Regional bond revolution risks making Britain more unequal and less prudent

If Andy Burnham wants a municipal bond revolution, he must first build the fiscal architecture to make it sustainable, says Tim Focas

Few politicians have done more to advance the cause of English devolution than Andy Burnham. The Labour leadership front runner has become the poster child for what happens when local leaders are given the power and freedom to shape their own destiny. But let’s be absolutely clear, from George Osborne’s Northan Powerhouse to Boris Johnson’s “levelling up” agenda, all devolution initiatives over the past two decades have had a dependence on Westminster to hand over the money.

It is therefore unsurprising that a growing number of voices are calling for the next stage of devolution which would allow mayors and regional authorities to issue municipal bonds and raise capital directly from institutional investors. Sounds sensible right? I mean, why should every local infrastructure project require ministers and treasury officials in London to sign off funding? And why shouldn’t ambitious local leaders borrow to invest in the roads, railways, housing and AI data centre infrastructure needed to unlock growth?

Well, it is not so much that local borrowing is inherently bad. After all, look at what it has done for places much further afield like Mississippi in the US, which has projected GDP growth of 1.5 per cent this year, building upon just under 2 per cent growth in 2025.

The issue is more that debt investors, just like they do with nation states, reward strong economies with cheaper capital and penalise weaker ones with higher borrowing costs. That reality creates a serious challenge for anyone who believes municipal bonds alone will help “level up” Britain. Take London as a prime case in point. With its enormous tax base, global financial centre status and concentration of economic activity, London would almost certainly be able to borrow more and at lower rates than almost any other part of the country. Investors would see a large, diversified economy capable of generating the revenues needed to service debt.

With its enormous tax base, global financial centre status and concentration of economic activity, London would almost certainly be able to borrow more and at lower rates than almost any other part of the country

Now compare that with a struggling post-industrial town in the North East or a local authority facing weak growth and declining demographics. The market would demand a higher return to compensate for the greater perceived risk. Consequently, the places already best positioned to attract investment would gain access to the cheapest capital. They could invest more, grow faster and further strengthen their financial standing.

The places most in need of investment would face higher borrowing costs and tighter constraints. What begins as a policy designed to decentralise power could end up reinforcing precisely the regional inequalities it is supposed to solve.

Market discipline

Now this is not an argument against municipal bonds, but it is a case against introducing them without a credible fiscal framework. Britain’s current devolution model is based largely on Westminster distributing resources around the country. A municipal bond model would be fundamentally different. It would shift power and responsibility to local leaders and introduce market discipline into local government finance.

That can be a good thing. But if borrowing powers are devolved, fiscal discipline must be devolved too. Every authority should operate under clear and transparent rules. Debt should be linked to investment rather than day to day spending, borrowing limits should be tied to revenues, and financial reporting should be rigorously monitored. Most importantly, there should be no ambiguity about whether the treasury will ride to the rescue if a local authority gets into financial trouble.

Without those guardrails, investors will assume government guarantees exist. With them, markets can allocate capital while taxpayers remain protected. The lesson from Manchester is not that every mayor should be handed a blank cheque. It is that local leaders perform best when given meaningful powers within a framework of accountability. Municipal bonds could become one of the most important economic reforms of the next decade. They could help break Britain’s addiction to Whitehall micromanagement and create genuine local economic autonomy. However, if ministers want a municipal bond revolution, they must first build the fiscal architecture that makes it sustainable. Otherwise, the bond market will do what bond markets always do. That is reward strength, punish weakness and make existing inequalities even harder to overcome.

Tim Focas is head of capital markets at Aspectus Group