Local Government Bill

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Mr. Hammond: The Minister just said that the creation of the prudential regime could lead to a surge of borrowing, which would require the imposition of limits. That suggests that he is looking at local authority borrowing in isolation and contemplating the use of the provision to impose limits because of aggregate local authority borrowing, rather than looking at the total macro-economic picture. Will he confirm that that is not true, and that limits would be imposed only if local authority borrowing were creating a problem as a component of the wider picture?

Mr. Raynsford: That is obviously implicit, because otherwise we would not have included the reference to the national economic interest. The hon. Gentleman is a thoughtful commentator on economic affairs, although at times he is a little obsessive on European issues—I did not rise to his challenge on that one—and I am sure that he will recognise that if local authorities, which account for a quarter of total public expenditure, were all borrowing large amounts simultaneously, they could have a disproportionate impact on overall national economic circumstances. I felt that it was right to mention that situation—but as I said, we do not envisage the circumstances meriting the imposition of a national limit at the beginning of the new system. I have said that we will consult local government, and we are already having preliminary discussions with local authorities to consider the type and general structure of regulations in case they are ever needed.

Clause 4(2) contains a second reserve power, which would enable the Secretary of State to set a limit on the borrowing of an individual authority. That could be used only for the purpose of ensuring that an authority does not borrow more than it can afford. Again, the power is a backstop that will be available only for extreme circumstances in which individual authorities are managing their affairs in such an imprudent way that, in the interests of their council tax payers and residents, Government intervention is necessary. There

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have been a few highly publicised examples of irresponsible behaviour by one or two local authorities, which give the whole of local government a bad name, but I hope that we have established the fact that the Government want to work constructively with local authorities as a whole to ensure that those cases are dealt with expeditiously and do not recur.

In response to concerns expressed by local government, we have reflected in the Bill the policy in the White Paper and the policy statement. As I have said, the limit would be imposed by direction—in other words, a letter from the Secretary of State to the authority involved. That offers flexibility, enabling the limit to be tailored to the particular case, varied or removed quickly if circumstances change.

Clause 4(3) provides that any limits imposed by the Government, nationally or locally, can be different for different types of borrowing. We could therefore allow borrowing for certain purposes to be subject to less stringent constraints, or exempted from the limit entirely.

Mr. Hammond: How does the Minister square that with the suggestion that limits under clause 4(1) are imposed only for macro-economic purposes, with regard to the aggregate level of local authority borrowing?

Mr. Raynsford: I am sure that the hon. Gentleman can envisage circumstances in which certain types of borrowing to promote national infrastructure, which is essential for economic development and prosperity, were regarded as overridingly important, and exemptions might be made as a result. Again, there is a degree of flexibility, which the hon. Member for Kingston and Surbiton rightly highlighted as important.

Flexibility is also important in relation to subsections (4) to (6). These deal with headroom, whereby authorities will be allowed the freedom to transfer borrowing capacity between themselves. Interestingly, the hon. Member for Runnymede and Weybridge asked whether there might be trading in headroom. We do not know whether there is any now. He may be aware that there is already a system whereby authorities can pass across unused borrowing limits within the current borrowing approval system. I do not know whether there is active trading. I think that it is mainly a question of voluntary agreements between local authorities whereby one exchanges this year's headroom in return for a transfer in the opposition direction in the coming year.

Such arrangements should continue to be available, because within the overall national limit, it would be perfectly reasonable for authorities to shift individual borrowing decisions provided that they did not breach the overall limit. That is where the headroom allows flexibility.

Mr. Turner: We certainly cannot blame the Government for not knowing the circumstances in which headroom may currently be traded. They cannot be expected to know everything. Indeed, it is better that they do not—but will the Minister help the Committee by telling us whether, where there is not a

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reciprocal arrangement, the traded or transferred headroom might have a value that should have been taken account of by the transferring authority, and should therefore show up in some form of recompense to its ratepayers for the transferred value?

Mr. Raynsford: No; we are getting into the sort of detail that is best, and properly, left to local government. There should be flexibility so that if a local authority has, say, £3 million of spare borrowing capacity because it chooses not to borrow up to its set limit within the overall national limit, it can make that available to another authority. However, it should be left to local government to make such arrangements, without a national framework.

Mr. Hammond: The Minister says that he does not know whether trading in headroom goes on at the moment, but will he confirm that nothing in the Bill or the existing legislation prevents local authorities from obtaining monetary reward for releasing their headroom? Will he also explain how the transfer mechanism will work? Presumably, a local authority that transfers headroom will want to do so on a time-limited basis. Will the regulations provide for a specific structured form of releasing headroom for a period of time? If the borrowing authority defaults on returning the headroom—in other words, on reducing its debt on time—will the donor authority be penalised, or will it automatically be assumed to have reclaimed its headroom when it is contractually supposed to have done so?

Mr. Raynsford: The hon. Gentleman asks two separate questions. The first is whether there is anything in the legislation to prevent trading in headroom. To the best of my knowledge, there is not. This simply enables the flexibility in the existing system that allows transfers of borrowing approvals between authorities to continue under the new system. If trading currently takes place—and I have told the Committee that I am not aware of any—there is no reason why that should not be extended under the new system.

The second question is about the auditing arrangements for keeping track of the process. The individual authority and its auditors will be responsible for ensuring that there are robust systems in place. The hon. Gentleman is correct to say that there will be a time factor, because borrowing approvals for authorities under the current system are limited for individual years, and under the new system, the authorities will set their own prudential limits for future years. They will therefore want to be satisfied about their capacity for future borrowing.

There will be a proper framework, but it will be determined at a local level rather than being set by the Government. I hope that hon. Members will not encourage the Government to become involved in that process, because that looks like the sort of micro-management that hon. Members complain about. That is very far from our intention.

Mr. Hammond: I understand the point that the Minister made, and to some extent sympathise with it, but he cannot avoid being cast in that role. Subsection (5) states:

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    ''The Secretary of State may by regulations make provision about the exercise of the right''

under subsection (4).

Therefore, the mechanism for the transfer of headroom must be defined in the regulations. If authority A were to transfer some headroom for a period of one year to authority B, would it be assumed that at the expiry of that one-year period, authority A had recovered that headroom, regardless of whether authority B had kept its side of the bargain and reduced its borrowing?

Mr. Raynsford: The whole purpose of the transfer of headroom is for authority A to make available its spare capacity for the current year to authority B in exchange for some benefit in a future year, such as making available an alternative degree of headroom. That agreement would need to be defined between the two authorities and confirmed by their auditors.

The hon. Gentleman is correct to say that there are regulation-making powers, and we will, after consultation with local government, set out broad parameters. We do not, however, intend to get into micro-management of that activity. The Government would not, and should not, be involved in that, because the overall effect would not be to increase total local government borrowing. As I said earlier, the arrangements are not dissimilar to those that exist under the present system for transfer of credit approvals.

The provisions are not odious, but are necessary as a prudent back-stop for a new system that will hugely extend the freedom available to local authorities. Local authorities will be able to borrow within a prudential framework, rather than being subject to borrowing control. They will take the decisions, and will be able to reflect their needs and circumstances by borrowing to meet those needs. That is a major advance, which local government welcomes.

I am sorry that the Opposition fail to recognise that that considerable extension of freedom to local government must be accompanied by limited safeguards to guard against extreme circumstances in which the exercise of those freedoms could create difficulties, either in terms of national economic management or the performance of a few local authorities. Those are no more than prudent safeguards, and I hope that hon. Members will not vote against them. If they do, I hope that the Committee will nevertheless confirm that clause 4 should stand part of the Bill.

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Prepared 28 January 2003