Select Committee on Transport, Local Government and the Regions Minutes of Evidence

Examination of Witnesses (Questions 100-119)



Dr Pugh

  100. I am very surprised you as accountants came out with a recommendation which did not say to have a minimum set of balances. Are you not being more realistic in a sense than the Government? You are recognising the world the councils have to live in and the fact that huge distortions such as social service expenditure can go up overnight really and to some extent that is due to the way the Government behaves. If you go on to the definition of old people, as in fact they did, the cost of residential homes bears down very heavily on some local authorities. In a sense for you to go along with the minimum level of reserves would you not have to demand from the Government a more predictable and equitable way of behaving because often they are the principal burden, are they not?
  (Mr Bilsland) It is true that Government changes can have a bigger effect than almost anything else. To be fair to the Government, although changes do happen they are usually signalled some time in advance. As we are looking towards next year, for example, and we are looking at new legislation which is going to come in place next April, then we are factoring in a degree of uncertainty. One of the processes we have to follow is a very formal risk assessment of reserves and balances. It used to be done really almost on the back of a cigarette packet, you cannot do that now, you have to do it in a very formal way, you have to report it to members. Again there are already very tough procedures in place in well run councils which does not need additional prescription from the centre.

Mrs Ellman

  101. Clause 26 places new duties on chief finance officers to comment on the robustness of the budget itself and also on the question of reserves. Is there any purpose in those conditions?
  (Mr Soare) I suppose we view that what is intended by Clause 26—we would say going back to the general picture—is already happening in the vast majority of local authorities. In terms of a local authority treasurer giving advice on the robustness of estimates and the reserves position, there is legislation already around balanced budgets, there are also, if you like, interventionist type powers which local authority treasurers can exercise under Section 114 of the 1988 Local Government Finance Act. We feel that those already statutory powers, plus the guidance that we are developing for local authority treasurers should be sufficient. In a sense, again, we see the intent but our take on this is the vast majority of local authorities are doing this and the vast majority of treasurers in a professional capacity are doing this already.

  102. If it is recognised that this is happening already, why do you think the Government wants to impose this as a duty?
  (Mr Soare) It is difficult in one sense to speculate on what is in the minds of the Government. I would say that potentially some of the recent very high profile cases of the minority of authorities where the financial position has become very, very bad may have prompted the thought that this is a sort of belt and braces job.


  103. Would this have stopped those problems developing?
  (Mr Soare) That is very difficult to say.

  104. Was not the problem that they did not really know what was happening?
  (Mr Soare) Not being party in detail to any of the authorities which have found themselves in this position, again it is difficult to say. Having something on the Statute Book potentially would not have altered the set of circumstances which took place on the ground in those small minority of authorities.

Mrs Ellman

  105. What about Clause 27, again giving new duties to local authorities to monitor budgets during the year? That is something that is already done.
  (Mr Soare) In the sense of it being a professional requirement on the local authority treasurer, that is already there. In terms of best professional practice, invariably—and again if you look at Audit Commission work in this area—you do not find the vast majority of local authorities being unaware of the in-year budget position. Indeed, there is a regular cycle of reporting, as is commonly known. We are developing our guidance into a professional practice standard for those treasurers who are CIPFA members, that is coming out later this year. We would say in the vast majority of authorities that in-year budget monitoring is part and parcel of the professional round and it is acknowledged that it is an essential element of financial management.

  106. Why do you think the Government is pursuing this in the knowledge that you are bringing out your best practice guidance later in the year?
  (Mr Soare) Whether they are aware of our best practice guidance I do not know but I think the comments I have already given on that is our best surmising of that position.

Mr O'Brien

  107. Clause 10 of the Bill suggests an increasing degree of central control over the use of capital receipts by local government. How would the pooling of capital receipts impact on the prudential rules system?
  (Mr Soare) I would just say in general that I think some other commentators on the draft Bill have picked up that it is a little bit unclear as to whether this Clause 10 refers to housing capital receipts only or is intended to be all capital receipts. I think there is a little bit of tightening that needs to be done there.


  108. Which should it be? Should it be all or should it just be housing?
  (Mr Soare) I think we would say it should only be housing. I do not think there is a case for pooling non-housing capital receipts.

Mr O'Brien

  109. What safeguards should be proposed over the control do you think?
  (Mr Soare) In our evidence we say that we do think there is going to be a great need for a transparent criteria for how these capital receipts, if they are housing capital receipts, are going to be redistributed because in one sense if an authority could have certainty on planning ahead, and there is a link here to the prudential system, it is obviously more helpful the more certainty an authority has over what its capital receipts position is going to be year on year. Perhaps I can ask Maureen to say a small bit about the link with the prudential system here.
  (Mrs Wellen) The direct link with the prudential system is that local authorities are going to have to regard to all their income sources, so if they are keeping all their capital receipts they can do their programme of activity for capital receipts in the knowledge of what they are going to get. If those capital receipts are going to be pooled and then redistributed, in order to take proper account of the income they are going to have they will need to know how that pooling is going to operate because otherwise—we are talking quite large amounts of money here—they will not know what income is going to come in to support the capital investment. So the pooling will have a direct impact on how the prudential system operates.

