but must then collect, transport, sort, reprocess and sell whatever is collected, using an in-house team or contractors for some or all of these stages. Trouble looms if a council either cannot provide the recyclables it has promised to its contractor, or supplies so many that the contractor cannot sell them.

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FEATURE

ENVIRONMENT AUSTRALIA

Radical change The City of Melbourne local government area has been hit

by China’s waste import restrictions. This is among factors that have led the council to issue its Waste and Resource Recovery Strategy 2030, which seeks radical change in public thinking. “The current recycling crisis caused by changing export markets (particularly in China) compels us to act quickly to reform the recycling system,” it notes.

“We need to improve waste management in the city to reduce congestion, odour and noise, and improve safety, particularly as Melbourne’s population grows rapidly.”

The strategy seeks to create a future in which people and businesses “appreciate waste as a valuable resource”. This means changing attitudes, so that products are designed to be durable and repairable, made where possible from recycled materials, and easy to recycle. Residual waste will be processed to produce recoverable materials or energy, with landfill used only as a last resort, because it can leach heavy metals and toxic chemicals into soil and water.

Consultant Ray Georgeson, former chief executive of the Resource Association, says: “There are very few local authorities – possibly none – that directly trade recycled goods. The vast majority are locked into contracts where they pay a fee to a materials recovery facility, and those fees can go up if there is a lack of demand China’s restrictions [for recyclables]. In almost all cases, on imported waste have a local authority will leave that had global consequences, negotiation to the middle people.” including reduced Georgeson says that not many prices, market blockages local government professionals have and stockpiling

the depth of market knowledge to know what is happening when a contractor says these charges have increased. “Waste is not a red flashing light for council finances,” he says, “but it’s an amber one, and they need to understand the market better.”

Chinese rejection A lot of recyclables from Western countries formerly went to China, which made money from reprocessing them.

China then found that too much of what it received was contaminated, such as consignments labelled ‘paper’ containing used nappies and other detritus, preventing efficient recycling. Tiring of this, China introduced the ‘national sword’ policy that set contamination limits on imported waste so low as to effectively ban them, and switched its factories to its burgeoning domestic waste industry.

Exporters stuck with waste diverted it to south-east Asian countries, but they too soon decided they did not wish to be international dustbins and also began returning it. An Australian government analysis of the country’s municipal recycling infrastructure capacity in 2018 said China’s restrictions had had “global consequences, reducing prices for recycled commodities and causing market blockages, stockpiling and some instability in the provision of recycling collection services”.

Overall, between 2016-17 and 2017-18, Australian waste exports to China decreased from 1.26m to 0.75m tonnes.

“The [Chinese] restrictions delivered a major shock to the recycling sector, particularly operators of materials recovery

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Malaysia has joined other south-east Asian countries and stopped waste imports

facilities processing household recyclables,” the analysis said. While other countries took up some slack, the analysis noted: “If Malaysia, Vietnam and Thailand stopped waste imports, Australia would need to find substitute domestic or export markets for approximately 1.29m tonnes of waste a year.” Since those countries have since done just that, Australia, along with other developed countries, faces the problem of what to do with unwanted recyclables.

Illegal waste exports

WALES

Collection cuts Waste divides into recyclable and ‘residual’, with the latter normally going to landfill or being incinerated. In theory, if fewer residual waste collections are offered, the public will recycle more, rather than carelessly discarding recyclables. From the traditional weekly waste collection, fortnightly – and, occasionally, even three-weekly – residual collections alongside weekly recycling ones have become increasingly common.

Conwy County Borough Council in Wales has gone where few have dared to tread with four-weekly collections for residuals. It introduced this in September 2018, alongside weekly recycling and nappy collections and fortnightly ones for electricals and textiles. Results so far have been promising, with the recycling rate up from 64% in 2017-18 to 69% for 2019-20.

Since 2016, there has been a 31% reduction in the tonnage of residual waste collected.

Neighbouring Denbighshire County Council is to adopt four-weekly collections.

In 2019 alone, Indonesia resolved to return 100 containers of contaminated plastic waste to Australia and lesser amounts to countries including the US, Germany, the Netherlands and New Zealand.

The Basel Action Network – a nongovernmental organisation that monitors the Basel Convention on hazardous waste exports – found that another consignment of illegally exported waste in Indonesia was sent on to other countries rather than being returned. It traced 38 containers diverted to India, South Korea, Thailand, Vietnam and Mexico among others, with only 12 returning as intended to the US. Simon Ellin, chief executive of industry body the Recycling Association, explains: “China stops accepting paper from the start of 2021 and has already stopped plastic. It is only really accepting copper and aluminium, which it does not class as waste. Indonesia is insisting on a very difficult registration process, which has been horrendous to deal with, and is headed the same way as China. Add to that Malaysia, Vietnam and most other countries in south-east Asia and it has pretty much stopped exports.”

In May 2019, Malaysia decided to repatriate 3,000 tonnes of unrecyclable plastic waste to Australia, the US, the UK and Canada. In October 2020, Sri Lanka sent 21 shipping containers back to the UK after hazardous waste was found hidden among used mattresses and carpets. In one horrifying case, the International Pollutants Elimination Network found that plastic waste exported to Indonesia was burnt as fuel, creating toxic concentrations of dioxins in eggs on local farms.

There are obvious reputational consequences for any public body caught in the fall-out, such as when the BBC’s War on Plastic documentary last year found recycling sacks with the branding of half a dozen UK councils on a Malaysian beach.

The councils had a reasonable defence – they could not control how their recycling sacks were used once issued – PUBLICFINANCE.CO.UK 39

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FEATURE

ENVIRONMENT but public faith in the environmental merits of recycling was damaged.

And things will soon get more demanding for UK local authorities, with further potential effects on costs. The government’s resources and waste strategy – to be given effect by the Environment Bill 2020 – brings Whitehall straight into the nation’s dustbins. It aims to reduce public confusion about recycling by requiring all English councils to collect the same materials, instead of this being a local decision.

The mandatory list covers glass, paper and card, plastic bottles, plastic pots, tubs and trays, and metal cans, alongside food and garden waste collections.

A consultation on the details is due next year. Fitting additional materials into existing contracts could be complicated, especially if new vehicles are required – for example, to collect garden waste. Whitehall has promised to cover costs, but given the history of disputes over other ‘new burdens’ funding, this is a Lee Marshall, LARAC, the UK’s local authority recycling advisory committee potential flashpoint.

So, too, is extended producer responsibility for packaging, also effect from April 2022. At £200 per tonne, HM Treasury has part of the strategy. This will make producers responsible calculated that the tax will raise £240m in 2022-23, falling to for the disposal costs of the packaging their products come £220m in 2024-25 as use of ‘virgin’ plastic reduces. Ellin says in. A levy on packaging would be imposed and distributed the threat of this tax has already driven investment in new to councils, which should divert the £820m annual cost UK plastics reprocessing capacity. This should ultimately help of managing packaging waste from councils to businesses. councils stuck with unexportable material, he adds.

This sounds like good news, but there is inevitable room for However, the ‘product’ – or degree of contamination of disputes over how much money finds its way to councils. recyclables – is something councils cannot fully control, as it arises from millions of decisions by the public on what is put Deposit return scheme out for recycling. Better quality materials command higher A third leg of the strategy will see a deposit return scheme prices, but LARAC chief executive Lee Marshall warns this is for drink containers, with cans and bottles collected by difficult to achieve. “You want things as clean as possible for the retailers or by ‘reverse vending machines’, which swallow reprocessors, but there is a limit on how far you can go with the container and pay a small refund. This could divert the public. A paper supplier might be served by 50 suppliers, material from household collections, causing problems and each of them collects from 50,000 people, so scale that up if a council then has too little to pass to its contractor. and you can see it is a huge number of people to educate.”

