Local Government Bill

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Mr. Raynsford: The hon. Gentleman raises a fair point. He will be aware that we have had lengthy and detailed discussions with the LGA and other interested parties about the appropriate basis for Government support for local authority capital investment. No decision has yet been taken, but we will, of course, decide in good time, so that local authorities can plan for the implementation of the new arrangements from April 2004. The principle is that Government support will continue on the same basis on which it has been available for the great majority of local authority capital spending. There is no intention to change that.

The additional freedoms implicit in the Bill will allow local authorities to extend their borrowing to cover unsupported projects, and the authorities will be responsible for the revenue payments. That is what would apply to any person considering their personal budgeting. If they decided to take out a new loan for some purpose for which they had no current income stream, they would obviously have to be satisfied that they had the means to repay that loan. That is a proper element of prudential planning. It is right that local authorities should have that freedom, but it would be wrong to imply that Government should provide additional support for that extra flexibility; that is not the intention. I hope that that clarifies the matter.

There are technical and complex issues involved in any change to the current revenue support framework, and we need to be satisfied that such issues are fully covered before we reach a decision. However, I give the hon. Gentleman an assurance that that will be done in good time to enable local authorities to implement the new arrangement expeditiously.

Mr. Davey: I have two points of clarification. First, will the Government make their decisions before the Committee has finished its deliberations? Clearly, the revenue regime that will support the capital regime is a rather important part of the equation. [Interruption.] I think that I have just destroyed part of the parliamentary furniture; no doubt the cost will be deducted from my pay.

On the second point, the Minister gives a fair explanation of the technical issues that his Department has to grapple with, and I hear what he says. However, is he saying that there may well be a sort of shadow credit approval system in place beneath the prudential regime? Will the Government be telling local authorities that they will support so much borrowing, but for anything above that sum, the authorities are adrift?

Mr. Raynsford: I sincerely hope that the hon. Gentleman's parliamentary salary will not be subject to deductions to meet the loan charges on the cost of replacing the furniture that he appears to be vandalising so early in the proceedings. We know that frustration in the later stages of Committee can lead to all sorts of intemperate behaviour, but in my

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experience it is unusual for Opposition Members to break up the furniture in the first sitting. Be that as it may, a remedy is at hand: if the hon. Gentleman has to meet the costs, he will be able to borrow, and he will work out whether his parliamentary salary is sufficient to cover that borrowing.

We will consult later in the spring on the framework for Government support of local authority borrowing, so I am afraid that it is unlikely that the consultation will be completed before the end of the Committee's proceedings. However, I repeat that the intention is that the Government will continue to support local authority borrowing on the same basis as they do currently—that is, supported borrowing. We are giving local authorities the freedom to borrow in support of their policies without Government support. That is a perfectly reasonable freedom, but they should not expect the Government to have to produce additional support for that borrowing. I believe that the prudential regime is sensible and meets that objective.

Mr. Hammond: I, too, would find it outrageous if the hon. Member for Kingston and Surbiton were to have his salary docked merely for destroying a piece of parliamentary furniture when, as my hon. Friend the Member for New Forest, West says, we are faced with a Government who appear intent on destroying the entire parliamentary structure, and they have not, so far as I know, had any of their salary docked.

The Minister talks about two classes of local authority borrowing: supported borrowing—in which the Government will support the cost in revenue terms—and unsupported borrowing. I do not want us to get too far ahead of ourselves, but if I understand correctly, all borrowing by a local authority is essentially in one pot. Local authorities cannot create mortgages, or dedicate revenue streams to particular forms of borrowing. Is there not a danger that we will have a situation in which local authority borrowing that is unsupported by revenue from central Government is seen as a higher risk class of borrowing carrying a higher coupon? Owing to the inability of local authorities to ring-fence parts of their borrowing, the effect might be a downgrading of overall local authority credit ratings. Has that been extrapolated by the Minister and his officials? Is he satisfied that there is no risk that unsupported local authority borrowing by some authorities will drag down the credit rating of all local authority borrowers?

Mr. Raynsford: I wholly reject the hon. Gentleman's suggestion that the Government are breaking up the parliamentary structure. He should be careful about using such analogies because many people believe that his party is in the process of breaking up what was once a great party of government. Let us not take the analogies any further.

The hon. Gentleman made a distinction between supported and unsupported borrowing. The key purpose of the reforms is to allow local authorities greater discretion to determine their borrowing. However, they are required to do that in a prudential framework, which is the safeguard against

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the hon. Gentleman's fear about possible downgrading of local authority credit ratings. He will know that all local authority debt is treated comparably. There is no question of ring-fencing any debt to specific revenue flows or repayment means. That gives the security that he wants to ensure that local government credit ratings should not be undermined—providing that local authorities act prudently. That is the obverse side of the coin: we are giving greater freedom, but that is in a framework that rightly expects authorities to operate a prudential framework.

Mr. Andrew Turner (Isle of Wight) rose—

Mr. Raynsford: I give way to the hon. Gentleman.

