Local government this week celebrated major new borrowing powers promised by coalition ministers. But regeneration experts warned US tax increment financing (TIF) regimes had left some cities burdened with high debts and inequalities.

Deputy prime minister, Nick Clegg, announced on 20 September that UK local authorities would get TIF-style borrowing powers to kick-start stalled regeneration plans.

Speaking at the Liberal Democrats’ conference in Liverpool, Mr Clegg said the Comprehensive Spending Review would contain plans for councils to borrow against future increases in business rates paid by firms in areas earmarked for regeneration. The move will soften the blow to councils of forthcoming grant cuts.

‘This may not make the pulses race… but I assure you it is the first step to breathing life back into our greatest cities,’ Mr Clegg told delegates.

Paul Carter, leader of Kent CC, told The MJ: ‘It is a very good concept. If we don’t have some [financial] tools in the cupboard, then nothing will happen. We think it’s the right thing to do, especially in getting things going coming out of a torrid recession.’

TIF regimes have been used extensively in the US, and UK blueprints for cities such as Birmingham have described them as accelerated development zones (ADZs).

Cllr Mike Whitby, leader of Birmingham, said: ‘We have already put forward several proposals for how ADZs could operate within the West Midlands, and our models demonstrate there could be a huge impact in job creation and economic output – unleashing our capacity to become true drivers of the UK growth agenda.’

Further details of the TIF plan will be revealed in a government White Paper on economic growth, alongside the CSR.

A Treasury spokeswoman confirmed officials were in discussions with local authorities and business leaders about the scope of TIF regimes, which could cover traditional city centre regeneration, transport, road, schools and public spaces development. Sources within London mayor Boris Johnson’s office said the mayor was considering how TIF could fund Tube network extensions and regeneration close to the new US embassy. The Treasury spokeswoman said: ‘Ministers will implement a strong and robust framework for this… to ensure there is no over-borrowing [and] that there are sensible limits to how much can be borrowed, how it is spent and by whom.’

It follows evidence that while many TIF schemes in the US have successfully regenerated city centres, some have experienced problems.

In Chicago and California, critics claim TIF has falsely inflated property prices, forcing some existing businesses to move on while debt levels are high following the downturn.

A senior source in Michigan added: ‘The gentrification of urban centres in the US has also forced some poorer or unemployed residents out towards neighbourhoods on the margins of TIF zones, heaping financial pressure on those areas.’

A report this year by parliament’s All Party Urban Development Group concluded TIFs had been ‘overused’ in the US. Treasury officials are carefully considering this issue of ‘additionality’ – ensuring projects funded by TIF are those which could not otherwise be financed through existing means, such as current prudential borrowing powers.

That has sparked a debate over priority projects. Some experts believe TIFs should only be used to fund projects within the most deprived areas.

Others claim they could be of more benefit to areas where growth in business rates is expected to be high. An assessment by lawyers Trowers & Hamlin warns: ‘More economically-depressed areas forecast to have lower growing business rates will have less scope to borrow using TIF.’

Chris Murray, director at the Core Cities Group, said the Treasury should not be ‘overly prescriptive’.

‘This is not for every [regeneration] scheme. It’s for schemes that cannot be funded using existing mechanisms.’

Asked what would happen in the event of a TIF failure – such as a large revenue shortfall against debt obligations – Mr Murray added: ‘The lead agency for TIFs would have to take the hit. Anyone embarking on a TIF will want to be really sure its going to make money. We’re not going to have wild spending and wild borrowing.’

The Treasury spokeswoman said ministers and officials were ‘well aware’ that US projects had encountered problems. ‘We’ll be seeking to discuss all of these issues… prior to the CSR and to address them through the White Paper,’ she said.