Scotland will go first with the scheme in July 2022, which However, the financial rewards to local authorities that should provide useful evidence, but LARAC, the UK’s local manage to reduce contamination in recyclables are clear. Ellin authority recycling advisory committee, is sceptical. It succinctly says: “The days of churning out crap are over. With has calculated that the deposit return scheme will cost better material, the local authority should make more money.” councils an average of £126,000 a year, with one county Waste might not be as pressing a cost as social care or projecting a 3.98% drop in household recycling volumes. children’s services, but it offers ample financial traps for In a separate government initiative, a tax on plastic unwary councils. packaging that lacks at least 30% recycled content will take

“You want things as clean as possible for the reprocessors, but there is a limit on how far you can go with the public”

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VIEWPOINT

ENVIRONMENT KO F I A D U - GYA M F I

Waste not, want not Levels of waste recycling have a direct impact on local authorities’ balance sheets – and reforms to the system are expected to provide a welcome boost

Packaging reforms are expected to make an estimated £1bn to £3bn available to UK local authorities

I

n good years, waste diversion from landfill and increased recycling help local authorities to achieve better environmental stewardship and generate significant financial savings. However, recycling operations in the West have been beset with perennial market volatility and a shortage of domestic reprocessing capacity.

Overseas recycling markets are becoming increasingly unreliable, and the reputational damage associated with waste exports is becoming more severe. Within the past two years alone, contaminated recyclables have been repatriated to the US, Canada and the UK among other countries.

As a result, developed nations are now accepting that an export-dependent recycling approach is unsustainable.

Australia’s ban on the export of waste recycling will kick in from January 2021. The UK has signalled, via the resources and waste strategy, its determination to boost domestic recycling infrastructure. Additionally, the role of chemical recycling for lower quality plastics is being amplified in the UK and EU. During the ongoing Covid-19 pandemic, all authorities have had to contend with the challenges of delivering frontline waste services. The first lockdown was characterised by variable service suspensions and increased general waste volumes – by up to double for some areas.

Dry recyclable levels also spiked, especially for cardboard and for glass bottles and aluminium cans – with pubs shut, people needed something to help them cope with uncertain times and home-schooling blues.

There has been some market recovery in recent years and the prices for selected materials – such as paper, cardboard and aluminium cans – have actually risen during the pandemic. However, uncertain shortterm headwinds face the recycling sector.

The ‘Amazonisation’ of Christmas 2020, severe weather events, pandemic-related staff availability difficulties and possibly Brexit could portend significant revisions to council budget outturns during Q4 2020-21 and beyond.

To mitigate against risks, councils should continue to prioritise waste avoidance in order to gain superior environmental and budgetary efficiencies. One of the unintended consequences of the push for local authorities to climb recycling league tables is that waste reduction is often not given enough emphasis, even though it sits at the top of the ‘waste hierarchy’ and can save councils considerable sums. As the saying goes, ‘only what gets measured, gets managed’, and waste avoidance is not exactly attributable.

On a positive note, emerging UK government measures such as extended producer responsibility reforms, consistent collections and plastic content tax are set to bring great benefits from around 2023.

The reforms are expected to make an estimated £1bn to £3bn available to UK local authorities for the collection and management of recyclables, while improving the quality and quantity of recycling. This could provide around £2m per year to an average council and remove the risk of commodity price volatility. Under packaging reforms, ownership of materials could be assumed by producers; this could have implications for existing long-term contracts, and renegotiation may become necessary.

However, suffice to say, things may get worse for the resources and waste sector before they get better.

KOFI ADU-GYAMFI is waste manager at West Berkshire Council PUBLICFINANCE.CO.UK 41

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DATA

ENVIRONMENT

C h i n a / H o n g Ko n g I m p o r t e d q u a n t i t y, t o n s

10 million

WASTE BY NUMBERS 9 million

Recycling imports China’s decision to ban most imports of plastics and other recyclable materials has had huge ramifications for the global recycling system. This infographic depicts the amount of plastic waste, parings and scrap imported by 16 countries or territories, with data collected by the International Trade Centre – an agency that aims to support SMEs in developing economies to connect to international markets. It shows the sheer drop in how much China imported in 2018 when it enacted its ‘national sword’ policy, which was aimed at halting the influx of contaminated materials to its processing plants.

Before the ban, 70% of plastics collected for recycling in the US and 95% of those collected in the EU were sent to China. The world’s largest provider of recycling services dropping out almost overnight shattered the system.

With plastic manufacturing outpacing population growth, solving the problem of what to do with plastic waste is set to become more expensive for governments and local authorities.

Although some countries (notably Malaysia and Thailand) accepted more in 2018, their imports fell sharply the following year, because they lacked the infrastructure to handle such high levels of recycling. As a result, plastics from consumers in former exporting countries are now staying put. This leaves waste to be processed in domestic recycling facilities or ending up in landfills, as litter or being incinerated.

8 million

57%

7 million

Drop in worldwide exports/imports of plastic waste during the past decade

6 million

5 million

4 million

3 million

2 million

1 million

0 2010

2011

2012

2013

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China Hong Kong, China Netherlands Germany

US Chinese Taipei Malaysia Thailand

Vietnam Indonesia Belgium Austria

Canada India UK Sweden

Other countries I m p o r t e d q u a n t i t y, t o n s

1 ,0 0 0,0 0 0

99%

9 0 0,0 0 0

Fall in plastic waste imported by China between 2017 and 2018, following its ban

8 0 0,0 0 0

7 0 0,0 0 0

6 0 0,0 0 0

5 0 0,0 0 0

4 0 0,0 0 0

3 ,0 0 0,0 0 0

2 0 0,0 0 0

1 0 0,0 0 0

0 2014

2015

2016

Source: International Trade Centre calculations, based on UN Comtrade and ITC statistics

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2017

2018

2019 PUBLICFINANCE.CO.UK 43

16/12/2020 11:26

FEATURE

ECONOMIC THEORY

Magic Money Tree We all know money is a social construct. But does that mean governments can relax about the need to repay their Covid-19 borrowing?

W O R D S C A LU M R U T T E R

G

overnments have taken on unprecedented levels of peacetime borrowing to deal with the crisis caused by Covid-19. But public debt has been on the rise for years. With economies and populations around the world in desperate need of succour from the public sector, there is heightened interest in an economic theory that, according to supporters, suggests there is no direct consequence of the runaway government borrowing.

Modern monetary theory proponents say that governments issuing their own currency can never go bankrupt – as long as that currency floats, and as long as they are the only government that issues it (unlike eurozone countries, for instance). Therefore, MMT advocates claim that revenue has no bearing on a

government’s ability to spend. Does the huge amount of borrowing currently being undertaken by governments mean the world is conducting a massive experiment in MMT? The theory originated in the early 1990s, but picked up momentum after the global financial crisis as people looked for new ways of thinking about the economy. In the past few years, MMT has received publicity from the likes of US politician Alexandria Ocasio-Cortez, who said it should “be a larger part of our conversation” about the economy.

“The government spends by changing numbers up, and taxes by changing them down,” says Warren Mosler, who is widely credited with originating MMT. “It is like scoring a field goal in American football, and wondering where they got the three points from.

It’s just record-keeping.”

The ‘money story’ of MMT, Mosler explains, is this: the government of,

say, the US wants to provide itself with a military force, education, public healthcare and so on, so it creates the dollar. To get people to accept the dollar, it then requires taxes to be paid in dollars, which forces people to take on work or sell goods in exchange for – otherwise worthless – dollars.

The government is then able to hire people and pay them with dollars, and because it and its agents, such as the central bank, are the only primary source of dollars, people will work for them as soldiers, teachers, nurses and so on. Dollars then circulate in the economy, allowing public sector workers to buy food and other items that people sell in order to get dollars.

The dollars are then passed around the economy until eventually ending up as taxes paid back to the government, when they cease to exist.

“If you pay your taxes with actual cash, the government gives

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FEATURE

ECONOMIC THEORY you a receipt, takes the bills and sends them off to be shredded,” says Mosler.

“That is the end of the chain. That is why it is called a ‘tax return’; that is why we call it ‘revenue’ [which came to English from Latin through French and means ‘return’]; that is why in the Bible it says ‘Render to Caesar the things that are Caesar’s’. The bills themselves do not have any value.”

