The political economy of local government financialization and the role of policy diffusion

Abstract

By analyzing why English local governments have made extensive use of long‐term market loans with embedded derivatives, this paper seeks to contribute to the growing literature on local government financialization. Using an original, large‐N panel dataset for the period from 1998 to 2014, we show that the configuration of the local political economy is an important driver of financialization processes: a Labour Party majority as well as fiscal and economic stress make it more likely that councils adopt risky financial instruments. As the use of financial innovations has also diffused geographically, policy diffusion impacts local governments as well. Highlighting the conditional effect of finance sector power, which only increases the use of financial innovations in very large councils, as well as the temporal dimension of fiscal and economic stress, we create ample avenues for further research.

Grasping the nettle: the central–local constraints on local government funding in England

“…In summary, the concept of financialization has connected into debates of decentralized government provision (Rodríguez-Pose & Gill, 2003) and 'roll back' and 'roll out' neo-liberalism (Peck, 2010;Peck & Tickell, 2002). Moreover, in England, it has provided new insight into how local places and government adapt to measures of austerity introduced since 2010 (Christophers, 2018; Gray & Barford, 2018;MacKinnon, 2015) and some of the controversies associated with these efforts, such as the use of Lender Option Borrower Option (LOBO) loans (Mertens et al, 2019). However, we suggest that financialization has played a peripheral role to date in that story.…”

“…These include: cutting services temporarily; instituting or increasing user fees and charges; increasing local taxes; increasing tax revenue by promoting local growth; closing less politically critical services; driving down staff costs; drawing down reserves; and 'open[ing] up services to market-type competition and delivery' (outsourcing). 'Promoting growth' can include capital investment to drive economic boosterism: this is where the possibility arises of lenders seeking to influence local investment priorities, explicitly or by default (Mertens et al, 2019). Local tax revenue forms on average some 40-50% of local authority income in England, meaning that, in principle, promoting local growth and benefiting from increased tax revenue appears an attractive strategy to increase local revenue substantially.…”

“…Critically, English local authorities may only borrow for capital investment, not for revenue spending. This distinction is sometimes blurred (e.g., Mertens et al, 2019): borrowing at unfavourable rates of interest, or using unfamiliar instruments such as tax increment financing or LOBO loans, has implications for the cost of capital programmes and the overall financial health of an authority, but it does not directly influence revenue spending decisions directly. Additionally, local authorities must follow a number of statutory codes concerning treasury management, investment guidance and minimum revenue provision, and undergo annual internal and external audit.…”

Why do state-owned utilities become subject to financial logics? The case of energy distribution in Flanders

“…Institutionally, we observe that the rescaling of decision-making capacities in itself triggers financial ownership strategies by the local state. At Eandis, the imbalance of skills is not between municipalities and financial actors selling products (compare with Lagna, 2015, and Mertens et al., 2021), but rather between municipal representatives and the management team, the central board of directors of Eandis and the Flemish government. This mismatch between ownership and institutional capacities is a product of market-making and state rescaling: economic rationalization during the 2000s has created a large company in the interstices of the state, where management, the central board of directors and the Flemish government direct an opaque, top-down decision-making process.…”

“…Budgetary pressure has been shown to trigger the adoption of risky financial products (Strickland, 2013). Yet, Mertens et al (2021) note how the adoption of financial products is also moderated by the degree to which political parties are sensitive to voters' demands for service, indicating that political interests might shape the financialization of municipal ownership strategies. Furthermore, the power of the financial industry appears instrumental in changing cultures of public debt management (Trampusch and Fastenrath, 2019).…”