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Moody’s lowers TfL’s outlook after Brexit vote

08 July 2016

Credit rating agency Moody’s has lowered Transport for London’s outlook, citing concerns that the Brexit vote will hit the UK’s public finances, slow the economy, and reduce passenger growth on the capital’s public transport.

Moody’s has changed the outlook for 52 UK sub-sovereign organisations – including TfL, four councils and six universities – from stable to negative following the Brexit vote.  

“Moody’s believes that there will be a prolonged period of uncertainty following the ‘leave"’ vote, which will weigh on the UK’s economic and financial performance,” it said. “A downturn in the economic outlook in the UK has direct implications for UK sub-sovereign budgets [such as councils and TfL] through (1) potential slowing or declining transfers received from the central government; and (2) further potential austerity measures included in the Government’s next Budget and next spending review.”

Moody’s said leaving the EU could reduce TfL’s public transport revenues due to “slowing growth in the economy and population” and lead to a loss of EU funding for capital programmes.

Responding to the change, Ian Nunn, TfL’s chief finance officer, said: “This was to be expected following the recent downgrade of the UK’s sovereign credit rating. This has no immediate impact on our finances and we will set out how we will continue to deliver improved transport for London in a new plan to be published in the autumn.” Moody’s recently warned that new mayor Sadiq Khan’s fares freeze could hit TfL’s credit rating (LTT 27 May). 

Reviewing the UK scene generally, Moody’s said: “UK public sector entities receive significant amounts of EU funding, including research funding for universities and structural and investment funds for local authorities. The public sector also benefits from European Investment Bank lending. UK sub-sovereigns may lose access to most of these funding sources once the country leaves the EU. We expect the shortfall to be partly compensated by the UK government.”

It added: “In our view, the negative effect from lower economic growth will outweigh the fiscal savings from the UK no longer having to contribute to the EU budget. A downturn in the UK’s economic outlook will weigh on sub-sovereign budgets through a potential slowdown or decline in central government transfers, which make up a high proportion of the sector’s revenues. UK local authorities and universities received around 60% and 25% of their revenue respectively from the central government in 2014/15. For TfL, the proportion was 17% of operating revenues (plus additional capital grants).”

Moody’s said local authorities’ business rates and council tax receipts were “likely to grow more slowly”. “A reduction in business rate revenues would also adversely affect TfL, whose capital programme is to be funded through retained business rates in the London area from 2017-18.

“For TfL, lower levels of immigration could lead to slower than expected population growth, holding back farebox revenues. TfL passenger journeys grew 15% in 2008-2014 on the back of population growth of over 7%. Much of this was fuelled by EU nationals, who currently account for about 12% of the London population.

“If population growth were to be slower than anticipated because of fewer arrivals from EU countries or elsewhere, TfL’s revenues may come under pressure.”  

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