Open a newspaper, switch on the radio or tune into your favourite TV station and you will read or hear the same message. The UK is broke! Years ago I used this very column to predict that America’s flirtation with sub-prime debt would lead to chilly winds blowing across the Atlantic. That’s where it all started for me, but it doesn’t really matter. We are where we are.
We are now just starting to come to terms with another American import. Tax increment financing or “Tif” for short, was quietly unveiled by the coalition government last year. What an earth am I talking about? Let me try to explain.
Councils all over the UK have deprived areas and/or derelict buildings which they would like to regenerate. But what do you do when you have no money and Central Government has made clear that its coffers are empty. Where do Councils go to raise funds to kick-start investment in a region? This is where Tif comes in. The concept is a simple one. The idea is that regenerated areas bring in income in the form of rates and other local government taxes. So your Council borrows today with the assumption that its future additional income, in the form of higher business rates and council tax, will repay the loan. Do you see?
Tif has a good deal in common with the private finance initiative (“PFI”), the controversial and hugely expensive mechanism used by Labour to pay for hundreds of new schools and hospitals. Tif and PFI are essentially different ways to deal with the same fundamental problem. Councils need to stimulate economic development in deprived areas. The reality is that public sector investment in infrastructure is needed to attract businesses into a deprived area and councils find accessing these large sums difficult.
Boris Johnson, London’s mayor, is planning to use this form of borrowing to finance the redevelopment of Battersea power station and the extension of the Underground’s Northern line.
Edinburgh Council plans to use Tif to re-develop a 750-acre stretch of waterfront with a new pier and esplanade, improvements to the old docks and new roads. The Council believes this would kick-start a wider development including 1,200 homes, 800,000 sq ft of shop and office space and 1,100 hotel beds.
Local authorities in Sheffield, Leeds and Manchester are believed to be planning similar projects worth several hundred million pounds.
Tif is different from PFI but there are obvious similarities. Tif in effect allows councils access to tomorrow’s spending power today. And, in the same way as it was possible with PFI, public sector bodies will in all likelihood be allowed to keep such arrangements off their balance sheets.
If these schemes work out, all well and good, but the reality is that the idea is based on public sector investment attracting private sector rate-paying businesses. But, if all goes wrong, guess who will end up paying the bill? That’s right – you and I, in the form of higher council tax and business rates. Fancy a gamble?