Local government in England: capital finance

An introduction to capital finance and borrowing by local authorities in England, including details on the Public Works Loan Board, bonds, and tax increment financing.

Local authorities are required to distinguish between capital and revenue finance in their accounting. They can access capital finance for infrastructure investment from a number of sources, but borrowing is the most common of these.

In England, local authorities have normally borrowed from the Public Works Loan Board in recent decades, at favourable rates of interest. There has been recent exploration of alternative sources of borrowing, including the new Municipal Bonds Agency.

The Government has also introduced tax increment financing schemes, founded on the Business Rates Retention Scheme introduced in 2013-14. Under these schemes, local authorities may borrow for infrastructure projects, against the future growth in business rate receipts which will result from the projects.

The note also covers recent debates on the possibility of local authority pension funds investing in local authority infrastructure projects; and on the restrictions on investment using funds from local authorities’ Housing Revenue Accounts.

This note covers England only. However, the Public Works Loan Board lends to authorities in England, Scotland and Wales, and the Prudential Code covers England, Scotland and Wales.