Because a government with a fiat currency can never go bankrupt and does not rely on taxation for income (it can be used instead to fight inflation, redistribute income or discourage harmful activities), ideas of debt sustainability are irrelevant, the theory says. “Debt doesn’t give you a guide for policy,” says Mosler, “There is no reason to even publish debt figures.”

Change the lens Once you look through the MMT ‘lens’, as its subscribers think of it, deficits are simply money in the economy that has not yet been (but ultimately will be) collected in tax, so policies do not need to be designed with the aim of reducing those deficits. Whereas orthodox economics sees deficits as increasing the demand for borrowing, thereby driving up interest rates, MMT claims that the state can set interest rates at zero, or even pay off debts immediately by changing some numbers on a computer.

Therefore, other concerns, such as fighting climate change, eradicating poverty or responding to the pandemic, can inform spending choices.

“Governments should not be obsessed by deficits,” says Dr Martin Watts, professor of economics at the University of Newcastle in Australia. “They should work out their budgetary strategy on the basis of achieving full employment, or for another public purpose. Outcomes are what is important.”

Some more cavalier advocates of MMT, particularly online, claim this means governments can spend without consequence by ‘printing money’ – an idea Watts wants to dispel. “MMT gets criticised because there is an assumption we are saying the government can always spend huge amounts, but we are not

“We should recognise that if MMT theorists are guilty of anything, it is of understating the costs of taking on huge debts” George Selgin, Cato Institute

saying that,” he explains. “We are saying there is not a financial constraint.

“For instance, there is no financial constraint on the government deciding to deposit £1,000 in everyone’s bank account. It is not printing money; it is some clicks on the computer.

You might think that sounds highly irresponsible, and it might well be for any number of reasons.”

Spending constraints Constraints on spending, both Mosler and Watts suggest, could include scarcity of resources or the eventual unavailability of labour as the economy nears full employment. Hyperinflation, which orthodox economists would expect with

large amounts of money creation, would only happen at full employment, and could then be controlled by increasing taxes to reduce aggregate demand.

Many other economists are sceptical about the theory. “At the core of MMT is a truth that the government can finance what it is doing by a range of sources, including borrowing, but the challenge is it tends to think there are no further consequences of doing that, other than inflation,” says James Meadway, associate fellow at progressive think-tank IPPR’s Centre for Economic Justice and former adviser to previous shadow chancellor John McDonnell.

“The idea that governments can try to use taxes to regulate inflation is such a non-starter, because of politics.

A government could not see prices rising and then say it is going to raise taxes too.”

Meadway says there are resource implications when governments create money, shown by the inequalities created by quantitative easing since the global financial crisis. Cheap money was available to the wealthy and the stock market soared, while wages stagnated.

Since the beginning of the pandemic, central banks have been buying up government borrowing even faster than they did just over a decade ago. “Central banks buying debt used to be very different from the private sector buying it, but it is not so different now,” says

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Some modern monetary theory advocates claim governments can spend without consequence by ‘printing money’

George Selgin, senior fellow and director of the Cato Institute’s Center for Monetary and Financial Alternatives.

“Before 2008, the Federal Reserve did not pay any interest on reserves that banks held, and it backed those with government bonds.

Most of the interest, after covering the Fed’s expenses, was rebated to the Treasury. Essentially, the Treasury was borrowing interest-free.

But, since 2008, the Fed has paid interest on bank reserves, which means the interest the Treasury is paying on its debt goes instead to banks. People claim that when the Fed is financing [Covid-19] aid programmes, we are getting a bargain, but these days it is not a bargain at all.”

So how does the current global crisis relate to MMT? Watts says that with reduced employment and income meaning lower tax receipts – even without considering increased spending needs – there is an “inevitability of higher fiscal deficits for some years to come”. But an assessment of the outcomes, relating to MMT, cannot take place in the near future, because these are long-run processes.

“There are, however, past precedents,” he suggests. “Western governments have not been reluctant to involve themselves in wars – quite often in faraway places. The attitude has been ‘we will do what it takes’, so spending has been based on strategic needs and not contentious economic arguments.

Political attitudes towards the pandemic have been similar.”

Selgin says applying MMT to pandemic spending is simply a question of scale – MMT supporters believe governments could safely spend a lot more than they are. “They might be right up to a point, but where is that point? The question really boils down to what the limits are, and it is not just about whether governments can Photography: Getty, ©HM Treasury

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default. I think we can all agree that a government that issues its own currency never has to default.”

Selgin warned that the level of spending often proposed by MMT advocates could result in high inflation or the need to raise taxes or interest rates exorbitantly, meaning the public will have to make do with less in order for the government to pay its bills. “There is no free lunch out there,” he says.

Growing influence?

MMT has had nothing to do with US government thinking, Selgin adds, as the response so far has been undertaken by a Republican government. Current enthusiasm for MMT in the US exists mainly on the left wing, from supporters of Ocasio-Cortez or former presidential hopeful Bernie Sanders. “Under the Biden administration, I think we will see some more influence of MMT, seeking to further government spending,” he says. “This is not necessarily a disaster, but we should recognise that if MMT theorists are guilty of anything, it is of understating the costs of taking on huge debts.”

Orthodox economists say everincreasing debt would eventually lead to high interest rates and expensive payments. “There would have to be some point where that happens,” argues Scott Sumner, chair of monetary policy at the Mercatus Center at George Mason

University in Virginia, US. “I believe MMT suggests you could set interest rates at zero, and, with them so low around the world already, it doesn’t seem so strange to a lot of people.”

But ‘taking advantage’ of low interest rates by increasing the debt would still have costs in the future, potentially from high interest rates. Although Sumner agrees with running large deficits during the pandemic, he warns that future challenges remain in place, such as ageing populations in many developed economies.

“Even if it were true that there is a free lunch for now, that would be likely to change in the future,” he says. “The way we should look at it is to hope to make that crisis less severe by not running massive deficits [as a matter of course].”

Sumner says the main risk in the future, if spending now continues unabated, is much higher taxes. “The optimal policy from a tax perspective would be to not run large deficits now, and then we would like smooth tax rises over a long period of time.”

Under MMT, of course, that is not true. Perhaps the fallout from Covid-19 will lend credence to the framework, but any evidence will take years to emerge.

The disagreements around MMT concern the fundamental nature of money, and it is going to take more than a pandemic and the biggest recession in a lifetime to sort that out.

As the interest the US Treasury pays on its debt goes to banks, ‘there is no free lunch out there’

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FEATURE

INFORMATION TECHNOLOGY

N I K C G IN CK A R C CRACK ING THE COST OF CYBER C RIME With hackers increasingly targeting the public sector, skimping on security measures could prove a costly mistake W O R D S G I L L H I TC H C O C K

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orally repugnant. Philip Glanville, mayor of London local authority Hackney, used these words to describe the actions of organised criminals who launched a cyber attack on his borough in October.

Already stretched by the Covid-19 pandemic, the council has been badly affected by the attack, which hit legacy IT systems, bringing serious and lengthy disruption to public services.

Hackney has yet to count the full financial impact.

However, a cyber attack in February on systems at Redcar and Cleveland Borough Council left the authority with a bill totalling more than £10m. Such incidents pose difficult financial questions for public bodies. With limited funds, do you spend on robust prevention, or gamble in the hope of not being attacked and use the money elsewhere?

“In a crazy way, the events at both Hackney and Redcar have helped in that they make it very real for local government,” says Mark Lumley, ICT director at London Borough of Hounslow, who is also vice-chair of Socitm, the body representing public sector IT staff in the UK. “This isn’t a theoretical topic any more,” he adds. “It happens to people close to us.”

Local authorities are facing an unprecedented barrage of cyber threats, warns insurance and risk management firm Gallagher. It found that UK councils were hit by more than 263 million cyber attacks in the first half of 2019, averaging 800 attacks per hour. Lumley says: “I think we are seen as both a high-value and easy target. We have links going into health organisations and, potentially, even central government.”

