The Economic Secretary to the Treasury (Ian Pearson): I beg to move,

It is a pleasure to serve under your chairmanship, Mr. Taylor. This order is being moved under provision of the National Loans Act 1968. While this procedure is well established and had been undertaken at regular intervals until 1988, I recognise that the long interval since the last such order may require a reminder as to what the Public Works Loan Board does and why this statutory instrument is required.

The PWLB is a long-standing unpaid statutory body which originated in 1793 and was permanently established in 1817. Its main function is to make loans to British local authorities for investment purposes and collect the repayments. The loans are at rates marginally above those at which the Government can borrow and provide good value for money for authorities through low-interest repayments. Local authorities can only borrow for the purposes of capital investment or for short-term cash-flow purposes and are required to balance their revenue budgets on an annual basis. While the PWLB is not the only source of finance for local authorities, about 80 per cent. of borrowing for investment undertaken by local authorities is made through it. Loans are advanced under section 3 of the National Loans Act 1968 which provides moneys from the national loans fund. Section 4 of that Act sets limits on the amounts of outstanding loans that may be held by the PWLB. Section 130 of the Finance Act 1990 amended section 4(1) of the National Loans Act 1968 and set a new limit of £55 billion for outstanding loans held by the PWLB. Section 130 of the Act also amended section 4 of the 1968 Act so as to grant the Treasury the power to raise by statutory instrument the outstanding loans limit further to a sum not exceeding £70 billion. The statutory instrument required to raise this limit has been laid before the House and, as I have indicated, is being debated today. The loans limit effectively provides parliamentary approval for lending by the PWLB. It is not formal control on council spending or borrowing.

This order to raise the PWLB’s loans limit is in effect required to update the board’s statutory position. The limit has not been raised for 18 years—when section 130 of the Finance Act 1990 inserted the new loans limit, it also inserted a new maximum loans limit which could be reached by order. However, no such order has been made under those new provisions since that date—historically a very long interval. Orders to raise the PWLB’s limit had previously been undertaken on a regular basis from 1968 to 1988.

The length of the interval in part reflects a period, particularly during the 1990s, when local authority investment was highly restricted by tight control of capital spending by central Government. Local authorities were also required to use a significant proportion of their receipts from asset sales to reduce their debt which included outstanding loans to the PWLB. The limit is presently being approached, however, following a number of years of net lending by the board driven by significant changes to the local government capital finance system, changes to the terms of the PWLB loans and overall significant increases in local authority investment. These changes include the introduction of the prudential regime on 1 April 2004 as part of the Government’s freedom and flexibilities agenda following the Local Government Act 2003. This replaced the previous capital finance system where central Government controlled capital spending by requiring local authorities to seek permission to borrow through credit approvals. The prudential regime removed central Government control of capital finance, replacing it by professional self-regulation through the Chartered Institute of Public Finance and Accountancy prudential code. That put the onus on authorities to demonstrate that borrowing was prudent and affordable given sensible assumptions about future revenues. That change was intended to allow local authorities to meet their local priorities as well as to tackle an estimated backlog in local investment of approximately £30 billion in 1997. Annual local authority capital spending in cash terms is nearly 300 per cent. higher than 10 years ago, and 220 per cent. higher in real terms. There is also provision for supported borrowing from Government Departments, which is similar to the previous system of credit approvals—a promise by central Government to make available a revenue stream to a council to support a given level of borrowing for capital purposes.

The PWLB is by far the largest source of finance for both types of borrowing. It should be noted that even before the prudential regime, when the Government tightly controlled spending, the loans limit was not used as a direct control on local authority capital, as authorities could still use the private sector to finance investment. That point was made clear in previous debates on the order, such as those of May 1980, May 1981 and June 1983.

Loans from the PWLB to local authorities are fiscally neutral and do not affect levels of public debt; loans are merely money flowing from one part of the public sector to another. PWLB loans do, however, relate to the public finances through forecasts for prudential and supported borrowing, for which they are sought as a source of finance. The forecasts for local authority borrowing have already been accounted for in the public finances over the current spending review period, and are not being adjusted in the light of this statutory instrument. The instrument simply allows councils to continue to use the PWLB as a source of finance. That allows them to obtain value for money in financing their existing capital spending plans through affordable rates of interest, which also aids the local taxpayer.

