UK local borrowing reforms could support infrastructure investment without unsettling gilt markets

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UK borrowing reforms for infrastructure

Highlights

UK considering reforms to allow development corporations' borrowing for projects to be excluded from public debt metrics, aligning with practices in the Netherlands and Germany.
Major gilt investors including Legal & General and Aviva support the potential shift, indicating market confidence that such reforms won't undermine the UK fiscal framework.
Stronger municipal bond market and fiscal devolution enabling local authorities to retain more tax income could increase efficiency and accelerate infrastructure delivery despite no overall rise in national borrowing capacity.

Borrowing model changes for development projects

As reported by Financial Times, one proposal is to change the treatment of borrowing by development corporations, public bodies that oversee large projects such as new towns.

In countries including the Netherlands and Germany, recent schemes are financed against the future rise in land values created by those projects, and that borrowing does not count towards public sector debt targets. In the UK, however, similar borrowing does count towards those metrics, even though the approach was used to help finance Milton Keynes in the 1960s.

Bringing Britain into line with those peers could let development corporations take on a bigger role without undermining the government’s fiscal framework. Major gilt investors including Legal & General and Aviva have supported such a shift, indicating markets may not view the change as an attempt to conceal borrowing.

Municipal bond market seen as wider opportunity

A broader reform would be to build a stronger municipal bond market, giving local and regional authorities more direct access to investors rather than relying on central government funding for each project. Supporters argue that while decentralisation does not increase the country’s total borrowing capacity, it can improve efficiency and speed up project delivery.

Charlie Nunn, chief executive of Lloyds, says working with mayors is "one of the best ways of getting things done" in the UK. Even without U.S.-style tax incentives for municipal debt, investors could still fund regional authorities at a spread over sovereign borrowing, a premium that may be acceptable if it helps accelerate construction or enables schemes that would otherwise stall.

The UK’s previous effort to foster a municipal bond market in the 2010s gains little traction, but advocates of devolution argue that the earlier push lacked a stable local revenue base to support repayment. If regional governments retain more tax income under fiscal devolution plans, future municipal borrowing efforts could stand a stronger chance of success.

Our earlier coverage focused on Chancellor John Healey’s commitment to sticking with deficit-reduction plans ahead of the October 28 Budget, positioning fiscal discipline as key to maintaining investor confidence while still supporting growth. It also highlighted the UK’s modest 0.1% GDP expansion in August and the rising political pressure around how the government balances consolidation with structural reforms.

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