Ransomware is currently the most successful and lucrative means of attack and a weapon of choice for criminals to ambush public services. Once ransomware is on a network, criminals can encrypt and withhold data until a payment is made. Even if a ransom is paid, however, there is no guarantee that victims will get their data back. Cities attacked have included both Atlanta and Baltimore in the US. Baltimore said the incident it suffered will cost at least $18m.

When the NHS fell victim to a major ransomware attack in 2017, a third of hospital trusts and 8% of GP surgeries were affected. Figures from the Department of Health & Social Care put the immediate cost of that attack at £19m in lost output,,

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FEATURE

INFORMATION TECHNOLOGY including the cancellation of surgery and outpatient appointments, plus £73m to recover and restore computer systems.

The ransomware attack on Redcar permeated almost every function. The authority’s entire IT infrastructure and equipment needed extensive recovery work or replacement. Along with additional security to prevent a repeat attack, this made up £2.4m of the total cost. Loss of financial systems has caused a reduction in enforcement income and the collection of council tax and business rates, estimated at almost £1m.

Meanwhile, the council expects to spend almost £500,000 on additional staff, data audits and consultancy.

The costs to individual directorates include £3.4m in adult and community services. Most of this went on paying staff and external agencies for workarounds to keep services running during system outages, alongside re-establishing data, updating records and dealing with backlogs. The children and families directorate is facing costs of more than £2.6m in managing services using less efficient, more time-intensive working practices as it continues to re-establish lost data.

Multiple methods In 2017, Hackney’s neighbour, London Borough of Islington was hit by another type of attack – a ‘distributed denial of service’ cyber attack, where hackers overwhelm a system, rendering it unusable. While no data is stolen in this type of attack, it can be extremely disruptive, because key websites or services are put out of action. At Islington, the target was its web portal, My eAccount, which enables residents to manage services and payments. During the first 24 hours of the attack, all Islington’s web services became unavailable, including internal internet access and staff email.

But how do hackers penetrate IT systems? The UK’s National Cyber Security Centre says one of the most common ruses is to prey on legacy software, hardware and systems that are no longer supported or updated. “We know the NHS is very dependent on outdated operating systems,” says Rob Pritchard, the former deputy head of the NCSC’s cyber security operations centre and founder of the Cyber Security Expert consultancy. “There are people still running Windows XP, for instance, which is not supported

by Microsoft any more. IT infrastructure is seen as a cost and hasn’t been managed very well through a variety of outsourcing contracts over the years.”

Marc McAuley, CIPFA’s head of counter fraud operations, warns that organised criminals will look to take advantage of other weaknesses. They will identify vulnerable devices,

“[Councils] are seen as both a high-value and easy target. We have links going into health organisations and, potentially, even central government” Mark Lumley, London Borough of Hounslow

harvest log-on credentials and clone privileged user information so they can act as an individual in an organisation.

“These organised criminals might clone a local authority staff email, pass themselves off as the director of finance and instruct someone in finance to make an immediate payment,” he says. “Because, as far as the member of staff is concerned, it is from a reliable, legitimate source, they follow the instruction.”

Cyber security should be higher on the agenda of public sector finance officers, according to Lumley. “Prevention can be costly, but it is certainly cheaper than the recovery if something happens,” he says. “My message to my finance directors has been that these incidents, such as at Hackney and Redcar, could so easily have been any other borough. It could have been us. It only takes one person to click on that one email link to cause trouble in the organisation.”

Neil Gooding, information security manager at the London Borough of Bexley, says: “Local government holds lots of

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sensitive information; there is a big risk there. And you are risking heavy fines from the Information Commissioner’s Office – and reputational damage – if you lose sensitive information. For us, having a secure managing service is quite expensive, but, without it, we would be exposing the business to a much higher risk.”

Rolling protection Gooding warns against relying on standard antivirus software, calling for a rolling programme of protection: “It cannot be a one-off piece of work. You cannot have a plan and say ‘In April 2021, we’re going to review our cyber security and we’ll do that annually’. You can almost guarantee that in May your cyber security protocols are out of date. The longer you go without a review, the weaker they are getting.”

Like fire safety, cyber security must be integrated into budgets, says Pritchard. “No organisation has a fire safety budget – it is baked into the architecture of the building and you have fire alarms and fire drills.

That is how all organisations should be addressing cyber security.”

Cyber insurance might provide some protection.

Earlier this year, the NCSC produced its first guidance on the growing market. It recommends questions that leaders need to ask about such cover. These should cover existing cyber security defences, understanding of the potential effects of an incident and whether the policy includes support during an attack.

Gallagher’s research shows that just 13% of councils hold a stand-alone cyber insurance policy, however.

This could leave the vast majority of local authorities unprepared for the financial shock of a cyber attack.

But, according to Pritchard, insurance can be part of the problem. He says insurers may want an incident to be solved quickly, so pay a ransom to get data unlocked. Encouraged by this, criminals may then launch cycles of further attacks.

A more successful and cost-effective route to cyber security could be using the tools and advice offered by a range of organisations free of charge. “There is lots of help out there, from Socitm, the NCSC, the Government Digital Service and the Ministry of Housing, Communities & Local Government,” says Lumley. “These resources can make cyber security not quite as big and scary as you might think it is. And there are lots of people willing to help.”

U N D E R AT TA C K

The global threat City of Albany discloses the costs of ransomware recovery In March, the city of Albany, New York, had its computer systems shut down when a ransomware attack locked its data. Details have not been shared about the ransom amount requested to release the data. WNYT, an Albany news channel, asked the city to disclose details of expenditure associated with the attack. City officials responded with a cost of US$161,000, related to employee overtime for re-entering lost data, hardware and software system upgrades, credit monitoring services for city employees and professional cyber security services.

The amount differs from the US$300,000 that mayor Kathy Sheehan cited during an event.

Cyber attack that shut down Canadian government systems In August, the Canadian government was forced to shut down most of its online portals after a sustained cyber attack over several days. Officials disclosed that, at one point during the attack, they detected as many as 300,000 attempts to access accounts on at least 24 government systems. “A Canadian Revenue Agency portal was directly targeted with a large amount of traffic using a botnet to attempt to attack the services through credential stuffing,” said Marc Brouillard, acting chief information officer for the government of Canada. In total, more than 11,000 out of a total of 12m personal accounts were compromised, including tax accounts and online portals offering access to Covid-19 relief programmes.

Ukraine power grid brought down by malware A cyber attack on western Ukrainian electricity distribution companies Prykarpattya Oblenergo and Kyivoblenergo in December 2015 caused a major power outage. More than 50 substations on the distribution networks were disrupted. The region reportedly experienced a blackout for several hours, and many other customers and areas sustained lesser disruptions to their power supplies, affecting more than 220,000 consumers. Use of the BlackEnergy3 malware has been blamed by some for the attack, after samples were identified on the network. At least six months before the incident, attackers had sent phishing emails to the offices of power utility companies in the Ukraine, containing malicious Microsoft Office documents.

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VIEWPOINT

INFORMATION TECHNOLOGY IAN WILLIAMS

Viral fatigue The cyber attack on the London Borough of Hackney will divert resources that could be better spent on the authority’s Covid-19 response for months to come

We have drawn on the digital skills of our team to find modern, cloudbased solutions that affected services can use

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very senior leader in any organisation dreads that out-of-hours call. We have been acutely aware for a long time of the increasing risks of sophisticated attacks on public and private sector computer systems. But organised criminals targeting Hackney was not the first thing on my mind when I picked up the phone on a Sunday morning in October.

Strategic director for customer and workplace Rob Miller, who leads our IT service, described it as a “bottom falling out of your stomach moment”. That is certainly how I felt – worrying how this would affect our residents and the services they rely on in the middle of a global pandemic.

Rob’s team is widely seen as one of the most forward-thinking in local government.

Over recent years, important systems – such as email and file storage tools and our finance and payments systems – have moved into the cloud, meaning this attack hasn’t completely crippled council services. But all the legacy systems we still host ourselves were affected. Some of the software and programmes we use daily to provide vital services for our residents are likely to remain unavailable for months.

