Local authority infrastructure financing

A complex system of local government has developed across the UK as a result of reorganisations and changes to funding regimes.

This section explores the various ways local authorities finance infrastructure projects, detailing the sources of funding available as well as the difficulties and potential pitfalls of the system.

It begins with an overview of local government and infrastructure before moving on to explore the different funding options available to local authorities. It then turns to the subject of credit risk and debt before concluding with issues of localisation, devolution and pension funds. 

This section is maintained by Robert Robinson of Bridgecourt and Company.

• High rates of inflation and government restrictions on generating commercial revenue are putting additional pressure on local authority budgets.
• Inflation, including pay demands and demand pressure, is forecast to result in a funding gap of around £1.6bn regarding the local authority budget in England in 2024/25.
• Local authorities are being encouraged to bring forward proposals to introduce single unitary authorities in areas where two tiers of local government currently exist.
• The government has delayed the Fair Funding Review (renamed the Review of Relative Needs and Resources) and the associated proposed business rates reset until after the next general election.
• The government has prioritised financial stability across the local authority sector rather than reform the system of funding distribution.
• The Local government finance settlement for England 2024 to 2025 increased funding for local authorities by £4.5bn to £64bn, a cash terms increase of 7.5%, which is a larger increase than last year and the largest increase in over ten years.
• The UK Shared Prosperity Fund has been established to replace the loss of EU grants received by UK local authorities.  
• Local authorities are at the heart of the government’s ‘levelling-up’ plans.  A £4.8bn Levelling Up Fund was announced by the government, which is expected to stimulate the improvement of town centres and local infrastructure.
• The Levelling Up and Regeneration Act 2023 received royal assent in October 2023. It gives greater central government powers to monitor local authority risk and intervene in cases where debt level thresholds are breached. It seeks to encourage greater local democracy, makes planning and regeneration more straightforward, and introduces a new infrastructure levy for new development. It also legislates on governance arrangements for RICS (giving the Secretary of State powers to order independent reviews).
• Borrowing by UK local authorities decreased by £0.4bn to £9.6bn in 2022/23. Capital grants provided by central government, the largest source of funding for capital expenditure, increased by £0.6bn to £11.5bn in 2022/23.  
• The UK government increased the total lending limit of the Public Works Loan Board (PWLB) from £95bn to £120bn. However, the cost of borrowing from the PWLB has increased significantly in line with the increase in gilts, and borrowing levels are forecast to decline further.
• The UK Infrastructure Bank (UKIB)  has a mandate to lend up to £4bn to UK local authorities.  In September 2023, it reduced its lending rate to local authorities to gilts + 40 bps (40 bps lower than the PWLB).
• The funding model for local authorities has undergone significant change in recent years with a switch away from central grant provision towards keeping a higher proportion of locally generated revenue. The government has delayed any move to 75% business rate retention and then to 100% retention.
• Some local authorities have seen their levels of reserves fall and have also seen pressure from inflationary costs, and the high cost of debt as interest rates increase in face of high inflation, which has increased the risk of financial failure and the issuing of section 114 notices. Eight local authorities have issued section 114 notices since 2018, and around 20% of all councils are potentially at risk of issuing a notice over the next couple of years.
• There remains uncertainty around the financial sustainability of many local authorities. However, given the strong framework of support in which they operate, local authorities remain highly creditworthy and attractive borrowers for most lenders.

isurv section: Housing as an infrastructure investment

isurv section: Infrastructure financing

isurv section: Infrastructure planning and development