Local Government Bill

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Mr. Andrew Turner (Isle of Wight): I am interested in the hon. Gentleman's argument that the rules and codes that apply to the Government should also apply to local government. Will he accept that the money supply, for example, is within the control of the Government, so they should have some responsibility in respect of limiting local authority borrowing and expenditure?

Mr. Davey: That is an interesting point, although we are in danger of going down the route of the debate that took place in the early 1980s between monetarists and neo-Keynesians about the real effects and causalities in respect of the money supply. I thought that that argument had been put to bed, and that most people did not believe that fiscal policy had a very big impact on the money supply but believed that monetary policy had by far the most significant effect. The hon. Gentleman may want to have a debate on macro-economic theory, but local authority borrowing and Government borrowing are a very small aspect of the overall money supply.

I was trying to say that the fiscal framework that is embedded in the code for stability takes all those issues into account. If the Government as a whole, local and central, stick by the code for fiscal stability, the theory is that there will not be the damaging side effects to which I think the hon. Gentleman alluded, so his point is covered whatever economic ideology he currently subscribes to.

I hope that the Minister will regard new clause 2 as helpful, because it specifically relates the Government's own policy to a point in the Bill at which it should be directed.

Mr. Hammond: Yes, we are the Opposition and consistently so, unlike the Liberal Democrats, who

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want to play at being an Opposition to the Government in England while at the same time propping up the Labour party in its minority Administrations in Scotland and Wales.

It is interesting to hear the hon. Gentleman dismiss so readily and easily the relevance of Government borrowing as a component of the money supply. That may be a warning that, if the Liberal Democrats were ever to get their hands anywhere near power, that component of the money supply would quickly run out of control.

I will comment on the Liberal Democrats' new clause 2, but I shall begin with clause 4 in general. This clause rumbles the Government. The original clause 4, which was in the draft Bill that went before the Select Committee on Transport, Local Government and the Regions, was an umbrella capital control power and perhaps more prescriptive than the existing situation. The much-quoted Mr. Travers told the Select Committee that

    ''the . . . legislation would indeed allow the Government to operate a very different capital control system, one similar to or even more controlled than the present one.''

The clause has two essential components. These are the ability of the Secretary of State by regulations to set limits for ''national economic reasons''—that rather curious term is undefined—and the power in subsection (2) to set by direction, without scrutiny, limits on the borrowing of individual authorities. In other words, the Government have retained power to get in at the front end to micro-manage and tell each authority what it can and cannot do. By virtue of having that reserve power to limit any authority's borrowing, the Government can in practice give authorities a clear steer about what they do and do not regard as acceptable in respect of their borrowing.

The Committee will remember that the Government resisted an amendment that would have limited their power under subsection (2) to cases in which the authority had not had sufficient regard to the specified codes of conduct and practice in setting its own borrowing limits. The Government have therefore made it clear that they want an unfettered discretionary power in dealing with individual local authorities to curb their activity and set limits for them.

The only legitimate area in which the Government should be concerned is the aggregate level of borrowing, because of the impact that that has on the overall fiscal and monetary macro-economic position.

The clause also raises more questions than it answers, because we have seen from the structure of subsection (1) that the Secretary of State, by regulations, would set borrowing limits for each authority. I therefore assume that an exhaustive list would be published of all authorities in the country, with a borrowing limit set for each. The purpose of that would not be the individual borrowing limits of each authority, but the macro-economic impact of the aggregate limit on borrowing by the local authority sector. However, the Minister has told us nothing

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about how he would set the individual authority limits in such a situation.

How can Parliament be reassured that those limits will be set in an equitable way? Will the approach be based on a mechanical formula, with top-slicing of the self-imposed borrowing limits set under clause 3 by each authority, so that each authority would be limited to, for example, 75 or 80 per cent. of its borrowing limit?

I suspect, however, that the Minister will insist on retaining the micro-management power that will enable him to go down the list ticking off the good, the bad and the indifferent, and to set the limits according to ministerial whim. Let us hope that the limits are set on the Minister's birthday, when he might be in a good mood and might be expected to be generous to prudent authorities, rather than on one of his blacker days, when he might be tempted to display bias, the accusation of which must by now be so familiar to him that it is water off a duck's back.

