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Before Clause 25

Lords amendment No. 6

5.30 pm

Mr. Raynsford: I beg to move, That this House disagrees with the Lords in the said amendment.

The amendment would insert a new clause at the beginning of part 2. The new clause says that part 2 can be applied only to an authority that has been identified by the Audit Commission as being at risk of overspending its total budget by more than 10 per cent.

I need first to explain the perverse and highly undesirable effects of such an overspending test. It requires the Audit Commission to undertake an entirely

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new task, which would be costly and potentially very hazardous. In effect, it would require the commission to create what would be a blacklist of authorities that had agreed budgets that were likely to be seriously overspent. How would that be done? The factors that lead to an overspend are extremely diverse and difficult to predict. The commission would have to examine the budget of every authority, consider the various contingencies that might affect it and their likelihood, and from that try to predict whether the outcome would be a 10 per cent. overspend. The scope for disagreement would be immense, and inclusion in the list would be highly likely to be challenged in the courts. A major input of audit resource would be required, which would be reflected in an increase in audit fees for all authorities.

What would be the effect of an authority's inclusion? It should be borne in mind that this is not a general assessment concluding that an authority is a poor performer, but, specifically, a supposedly authoritative statement that it is likely to spend at least 10 per cent. more than it put in its budget. If the authority had reserves of less than 10 per cent., that would effectively mean that it had set an illegal budget. On the other hand, if it had reserves of more than the expected overspend, it would be on the blacklist but not at any financial risk. Its reputation would be compromised for no reason.

The purpose of the amendment is apparently to apply part 2 to authorities that have unsound finances. When Hackney's chief finance officer issued his section 114 report in October 2000, he was estimating an overspend of between £14.5 million and £22 million. The reserves were £6.5 million. The general fund budget for the year, however, was £264 million. The reserves were insufficient, but the projected overspend was less than 10 per cent. of the budget.

Even if it could have foreseen that development, the Audit Commission would not have identified Hackney under the new clause. The part 2 provisions would not have applied in one of the most serious financial crises to have hit a local authority in recent years. This arbitrary test would not guarantee the identification of authorities facing financial crises, while running the risk of needlessly tarnishing the reputation of an authority with sound finances.

The new clause would have another serious consequence. Much has been made of the opposition to part 2 in local government, but one clause, clause 30, has been universally welcomed. It helps an authority to take rapid remedial action when a section 114 report has been issued. The amendment would perversely deny an authority the use of that facility unless it was on the Audit Commission list—but unexpected financial crises can affect many authorities. It is absurd that only projected overspenders would be allowed the means to take immediate action to deal with such a crisis.

Those are the reasons for our belief that this is a perverse and unworkable amendment, but there are more fundamental issues at stake. The purpose of part 2 is to reinforce important aspects of sound financial management in local government. It does that mainly by requiring authorities to follow proper procedures and have regard to appropriate considerations, while leaving the substance of the decisions to authorities themselves. This is all part of our programme to extend freedoms and flexibilities to local authorities—in this case, by repealing the restrictive policies relating to capital

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spending that were introduced by the last Conservative Government. I am interested to see the right hon. Member for Wokingham (Mr. Redwood) laughing at the fact that his party was responsible for the introduction of those measures.

Mr. Hammond: The Minister is going into chapter and verse about his technical objections to the amendment, but he knows that the underlying principal concern was clause 26, which, in contrast to what he has just said about giving local authorities freedom and allowing them to manage their affairs in accordance with generally accepted accounting practice, gives the Secretary of State the power to dictate reserves. Why did not the Government take the opportunity to accept the Opposition amendment that would have struck out clause 26, and then everyone would have been happy?

Mr. Raynsford: If the hon. Gentleman bears with me, I will come on to precisely that issue. I emphasise that the Bill is part of a programme to extend freedoms and flexibility but, as all sensible people recognise, with freedoms come responsibilities, and the part 2 provisions are sensible safeguards to ensure that the new freedoms are applied responsibly. Clause 26 provides a fall-back power to require an authority to budget for a minimum level of reserves but we have made it clear on many occasions that we would use that power only in very limited circumstances. We have said on the record, and I repeat tonight, that we will set a minimum only if an authority is disregarding the advice of its chief finance officer and is heading for serious financial difficulties. In deciding the level of the minimum, we would take account of the advice of the chief finance officer and any observations of the auditor.

Mr. John Redwood (Wokingham): I was laughing because the Minister was purporting to say that this is a liberalising Bill when, as my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond) has pointed out, there is a very strong measure of centralisation. Before the Minister suggests that I should not be making this point, he should remember that, when I was the Minister with responsibility for local government, the only changes I made liberalised. I would have liked to liberalise more. I wish this Government would liberalise more. This is not the measure that is going to do it.

Mr. Raynsford: I remind the right hon. Gentleman that, when he was a Minister, there was a capital control regime in place that involved central decision taking about every local authority's borrowing—every local authority's borrowing was determined by central Government. That was the policy that he followed. That is what we are doing away with by giving local authorities freedom to take decisions based on a sound prudential assessment of what they can afford to borrow. The only safeguard that we have put in is the safeguard that I have been referring to, which ensures that, in the event of an authority disregarding the advice of its chief finance officer and heading for serious financial difficulties as a result of that, there is a fall-back. I think that any sensible person would recognise that that is prudent and a necessary safeguard, but I hope that we will have to use it very rarely, if ever.

Mr. Edward Davey: The Minister knows that we disagree with the policy as embedded in clause 26 but

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can he elucidate a little more about when he thinks the power could be used? He said that it would be used on very rare occasions, if ever. Have his officials given him a list of occasions over the past few years when the power might have been applied, given the undertakings that he has just given?

Mr. Raynsford: As I have already said, we hope that we will never have to use these powers. There have been very infrequent occasions where authorities have disregarded the advice of their chief finance officer. There were cases some years ago where authorities got into imprudent financial arrangements, disregarding official advice, but thankfully they have been very few and infrequent, and we hope that they will not happen at all in future. That is why I can say with some confidence that I hope that we will never have to use the powers, but it is a foolish Government who do not make provision for the possibility of one rogue authority taking irresponsible decisions against the advice of its chief officers in certain unforeseen circumstances. If that were to happen and we did not have the power to intervene, I would be surprised if there were not some Opposition Members saying, "How is it that the Government have got into a position of giving these freedoms to local government without any ability to step in and to prevent the people of that area suffering as a result of irresponsible behaviour by the local authority?"

Mr. Hammond: Since the Minister places so much stock on the advice of chief finance officers, will he take some advice from the Society of County Treasurers, which told the Select Committee that the proposals for the Secretary of State to specify that local authorities maintain their reserves at a minimum level seemed to be "particularly problematic and unnecessary"?

Mr. Raynsford: I hear what the society says, and I know that local government is generally hostile to the proposal. But the hon. Gentleman should reflect on the circumstances that I am describing, in which, at some unforeseen future date, an elected authority disregards the advice of its chief finance officer and undertakes highly imprudent borrowing, putting the authority's finances at risk. If that situation arose and the Government had no means whatever to deal with it, would he and the Opposition really be silent? On reflection, he will realise that this is a sensible safeguard that is there for extreme circumstances. We hope that we will never have to use it, but it is a necessary concomitant of a policy of liberalisation that is extending substantially greater freedom to local authorities over their borrowing decisions.

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