The Chairman: Order. This issue can be debated under a subsequent amendment, so unless the Minister wishes to conclude his remarks on clause 1 stand part, I would prefer to put the Question.

Mr. Raynsford: Under that guidance, I shall say that the framework is coherent and achieves the objectives that the hon. Member for Runnymede and Weybridge set out. I hope that he will agree that the clause should stand part of the Bill.

Mr. Hammond: I am grateful to the Minister for his clarification. We will need to return to several issues raised by his past few comments when we consider clause 3, although the Liberal Democrat amendment to clause 2 will provide a vehicle for that.

I do not want to take up more of the Committee's time, but may I draw the Minister's attention to the fact that we have been sensibly debating clause 1 for 18 minutes, although the clause was his example of a clause on which we would not need to spend any time. There has been no time wasting and no unnecessary debate. The debate has been valid and it clarified many issues. That underlines the real difficulty of considering the Bill under the timetable before the Committee.

Question put and agreed to.

Clause 1 ordered to stand part of the Bill.

Clause 2

Control of borrowing

Mr. Davey: I beg to move amendment No. 52, in

    clause 2, page 1, line 13, leave out from beginning to end of line 14 and insert—

    '(a) any aspect of the Prudential Code for Local Authority Capital Finance produced by the Chartered Institute of Public Finance and Accountancy under section 3; or

    (b) any aspect of a regulation made by the Secretary of State under section 4.'.

The Chairman: With this it will be convenient to discuss amendment No. 54, in

    clause 3, page 2, line 8, leave out from beginning to end of line 23 and add—

    '(2) The Chartered Institute of Public Finance and Accountancy or another accountancy body nominated by the Secretary of State shall prepare and issue a Prudential Code for Local Authority Capital Finance.

    (3) The local authority shall perform its duty under subsection (1) by reference to the Prudential Code for Local Authority Capital Finance.'.

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Mr. Davey: Having debated the borrowing powers and borrowing freedoms that local authorities will have, we will now consider three clauses about controlling those freedoms. Although Liberal Democrats accept that there should be control—prudential control and control as a backstop in the event of a macro-economic crisis—we believe that the Government's control regime in clauses 2 to 4 is too prescriptive and that the Secretary of State keeps far too many reserved powers, which could be used in circumstances far beyond prudential control or control in the event of real macro-economic crises. That is the main thrust of the debates that we are about to have.

9.45 am

Amendment No. 52 would make the prudential control regime the focus of the limitations. In its references to sections 3 and 4, clause (1) establishes the means by which the Secretary of State can interfere at will in local authorities' decisions about borrowing. It also establishes a way in which the Government can decide to limit local authorities' expenditure from Whitehall.

If the Government are committed to a prudential capital regime, first and foremost, they would not seek such powers. We cannot see why the Government need such broad and wide-ranging powers. The powers could be far more narrowly defined, which would give greater clarity and freedom to local authorities.

We accept that the Government are working with CIPFA. I have its draft code, to which our amendment refers. I have flicked through the code and it seems to be sensible and moves in the right direction. It shows how a code produced by a professional body can be flexible and cover all the nuances and subtleties that are inevitable in a complex capital control regime. It is best practice. To lay on top of that the Government's ability to intervene willy-nilly is unnecessary and goes against the thrust of a welcome change in the philosophy of control of local authorities' capital spending.

The case has not been made in the Bill, the Government's reply to the Select Committee or the White Paper, for the extent of powers sought by the Government to limit local authority borrowing. Amendment No. 52 would therefore help to improve the legislation.

Amendment No. 54 is linked to amendment No. 52, although it relates to clause 3. It would include the role of CIPFA in primary legislation, and local authorities would not need to rely on regulations that could be changed willy-nilly at the Minister's discretion. The amendments go well together.

The Committee should remember the controls that already exist with regard to local authority capital spending, especially under sections 32 and 33 of the Local Government Finance Act 1992. Those provisions place a duty on local authorities to calculate their budget requirements for each financial year. Annex B13 to the Government's Green Paper ''Modernising Local Government Finance'' states that the budget requirement includes calculation of

    ''the revenue costs, which result from the capital investment decisions of the authority. These costs include capital financing

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    costs (interest and loan repayment provision) and running costs. Section 33 of the Act requires the local authority to set a council tax sufficient to meet its expenditure taking into account other sources of income such as government grants and non domestic rates.''

In other words, sections 32 and 33 of the 1992 Act already give the Government significant powers to control the capital financing regime of local authorities throughout the country. Those are on top of the CIPFA code and, hopefully, more narrowly-defined reserved powers in respect of macro economic reasons.

I do not understand why the Government need to establish such an elaborate system of control when they already have those powers, which are complemented by the prudential capital regime—which we support—in the CIPFA code. The Committee should accept amendments Nos. 52 and 54 because they would implement the Government's intentions far better than the provisions in the Bill as drafted.

There is a danger that the Chancellor's love affair with prudence will be seen in towns throughout the country rather than the town halls' own prudential regime, which is what the Government promised and what they should be relying on.

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