Clause 4 introduces the curious notion of headroom and transfers between authorities, which we have not yet had the opportunity to debate. Having set debt caps on individual authorities, for the purpose of creating a limit on sectoral borrowing, the Government would then allow authorities to swap headroom, which, in effect, would create an internal market in borrowing capacity. Will the Minister comment on that?

I assume that it is envisaged that local authorities, for a limited period of time, would be able to sell their unused borrowing capacity to other authorities. That may sound slightly strange, but I know that that sort of thing has happened before. I was talking to a local authority a week or so ago, which had made a very nice turn in the 1980s and early 1990s by lending to Liverpool city council, when no other lender was willing to do so. Will the Minister explain how this internal market in debt capacity will work?

During a macro-economic crisis, in which the objective is to control total sectoral borrowing, is it sensible to envisage a system that imposes limits on individual local authorities, but then immediately opens up the opportunity for those authorities on whom the limit bites to acquire borrowing capacity from another authority—a prudent authority that has very low borrowing in relation to their ministerially set borrowing limit? There will be a tendency for the maximum borrowing limit set under the mechanism to become, through that transfer of headroom, a minimum borrowing level. Borrowing will tend to increase to the maximum permitted. That is perverse, because in a crisis where borrowing needs to be limited the objective would be to limit an individual authority's borrowing as the Minister directs—he has some discretion—and certainly not to encourage other authorities effectively to borrow or to allow borrowing against their unused capacity. I would be grateful if the Minister could clarify that point.

Mr. Davey: I have been closely following the hon. Gentleman's argument. I agree with him that the clause is fairly odious. Its one redeeming aspect is the ability to share unused borrowing capacity. It is the

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only flexibility in the system, so I am surprised the hon. Gentleman speaks against it.

Mr. Hammond: That depends how one views the use of the power under subsection (1). The Minister has told us that it would be used only in extremis in a national macro-economic emergency. In those circumstances it is curious to impose limits that almost certainly would not bite. There is a local authority sector debt. The Government seek to curb the growth of local authority borrowing—temporarily, I hope—for some external reason. If authorities on which the limit bites are able simply to acquire debt capacity from other authorities, the limit will not bite and the macro-economic objective will not have been achieved.

9.15 am

Mr. Davey: I may be misunderstanding the clause, but I thought that the limit set in subsection (1) was for the total of all local authorities' debt; and, therefore, if there was room within that limit that is where the arbitrage would take place.

Mr. Hammond: We do not have a draft regulation because there is no suggestion that there will be any regulations under subsection (1). The Government rejected an amendment that sought to specify an aggregate limit and an allocation of that aggregate to individual local authorities. My understanding is that each local authority will be given a limit, but perhaps the Minister will correct me. If one sat down and did the arithmetic, that would produce an aggregate limit for local authority sector borrowing. But, given the ability to trade headroom, it is not clear that that would achieve the objective effectively, efficiently and quickly in the circumstances where it is right to use subsection (1)—that is, a serious monetary crisis. I look forward to the Minister's comments.

The general thrust of new clause 2 is similar to amendment No. 7, which requires the Government to define the national economic reasons. The Minister's courage clearly deserted him when he went to write ''crisis'' into the Bill. We have talked about a national economic crisis, but the Bill uses the word ''reasons'' instead.

I am not convinced that the code for fiscal stability has the relevance here on its own that the Liberal Democrats have written into new clause 2. I prefer the structure of amendment No. 7. I do not disagree with the hon. Gentleman's purposes, but the problem is that the test in subsections (2) and (3) of new clause 2 is that the code for fiscal stability would be breached if limits were not set in relation to the borrowing of money by local authorities. So many variables in terms of Government borrowing and fiscal activity would contribute to a breach of the code for fiscal stability that it would be a difficult test to satisfy that local authority borrowing had to be controlled in order not to do so. I suspect that it would never bite. Perhaps that is what the hon. Gentleman intends, and if so he will join us in voting against clause 4.

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