A criminal investigation is ongoing into the attack. But, at a local level, we have run a 24/7 operation to quickly find new ways of delivering essential services, finding IT workarounds and being honest with people about things we cannot do or that will take longer than usual. I am proud of the innovation and commitment of our staff, but incredibly angry that, after nearly a year of working around the clock owing to coronavirus (and with all the challenges that will bring over the winter), they have to deal with the effects of this attack on our residents.

We have found new ways to fulfil our basic tasks, like paying benefits, repairing homes,

and making payments to our suppliers.

Fortunately, this hasn’t meant running the entire council on pen and paper. We have drawn on the digital skills of our team to find modern, cloud-based solutions that affected services can use. While these may not be perfect, we are still up and running.

This, of course, all comes at a cost – in time and money – but it is difficult to say what the long-term impact of this may be on our finances. Our focus remains on restoring heavily affected services, such as our land searches system, which housebuyers in Hackney need to take advantage of the current stamp duty holiday.

We are determined to share learning from our experiences with other councils and public bodies. We are working with the National Cyber Security Centre and helping it make sure its guidance reflects all that is being learnt about our attack and the attackers. I strongly encourage colleagues to refresh their knowledge of this guidance and to attend regular cyber protection briefings by the Local Government Association, the Ministry of Housing, Communities & Local Government and NCSC. This is also another opportunity to see how effectively local councils work together.

The offers of support we’ve received from colleagues across London, the wider sector and from government have been inspiring, and are really helping us in our response. There is no easy fix to protect yourself in this increasingly complex world of cyber security, but our experience – and that of other organisations and businesses recently attacked – underlines its importance as more and more of our life moves online.

IAN WILLIAMS is group director, finance and corporate resources, London Borough of Hackney

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PARTNER CONTENT

THE FUTURE OF WORK AND THE PUBLIC SECTOR Public service organisations are adapting to build workforces that reflect the communities they serve and to support a workforce with the right skills both now and for the future

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ne of the many challenges Covid-19 has presented is the rapid pace with which organisations have had to adapt, and public service organisations are no different. Adapting duties and redeployment of skills has been essential to many for ensuring that community needs are met. From delivering food parcels through to monitoring social distancing – teams and individuals across the United Kingdom have shown incredible patience, collaboration and determination.

The pandemic has been a catalyst for change within the workplace. To many, it has proven what can be done and what individuals are capable of, as well as providing unique opportunities for agile working and expanding career options.

Now, as we reflect on the past few months, we must consider: how will the future of work change within the public sector?

Remote working In March, the UK was told to work from home where possible. Organisations that already encouraged flexible working had a head start – with systems and infrastructure in place. For those that did not, remote working presented bigger immediate challenges in making sure people were looked after and operations could continue.

Regardless of the initial responses, it quickly became apparent that as well as challenges there were opportunities. Studies show that flexible working positively impacts on employee wellbeing and productivity; allowing people to spend more time with loved ones and less time and money commuting.

However, homeworking has not worked for everyone – some have struggled with

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ALIX BEDFORD is risk proposition manager at Zurich Municipal

lack of workspace or poor connectivity, while others have faced unstable domestic situations they can no longer escape. The changes Covid-19 has brought about will affect the future of work, but it’s clear that not one solution works for everyone.

Instead, we consider a middle ground, where organisations fully embrace flexible working to suit individuals’ needs.

Career pathways We are also seeing people at all stages in their careers being affected by the changes to working life. Those starting out on their careers are seeing fewer opportunities for development and are struggling to learn from others while working remotely. Equally, those nearing the end of their careers are having to adapt to keep up with the digital world that’s been thrust upon them.

Looking toward the longer term, organisations are going to have to take great care to ensure their workforce is developing and becoming more inclusive and diverse. For example, differences are already emerging, as most primary caregivers are women – which may result in an enhanced gender imbalance that will need to be tackled.

These are just some considerations for public service organisations, and, although the sector’s response to the pandemic has been remarkable, the number one strategic risk is financial. Covid-19 has exacerbated underlying financial issues and has brought new insecurities. This uncertainty can impact on employee wellbeing and lead to more permanent changes having to be taken, such as total remote working and property being sold off.

Existential risks won’t stop at Covid-19 – future pandemics and climate change may bring further devastating impacts that make it more important than ever to adapt and plan for the future of work. Emergency response and recovery and business continuity plans must reflect the hard lessons learned in 2020 in order to help the public sector to thrive.

Zurich Municipal’s recent white paper, The Future of Work, looks at the opportunities we now have to re-imagine our organisations and the ways in which they work in more detail. This includes exploring how to bring about meaningful change and improved workforce engagement and performance. newsandviews.zurich.co.uk/specialreports/the-future-of-work/

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TIPS / LESSONS / CASE STUDIES / VIEWPOINTS

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PICTURE THIS Scenario planning provides tools to navigate uncertainty

PROPERTY OPPORTUNITY Public bodies can capitalise on reduced office space demand

RISKY BUSINESS How much exposure can your organisation tolerate?

LEARN FROM…

Grassroots funding An English council has successfully raised £1m for solar projects through a community bond

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n October, West Berkshire Council became the first UK local authority to close a community municipal investment bond. The model sees public authorities issue debt directly to the public. West Berkshire attracted more

Photography: Alamy, Shutterstock

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than 600 investors for as little as £5 per investor. The £1m raised will pay for solar panels on school buildings and a community centre, as part of the council’s plan to become carbon- neutral by 2030.

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£13,000

IN PRACTICE

LEARN FROM...

In December 2019, the council voted to allow its finance team to pursue a bond launch in partnership with crowdsourcing platform Abundance Investment. “We did consider issuing the bond ourselves,” says Joseph Holmes, executive director of resources at the authority, “but we did not have the in-house expertise.”

Abundance had received pilot funding from the Horizon 2020 Project, an EU scheme promoting innovative private and public sector partnerships. “We also considered using another provider, but the administration costs would have probably obliterated any saving that we would have made,” Holmes says.

“We would also have had to do an awful lot of due diligence and extra market research to then get somebody interested in doing it.”

One of the biggest challenges in getting the bond to market was agreeing a rate paid to investors. The aim was to achieve a rate lower than the council would have paid if it took out the borrowing through the Public Works Loan Board, Holmes says.

During preliminary discussions, the prevailing PWLB rate was near to 1.2%. In October 2019, the Treasury decided to add a percentage point to its rates.

However, the council decided that it still needed to keep its own bond rate low. “We wanted to ensure that we beat the board

I think we probably struck the sweet spot between achieving a rate we wanted and also gaining traction in the market

West Berkshire’s bond will fund the installation of solar panels across the district

The council negotiated a rate of 1.2% with Abundance, considerably lower than the certainty rate of 1.7% available from the PWLB, saving the council around £13,000

by a substantial number of basis points, so that if the PWLB rate was lowered again, we would not be left with an issue higher than the comparative PWLB rate,” Holmes says. “That would have meant the council was effectively subsidising the borrowers.”

The council negotiated a rate of 1.2% with Abundance, considerably lower than the level available from the PWLB at that point. Holmes estimates this saved the council around £13,000.

When the bond launched in June, initial uptake among investors was strong, Holmes says. However, after a few weeks, interest began to slow down. To help entice further investment, the council worked with its communications team and alongside Abundance to promote the community municipal investment bond. “We put out press releases about the scheme, as well as promoting it to mailing lists of people interested in different issues across the council,” Holmes says. “Our portfolio holder for finance also talked about the scheme at a local village green festival.” While the authority focused on local investors, Abundance garnered national media coverage, including in The Times.

“The fact that it took two or three months for people to sign up makes me think we probably struck that sweet spot between achieving a rate that we wanted and also gaining traction in the market,” Holmes says.

He adds that West Berkshire could look to issue further CMI bonds in the future. “We want to review the time, cost and interest levels,” he says. “However, we are very happy with the rate that we were able to attain.”