  110. In your evidence at 1.3 you say "In other respects, however, CIPFA's view is that the Bill does not move far enough in encouraging the `new localism' that is key to achieving the Government's vision." Do you consider that this issue of capital receipts and the services that will follow needs some further adjustment or amendment to the Bill to meet that new localism?
  (Mr Soare) I think that comment at 1.3 was specifically related to the balance of revenue funding but as we have already discussed here there is an impact on the sustainability of the capital investment programme. I think CIPFA has consistently taken the view that one of the difficulties in terms of financial management and other issues is the very high level of direct Central Government grant and allied ring-fenced or specific grants. I think we have always thought that a lot of the debate and concern generated around Revenue Support Grant would be dissipated if it was, say, a 50:50 allocation because obviously the more that hinges on the formula, the more people are going to be concerned to make sure they maximise their own authority's take of that.

Chris Grayling

  111. Do you think the pooling arrangements will actually create an accounting industry within local government to try and avoid declaring capital receipts?
  (Mr Soare) I would hope very much not.

  112. You might hope not but do you think that?
  (Mr Soare) Should I rephrase that? CIPFA's professional practice standards would make it very clear, and our ethical standards make it very clear, that transparency and straightforwardness is an absolute requirement of CIPFA members. If you like, that is the incentive but I suspect that external auditors will be taking a very close look at what happens both in the transitional phase between the old capital system and the new one and ongoing after that.

  113. Do you think that there may be a tension between elected members and your members over whether or not things are accounted in an attempt to minimise the amount that is paid from the authority's main out of capital receipts into the pool when elected members will not want that to happen?
  (Mr Soare) Maybe I can ask my colleague who is a County Treasurer to comment on that relationship.
  (Mr Bilsland) I can see the drift of your argument. I think it is more likely that members are going to be reluctant to sell assets if they think they are going to be pooled. I think it is highly unlikely once an asset is sold that they would try and interfere in the accounting to try and disguise it because at the end of the day that just cannot be made to work, there are too many people who would know the full story.

Mr Betts

  114. We talked previously about the issue of Central Government support through grant for capital schemes. You say in your evidence you feel the form of that support should not be by way of capital grant but by way of revenue grant because capital should not be a free good.
  (Mr Soare) Yes.

  115. If Central Government effectively gives local authorities the cost of borrowing, the interest charges they have to pay, is it not a free good to all intents and purposes?
  (Mrs Wellen) We would recommend that the support for capital should take into account the interest costs and depreciation costs and that support should move towards that because those are the costs that should be charged under generally accepted accounting practice to revenue for capital. The intention there is to be able to look equally at whether things are being funded direct from revenue or from capital. In fact, the Government's own fiscal strategy has now moved to a definition of current expenditure that includes interest costs and depreciation, so moving the funding for local authorities to that would be a move in tandem to the Government's new fiscal strategy. I do think this is extremely significant, although it sounds very technical, because Government themselves have not in the past had that kind of definition and arguably the fact that depreciation has not been considered for public service assets has led to one of the major reasons why public service infrastructure generally in this country actually needs now an awful lot of investment whereas if over the years you had been funding for current revenue, including depreciation, that would not have been the case. I do think that is a very big issue.

  116. And it does not mean that it is a free good then if Government is supporting the revenue transfer of the capital itself?
  (Mrs Wellen) It is not a free good at the point of delivery, it means that those assets are funded over time and they are funded as they are used up and that provides management incentives for better use of assets and it also guarantees long-term sustainability of assets. They are not free at the point of delivery, they are paid for over time.

Mrs Ellman

  117. What changes would you like to see between central and local funding of local government services?
  (Mr Soare) I think CIPFA's line on this has been quite consistent over the years. We felt that we would like to see a reduction in the reliance on Central Government grant as a proportion of total revenue funding. The gearing effect—a technical term but I think most people understand—means that it makes it difficult for local authorities to raise more revenue without impacting heavily upon the council tax. We have said consistently that we do believe that a return of the Non-Domestic Rate would be helpful for the reasons we outline in our written evidence. On specific grants, again I think we recognise there is a place for specific grants, especially for pump priming initiatives, but an over-reliance—I think the percentage has gone up quite considerably—means there is less and less room for local discretion in terms of how you respond to your local circumstances if a large amount of the funding is actually ring-fenced. I do not know whether Chris wants to say something on this issue.
  (Mr Bilsland) Just specifically that we think the proposals to return to Non-Domestic Rates are premature in advance of the work that is still to be carried out on the high level review of local balance of funding. Also, I think that we would be sorry to see the loss of NNDR because of the connection with the business community which is quite important. I think specifically we need the retention of the National Non-Domestic Rates, certainly until the review is completed.


  118. How urgent is the Bill? Do we need it and when do we need it for?
  (Mr Soare) I think we would say we do need the Bill urgently, particularly with respect to the prudential system. It does need primary legislation to replace the current system.

  119. The prudential system is for April 2004, is that right?
  (Mr Soare) Yes.

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