Dismore questions Mayor over impact of Brexit on GLA projects borrowing
At today’s Mayor’s Question Time on the GLA Budget, Labour London Assembly Member for Barnet and Camden Andrew Dismore AM, questioned London Mayor Sadiq Khan over the over impact of Brexit on the ability of the GLA ‘family’ to raise funds for capital projects. (video here and here)
Mr Dismore asked the Mayor:
‘In the event of a no deal Brexit, what are the implications for any public sector borrowing necessary to finance GLA family capital projects, especially if the UK’ s credit worthiness is further downgraded due to Brexit, as it was after the referendum?
‘While the Conservatives are taking the UK towards a no-deal Brexit, London must still invest in vital capital projects like new homes, transport infrastructure, and equipment for the Fire Brigade and police. What elements of the GLA family’s capital programme are most at risk due to increased borrowing costs if a no deal Brexit becomes a reality and causes interest rates to rise?
‘Transport for London has funded capital projects through loans from the European Investment Bank. What will be the impact of losing access to the European Investment Bank (EIB) post Brexit; and how will you mitigate them?’
The Mayor said that he was very concerned about the risk of the cost of borrowing going up due to credit worthiness downgrades post a ‘no deal’ Brexit. GLA bodies have to have to borrow to invest, for example through the Public Works Loans Board. He was particularly concerned about the impact of higher borrowing costs on house building. Through the London Resilience Forum, they were talking with local authority colleagues to share good practice. With the Secretary of State for DCLG talking of new burdens on councils, there are real risks to financing. TfL uses the EIB and it is unclear what happens afterwards.
After Question Time Mr Dismore added:
‘A credit rating downgrade can affect how much it costs governments to borrow money in the international financial markets. A high credit rating means a lower interest rate (and vice versa).
‘Credit rating agencies Fitch and S&P downgraded their ratings for the UK in 2016 after the referendum, with S&P cutting it two notches from AAA to AA, and Fitch lowering it from AA+ to AA. Moody’s followed in September 2017, downgrading the UK to an Aa2 rating from Aa1 – a 35 year low.
‘A ‘no deal’ Brexit may well make borrowing more expensive with higher interest rates, especially if the UK’s credit worthiness is downgraded. Ratings agency Moody’s described their assessment of some of the impacts of a no deal scenario:
- It would damage the UK’s economic, fiscal and institutional strength. The immediate impact would likely be seen first in a sharp fall in the value of the British pound, leading to temporarily higher inflation and a squeeze on real wages over the two or three years following Brexit. This in turn would weigh on consumer spending and depress growth, with a risk of the UK entering recession.
- A number of corporate sectors in the UK would be significantly credit negative due to factors such as tariffs, the weaker pound and regulatory changes. The most severely affected sectors would be automotive, airlines, aerospace and chemicals.
- The UK banking sector’s overall credit fundamentals would weaken due to lower asset quality and weaker profits. The negative impact on UK banks’ asset quality and profitability would be partly mitigated by their strong solvency and liquidity.
- Reduced immigration, a weaker economy and lower employment would put pressure on Transport for London’s passenger numbers and income. It would also exacerbate challenges for UK universities which could affect student and staff recruitment.
‘In the event of a no-deal outcome, the balance of risks would shift firmly to the downside.’