Key lessons

GIVE INVESTORS CLARITY “Make sure you have a project you need to fund, so it is clear to investors what you want them to buy into,” Holmes says.

BE CLEAR ON DUE DILIGENCE. “Make sure you understand both the legal and the accounting side of the facility, so you understand the obligations that you have over the issuance period.”

ATTAIN A BENEFICIAL RATE “As a public body, it is really important that you can achieve better value for money than you would borrowing from other sources.”

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IN PRACTICE

STRATEGY

psychologists find people are biased to assume that growth unfolds in a linear way. The Covid-19 exponential change heightened awareness of deep uncertainty, and I think leaders saw scenario planning as something that could help them more than trying to forecast specific outcomes.

EXPERT Q&A

Scenario planning

Q

Working backwards from plausible visions of the future can help public sector finance directors navigate uncertain times

Q

How does scenario planning differ from traditional forecasting?

RR: Forecasters work with modelled distributions of past facts to predict the future.

Scenario planning complements forecasting by doing the opposite.

It rehearses unforecastable – but imaginable – plausible futures that might unfold and allows preparation for them. If a strategy is married to one forecast, with an x percentage probability that it fails to unfold, it lacks a well worked-out alternative.

Forecasters attach probabilities to their outcomes, whereas we do not – largely because it is impossible to do. Scenario planning in the Oxford approach is uninterested in approximating the truth – it is interested in serving usefulness.

TL: The world has become so interdependent, complex and dynamic that forecasting with sufficient accuracy to be useful is very difficult. Scenario planning provides an alternative way of engaging with the uncertainty of the future. It helps leaders interpret potential developments, opportunities and risks to experiment with new options.

TL: Public sector finance directors can use scenario planning to lead strategic conversations about financial matters in their departments or across government. There is a famous expression in Washington: ‘If you are not at the table, you could be on the menu’.

Scenario planning offers the opportunity for finance directors to not only be at the table for the important strategic conversations in their organisations but potentially to lead them.

Q

Why has Covid-19 brought scenario planning back into the spotlight?

RR: The pandemic is a good exemplar of the kind of deep uncertainty that scenario planning is helpful with. The whole set of assumptions are nothing to do with the assumptions that finance officers were using back in January. After events such as 9/11 and the global financial crisis, Covid-19 drives home that deep uncertainty is something that is here with us to stay. We cannot pretend such events are ‘Black Swan’ phenomena. They are ‘normal’, and we needs tools to engage with that. People have realised that forecasting does not do it well and are asking what else is available in the shop.

TL: Covid-19 is a classic example of exponential growth – growth that starts slowly then, at a tipping point, accelerates rapidly.

The story of the lily pond that was half covered by day 47 and completely covered by day 48 is an example. Exponential growth can be disorientating and challenging – cognitive

How can public sector finance directors use scenario planning?

Q

What are the challenges to adoption of scenario planning by the public sector?

RR: Decision-makers need to

DR TRUDI LANG is senior fellow in management practice at the University of Oxford’s Saïd Business School

RAFAEL RAMIREZ is professor of practice at the University of Oxford’s Saïd Business School

exit year-by-year budgeting and adopt a philosophy that engages with deep uncertainty and does not kick it down the road for future populations to have to live with the consequences. It is not about us telling them, ‘Look, you could be facing a more severe pandemic in five years’. It is about their becoming more proactive, systematic and courageous. They need to learn that the right questions to ask are not ones for their successors to ask. We advise people to talk to peers who have used the scenario planning process – it is much more useful than talking with professors.

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IN PRACTICE

ETHICS

Q&A

Questions of principle Former CIPFA president Margaret Pratt gives her advice on ethical dilemmas facing public sector finance officers become clear that Q Itmyhasauthority will be unable to achieve a balanced budget. I have prepared a draft section 114 notice, but the leader of the council does not want me to issue it, owing to the potential impact on the reputation of the council.

What are my options?

This is a dilemma that will resonate with many members at present. As a professional, you have a duty to act with objectivity and integrity and to undertake your role with competence and due care. In the case of a local government officer, your professional obligations also align with your statutory duties as a section 151 officer. At the same time, you will appreciate the leader’s perspective – a notice will bring significant reputational risk for your authority.

You may feel your ability to discharge your professional duty is threatened because you are being put under undue pressure. Conversely, you might feel your objectivity is being compromised by your own self-interest, that you are too familiar with the issues or even that you are advocating for a particular course of action.

In reaching your conclusion that led to you drafting the notice, have you considered all the available sources of funding? Are there options to use reserves while a longer-

term financial recovery plan is developed and implemented?

Have you consulted with officer and member colleagues, your external auditor, the Ministry of Housing, Communities & Local Government and your professional network to ensure they understand and consider the situation? What is the view of the monitoring officer?

The question clearly identifies risks to your ability to act professionally in very difficult circumstances. But your job is to manage risk. For me, the next step is to manage actively the relationship risks and ensure regulators, stakeholders and colleagues understand not only what you are saying but why you feel you have to say it – and say it now rather than later. Good luck.

MARGARET PRATT is CIPFA representative on the ethics group of the Consultative Committee of Accountancy Bodies

years ago, our Q Three authority introduced a grant scheme to support small businesses. I have noticed that a disproportionate number of these grants have been awarded to businesses in and around a regeneration area on land owned by the council.

Is this unethical and should I take further action?

This is interesting. I am assuming that the council makes these grants in line with a clear policy that is publicised and transparent and which sets out clear selection criteria. The grants award process, for a public body, will be discoverable – either through the publication of documentation or through Freedom of Information requests. I think you may have identified that the application of the policy could have unintended consequences and that there is a resulting reputational risk?

An inference might be drawn that the policy was carefully designed, and that the number of awards you view as disproportionate could be considered to be weighted towards applicants meeting criteria that are biased in favour of the regeneration area.

Now that you have identified a pattern, you may want to think about alerting colleagues to the potential risk. You might wish to suggest revisions to the policy and criteria, and you might also think about commissioning a review of how applications have been sought and prioritised. If you feel that there could be allegations of impropriety, you may want to discuss next steps with the monitoring officer.

Submit your own public finance ethical dilemmas to editorial@publicfinance.co.uk

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IN PRACTICE

TRANSFORMATION

L

ong-Covid’ describes the chronic illnesses that linger after the initial coronavirus infection has passed. Economically, the prolonged directive to work from home is having a permanent impact on the workplace. The release of unwanted property space is a natural next step resulting both from the new way of working and an urgent need to reduce costs.

Naturally, downsizing by businesses will have an impact on local authorities’ future income. Business rates, commercial property rents, transport fares and parking charges are all being affected by a repositioning of the workforce.

But there are positive aspects too. A vacant workplace can give councils a valuable opportunity to look at their own office footprint and how to repurpose their space for future use.

We still need offices. Teams must meet – with each other and customers – but it is likely that trips to the office will be planned rather than habitual.

Pre-Covid-19, every council department would have had dedicated space, separate from other departments. The office was where you went to work, and, although employees were part of a team, for much of the day they worked alone.

In the future, the emphasis will be on collaboration. Desk space is likely to be booked in advance, with only large meeting rooms retained for team or project collaboration.

Surplus space could be leased to other organisations to generate income, or provide co-working or innovation space to residents or small local businesses.

This process will take time.

Social distancing limits the Photography: Alamy

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PROPERTY MANAGEMENT

Finding new uses for unwanted office space Covid-19 could mean big changes to the future of office working, presenting public bodies with opportunities to reduce costs and raise income amount of space that can be trimmed in the short term.

But, over time (and with the potential introduction of a vaccine), we expect the need for distancing to gradually reduce and building densities to revert to previous levels. It is important that councils take a long-term view as they think about their space – consulting and collaborating at every functional level across the authority to identify, design, agree and implement a lasting solution for the new workplace.

Meanwhile, home-based knowledge workers have rediscovered their communities and the amenities available to them. Indeed, recent polling by the Local Government Association has indicated a

JOHN BURGESS is associate director of real estate and assets at Grant Thornton

marked increase in resident satisfaction with local councils.

