Reader's Letter Of The Day

From The FT:

Sir, With reference to your report Council bond issuing plans spurred by subsidy cut and rise in borrowing costs (September 1): am I missing something?

The government used to lend to local authorities at 0.17 per cent over its own borrowing costs. With negligible transaction costs, the 0.17 per cent turn was almost pure profit to central government.

The Treasury has now increased the turn to 1.0 per cent, which is so high that councils are seeking to issue bonds in the open market at 0.8 per cent over gilts, notwithstanding the significant transaction costs. Because municipal borrowing is part of the national debt, the net effect is that the total interest payable on consolidated public borrowing increases.

At the same time, the government’s profit from the margin on lending to local authorities drops to zero, because none of the latter will borrow on the exchequer’s terms. This is a lose-lose situation. Would the chancellor not do better to lend at a more modest uplift?

Adrian Jack, London WC2, UK.

It's PFI all over again, why do something cheaply in the public sector, if you can do it more expensively in the private sector?

If the true interest rate for local councils is 0.8% more than central government debt, then surely the ideal mark-up for central government is +0.79%; while the councils pay more than now, it's close to the market rate (good) but the extra bit which councils pay is extra income for central government, so there's no extra cost on the taxpayer (also good).