But homeworking – especially for young adults – can be lonely or difficult, and the need to make human contact beyond friends or family is very real.

Here again, local authorities have a number of opportunities.

Remote working need not mean working from home but could involve working near it.

Repurposing council space (such as public libraries) or working with struggling retailers along a high street to convert shop units into affordable co-working spaces are just two ways to preserve and enhance a place, as well as creating valuable income with a social purpose for local government.

While this is a local solution, it is gathering national attention.

As part of the government’s Towns Fund initiative, Warrington Borough Council recently secured a grant of £22m, part of which will be used to help revitalise unloved, underused and vacant buildings by transforming them into new office space and community hubs.

Another, more complex, opportunity addresses the question of what to do with redundant (and often obsolete) office space that returns to the market. Much has been written about low-quality social housing conversions created after the relaxation of permitted development in 2015. However, many successful schemes do exist.

In coming months, there must be a forum for a balanced discussion between corporate occupier, landlord and local authority to enable development to happen in an effective and responsible way that addresses local needs, reinforces corporate reputation and enhances place.

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IN PRACTICE

STRATEGIC PLANNING

RISK MANAGEMENT

Developing a risk appetite statement Formalising risk appetite and tolerance positions can help public bodies improve decision-making, according to a new government publication

P

ublic sector organisations “cannot be risk averse and be successful”, according to the UK Treasury’s bible of risk management, The Orange Book, last updated in 2019. In October, the Government Finance Function published an accompanying note to the guidance, providing the public sector with bespoke advice on how to prepare risk appetite statements. It outlines issues for organisations to think about before formalising and strengthening their existing practices to help decision-making.

October’s note aims to fill a gap left by existing literature in the area, most of which the GFF said focuses on the financial services sector. Such companies are able to apply consistent measures – usually monetary – to inputs and outcomes, making risks easier to measure.

“Risk appetite development in the public sector requires a different approach,” it says, because public services measure value in different ways and to diverse timescales.

Before drawing up a risk appetite statement, public bodies need to distinguish between two thresholds that define their attitude. First, risk ‘tolerance’ is defined as the “level of risk within

FIVE-POINT SCALE

What is your appetite for financial risk? which [a body] is willing to operate given current constraints”. Meanwhile, ‘risk appetite’ is defined as “the level of risk with which an organisation aims to operate”, informed by strategic objectives.

According to the document, risk appetite statements should: provide a structure for an organisation to work within; drive thinking about results and outcomes the organisation seeks to realise, as well as potential actions if outcomes are not acceptable; describe the organisation’s typical challenges and the basis on which different outcomes are justified; describe the organisation’s acceptable behaviour in reasonable circumstances; be set against a five-point scale, with wording relevant to the organisation (see panel, right, for financial exemplars); be dynamic and updated to reflect significant changes in the context (societal, economic, political, etc) within which their organisations operate.

Download the Risk Appetite Guidance Note at gov.uk/government/ publications/orange-book

AVERSE Avoidance of any financial impact or loss is a key objective MINIMAL Only prepared to accept the possibility of very limited financial impact if essential to delivery CAUTIOUS Will seek safe delivery options with little residual financial loss only if it could yield upside opportunities OPEN Prepared to invest for benefit and minimise the possibility of financial loss by managing the risks to tolerable levels EAGER Prepared to invest for best possible benefit and accept possibility of financial loss (controls must be in place)

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IN PRACTICE

TREASURY MANAGEMENT

FIVE MINUTE GUIDE TO…

The transition to SONIA At the end of 2021, LIBOR, the most popular sterling benchmark rate, will be phased out. What do public sector treasurers need to know about the transition to its recommended replacement, SONIA?

1

Why is SONIA important?

In 2017, the Financial Conduct Authority announced that it will no longer compel banks to contribute London Interbank Offered Rate (LIBOR) quotes beyond the end of 2021.

This effectively spelled the end of the world’s most widely used benchmark rate, mainly because the underlying markets that LIBOR sought to measure were no longer active. In the UK, the Bank of England recommended SONIA (Sterling Overnight Index Average) as its preferred replacement.

2

How is SONIA defined?

SONIA is the average interest rate of large, unsecured, overnight sterling debt transactions and made up of two elements. First, the ‘statement of underlying interest’ says: “SONIA is a measure of the rate at which interest is paid on sterling, short-term, wholesale funds... where credit, liquidity and other risks are minimal.” Second, the ‘statement of methodology’ says SONIA is the trimmed mean of interest rates paid on eligible sterling-denominated deposit transactions. Eligible transactions must be unsecured, of one business day maturity, above £25m and executed between midnight and 6pm UK time.

Illustration: IKON images

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Key takeaways

SONIA, unlike LIBOR, is purely an overnight rate LIBOR contains bank risk, but SONIA is near risk-free LIBOR is forward-looking, but SONIA is based on past transactions It is worth checking your organisation’s LIBOR exposure

GREG READINGS is assistant client director at treasury adviser Arlingclose

3

How does SONIA differ from LIBOR?

4

How can I work out the SONIA rate?

LIBOR rates contain an expression of bank credit risk.

SONIA is near risk-free, meaning it will usually be lower than LIBOR. A straight switch between the two rates could significantly benefit one counterparty (eg, in lower borrowing costs) and make the other much worse off (eg, in lower investment returns).

To deal with this, a ‘spread adjustment’ that considers this difference will need to be agreed by counterparties. SONIA is, by definition, an overnight rate only, while LIBOR is set for a variety of terms, from overnight to one year.

Some forward-looking term SONIA rates have been developed, but the standard compounded version looks set to be the market default option.

5

How will SONIA affect public bodies?

It is worth checking your organisation’s LIBOR exposure and considering the impact of SONIA, which will potentially be a lower reference rate. Instruments affected could include term loans and bank debt, revolving credit facilities, deposits and floating rate investments, leases, pension schemes and some commercial contracts. For significant exposures, it would be sensible to consider options for negotiating conversion terms with counterparties. The FCA may have powers to help manage legacy contracts, using a wind-down, synthetic LIBOR rate (on less certain terms, however). For new contracts, developing a familiarity with SONIA and considering the key differences from LIBOR is increasingly important.

LIBOR is set for periods in advance – for instance, the three-month LIBOR represents the rate to borrow or lend at for three months starting today (‘forward-looking’), while SONIA is based on past transactions (‘backward-looking’). This means the daily SONIA data must be recorded and then compounded to calculate the overall rate at the end of the period. Therefore, counterparties will not know the exact cashflows from these transactions in advance as they did with LIBOR. PUBLICFINANCE.CO.UK 61

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IN PRACTICE

DIARY DATES

CIPFA offers events around the UK to members and non-members alike. Our events range from small workshops for local CIPFA members through to largescale conferences aimed at professionals across most disciplines in the public sector. Below are the upcoming events in your region, plus national conferences.

EVENTS

Visit www.cipfa.org/training to search for the events you are looking for or contact customerservices@cipfa.org

To continue supporting you during the Covid-19 restrictions, all our events will be delivered online.

The format and provision of the programme is under constant review.

For support and guidance around Covid-19, including webinar and e-learning support, please visit cipfa.org/coronavirus

EVENTS cipfa.org/training/ 21 JANUARY

CIPFA’s Housing Symposium Focusing on the social housing white paper and zero-carbon homes, speakers from MHCLG and the Regulator of Social Housing will examine the implications of the white paper for local authorities and housing associations. We will also explore the challenges of building more zero-carbon homes and retrofitting existing stocks to meet new standards, plus how much can be afforded by Housing Revenue Account councils and housing associations.

JANUARY AND FEBRUARY

2020-21 Accounts Closedown and Financial Reporting Workshops An extensive programme of accounts closedown and financial reporting webinars, with separate events for English local authorities, English police bodies and authorities in Wales and Scotland. This

S TA R T S 5 F E B R U A RY

CFO Leadership Academy Designed for those who are in, or aspire to be in, senior finance roles in the public sector, this course focuses on the development of personal impact, problem solving and decisionmaking skills. www.cipfa.org/cfoacademy S TA R T S 1 5 F E B R U A RY

year’s closedown workshops will cover the latest changes to the Code’s requirements and current developments in relation to 2020-21 local authority financial reporting.

guidance on public sector business cases, using the five-case model. It is a pre-requisite for the practitioner qualification. www.cipfa.org/bbcfoundation

Accredited Counter Fraud Technician Ideal for anyone in a position to spot fraud at an early stage, this course offers a comprehensive introduction to counter fraud and investigative practice. www.cipfa.org/acftech

COMING SOON

25 JANUARY

S TA R T S 2 3 F E B R U A RY

Diploma in Finance Business Partnering Focusing on the skills, knowledge and expertise required to operate effectively as a finance business partner, the course enables finance practitioners to advise and guide decision-makers. www.cipfa.org/fbp

Diploma in Contract Management Combining contemporary contract management theory and existing good practice to give you the knowledge, understanding and practical skills necessary for managing contracts effectively. www.cipfa.org/ contractmanagement

16-17 MARCH

Scoping the Future for Police and Fire Finance

COURSES S TA R T S 1 2 J A N U A RY

CIPFA /ACES Diploma in Public Sector Asset Management Modular course that will allow property professionals to develop the asset management skills needed to support their organisation. www.cipfa.org/dpsam 18 JANUARY

Better Business Cases, Foundation Foundation-stage accreditation on HM Treasury’s Green Book

28 JANUARY S TA R T S 1 M A R C H

Better Business Cases, Practitioner Achieve sufficient understanding of the theory and application of the five-case model to effectively develop and produce a business case.

You must have passed the foundation exam before undertaking this course. www.cipfa.org/ bbcpractitioner

Accredited Counter Fraud Specialist This course focuses on the skills and knowledge needed for the effective end-to-end management of fraud – from prevention and creating an antifraud culture to investigation and resolution to the highest evidential standards. www.cipfa.org/acfs

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IN PRACTICE

ON ACCOUNT ROB WHITEMAN CIPFA CHIEF EXECUTIVE

THE YEAR TO COME

Looking ahead to 2021 Local authorities have shown they can keep services running, whatever is thrown at them

T

he past 12 months have certainly been difficult. The Covid-19 pandemic created an unprecedented level of change for the public sector. As we move forward, it is important to look back on how we responded to the challenges, so we can make informed decisions and prepare for what the future might bring.

I am proud of what we have all accomplished during these demanding times. Public sector organisations were able to change their ways of working to continue providing services to those in need, even with stretched budgets, limited resources and no foreseeable end to the pandemic.

At CIPFA, we had a successful 2020, with a smooth transition to virtual learning, professional development and events. Our first-ever virtual Public Finance Live conference went phenomenally well, creating a space for public finance professionals to come together and explore options for how the public sector must adapt to a postCovid-19 world. And the schedule is certainly packed full for 2021 as well.

CIPFA is currently in the process of updating both the Prudential and Treasury Management Codes to reflect the new world we inhabit. The main focus of the updates is to ensure the codes remain relevant for the modern era of public sector investing.

Prudential indicators will be reviewed to make sure they are best suited for decision-making and transparency.

We will also be looking at governance structures and improving formal training and monitoring.

We are looking at updates to streamlining and financial reporting

in response to the Redmond Review recommendations, which analysed the effectiveness of local authority auditing and financial reporting. It is crucial that public finance professionals have the rights skills to manage public money in the face of increased risk and uncertainty. To this end, we will be expanding our audit-related training and continuous professional development offer for finance officers.

Look out for more updates on this in the coming months.

2020 saw the introduction of our new CIPFAstats+ tool, a cloud-based suite of data products that enables local authorities to make the best decisions through access to comprehensive financial and non-financial data. As we enter the new year, we expect this service to lead to better outcomes and enable

more informed and effective decisionmaking as the public sector continues to recover from the pandemic.

We also introduced our public finance international advisory panel, which convened a group of public finance experts from around the globe to provide diverse perspectives on public finance issues. We will be continuing our efforts in the coming year, with ongoing and future projects specifically designed to deliver accountancy training and build capacity for public financial management around the world.

As you can see, a lot was accomplished in 2020, and there is much in store for the new year. Without a doubt, 2021 will bring new challenges, but also new opportunities to make lasting change in our line of work.

There are still big issues to tackle. In addition to continuing the recovery from the pandemic, we must also turn our attention to the changing climate and how to continue evolving our ways of working so that they are fit for the future. There is plenty of work ahead, but I have every confidence that the dedicated, hard-working members of the public sector can tackle anything that is thrown their way.

Satellite office: 2020 saw CIPFA manage a smooth transition to virtual learning and events

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LAST WORD

WHERE NEXT?

Give this your fee mo db @PU nth’s m ack on agaz BLIC ine a _ F IN t @PF _FO ANCE_ CUS

READ…

The latest publications from CIPFA Delivering Outcomes in the Public Sector Practical guidance on how to use an outcomes approach to deal with challenges in public spending. delivering outcomes

in the public sector

cipfa.org/policy-and-guidance

Combating Financial Crime: Practical Advice for the Public Sector (2020 edition) This guide updates public authorities on the latest money laundering regulations and draws on current best practice on ways to prevent issues from arising. combating financial crime

Visit publicfinance.co.uk and publicfinancefocus.org for exclusive news and opinion on the latest developments affecting public finances. Sign up for news bulletins direct to your inbox SECTION 114 NOTICES “You have to act on the facts, not on wishful thinking or that curious group-think optimism that pervades local government.”

Former Northamptonshire County Council CFO Mark McLaughlin on issuing a Section 114 notice

LGPS EXIT CAP “Funds are… forced to choose which laws to break whenever someone is made redundant from a council or academy school and the value of the pension strain exceeds the cap.”

Ian Colvin, head of LGPS benefit consultancy and pensions consultancy, Hymans Robertson Full articles at www.publicfinance.co.uk/type/opinion

We had saved the economy.

We had stabilised the global financial system and yanked the US auto industry from the brink of collapse… [but] whether for lack of talent, cunning, charm or good fortune – I’d failed to rally the nation, as FDR had once done, behind what I knew to be right…

LISTEN

CIPFA speaks! podcast Latest episodes Institute for Government director BRONWEN MADDOX gives an overview of the Performance Tracker 2020, while LINDSEY WISHART, who has held various charity sector treasurer roles, discusses the impact of Covid-19 on services for children and young people.

NEIL GREEN, deputy director for counter fraud and investigation at the Government Internal Audit Agency, gives the big-picture view on fraud and corruption in the public sector.

LISTEN at publicfinance.co.uk/

…writes former US president Barack Obama in his memoir A Promised Land

podcasts-cipfa-speaks

66 PUBLIC FINANCE JANUARY/FEBRUARY 2021

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"DIJFWJOH OBODF FYDFMMFODF JO QPMJDJOH Due to the AFEP programme’s success, we are delighted to notify our members of a unique reinvestment initiative by CIPFA back into the police sector.

• Free PQ Scholarship places – apply now for March 2021 intake (up to 10 places available)

Beyond the scope of the AFEP programme, we invite members to take advantage of:

• Free guidance paper – Governance of ūŕŕîċūƑîƥĿūŠɉHƭĿēîŠČĚ

• Free asset manager health checks

Next steps visit cipfa.org/AFEPreinvest call 07867 425402 email nicole.burrell@cipfa.org

In association with the Finance and Coordinating Committee of:

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IF UNDELIVERED PLEASE RETURN TO: CIPFA The Quadrant Sealand Road Chester CH1 4QR

Headline sponsor:

COVID-19: Road to recovery The Public Finance Live Annual Conference 2020 went virtual bringing together professionals to discuss the important topics within public finance.

VIEW ON DEMAND SESSIONS NOW AT:

cipfaannualconference.org.uk #publicfinancelive20

VIRTUAL CONFERENCE V

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