The Treasury’s annual forecast for net lending by the PWLB is £2.2 billion in this and each future financial year. At the start of this financial year, outstanding loans held by the PWLB totalled £50.7 billion. That would imply that outstanding loans should not reach the limit during this financial year. However, PWLB loans have been volatile in the past and are entirely driven by local authorities’ demand for loans. There are some potentially significant investment projects, such as Crossrail, for which the PWLB may help to provide finance. One could imagine the reaction of hon. Members, or the volume of correspondence from local councillors bemoaning their inability to fund capital investment deemed necessary in their local areas, if that limit were reached and the Government had not taken the action being debated today. The private sector currently accounts for only 20 per cent. of lending, so if PWLB loans were no longer available, the alternative sources of funds would be uncertain, and many authorities might look instead to curtail their investment. Enabling local authorities to continue capital investment and investment planning is a key reason for the order.

As well as the aforementioned freedoms provided by the prudential regime, other factors that have driven the demand for loans in recent years include: the extension in December 2005 in the maximum loan term available from the PWLB, from 30 years to 50 years; declining council house sales, and sales of other assets, leading to lower early debt repayments that reduce outstanding debt; and the rates of interest available from the board and how they affect the relative attractiveness of alternative sources of finance.

Local authority treasury officers have tended to set target borrowing rates for PWLB loans. As rates have fallen, local authorities have progressively increased their borrowing. It is important to note that however local authorities chose to finance their capital spending, they must either have the cash available or prove that any borrowing is necessarily affordable and locally sustainable.

I wish to take the opportunity to thank the Public Works Loan commissioners for their work on loans to local authorities, which they do on an entirely voluntary and unpaid basis. Their expertise and skill, together with that of the professional staff at the Public Works Loan Board, led by its secretary Mr. Mark Frankel, is a valuable asset. I commend the order to the Committee.

The Chairman: The Minister referred to the role of the Chartered Institute of Public Finance and Accountancy. I did not think that he was going to do that. I ought to declare to the Committee that I am a member of that body.

Mr. David Gauke (South-West Hertfordshire) (Con): It is a pleasure to serve under your chairmanship, Mr. Taylor. I thank the Minister for his explanation of the order and for the statutory background. As he said, section 130 of the Finance Act 1990 sets a limit of £55 billion on the total of loans outstanding to the commissioners at any one time, with a power to increase that by order to £70 billion under the National Loans Act 1968, which is what this order does.

The explanatory memorandum states that the Treasury and the commissioners say that it is necessary to increase the limit to accommodate for forecast future demand. The Minister gave us details on that, but, specifically, what level of loans is the PWLB forecast to make? Does he anticipate it going up to the £70 billion limit fairly quickly or will it take longer? How close is it at the moment to the £55 billion limit?

Why has the forecast future demand increased? He mentioned Crossrail, but what other factors are causing the increase in demand? For example, is the increase necessary to finance the decent homes programme? Is it in any way due to the potential losses of local authorities with funds in Icelandic banks? I will be grateful for confirmation from the Minister. In asking about the reasoning behind the order and increasing the limits—that is the topical question of the day—one should ask whether it is part of a fiscal stimulus programme or entirely unrelated.

The Minister describes the proposals as being fiscally neutral, but how do local authorities appear to be borrowing more, financed by central Government, without that having an impact on Government borrowing or debt figures? I would like some more information about the loans that will be made by the PWLB. The Minister referred to the applicable interest rates as being slightly higher than the level at which the Government are able to borrow themselves. It would be useful to have a comparison with commercial banks, where local authorities might be able to find an alternative source of financing. What range of products—for example, available lengths of time until maturity—is available? The Minister mentioned an increase in the absolute limit from 30 years to 50 years; can he provide further information on that? What process does the PWLB use in evaluating a request for a loan from a local authority? Is it simply first come, first served or does the PWLB evaluate how the sums will be spent or invested? Does it evaluate the financial soundness of the local authority? How does it evaluate whether to approve a loan?

The Minister paid tribute to the role of the commissioners who provide their services for free. What precisely is their role? It has been suggested that part of their role is to prevent political interference or favouritism, or the perception of it, in the granting of loans, is that the case? The Treasury Committee looked at that issue in 2000 and recommended that the Government review the role of the PWLB commissioners. It may well be that the Government have done that, although in my preparation for this order I was unable to find any information suggesting that they had. It would be helpful if the Minister could indicate whether this has been reviewed. The Treasury Committee reported in 2000:

Have the Government reviewed the governance structures of the PWLB commissioners?

Subject to satisfactory answers to those questions, I do not envisage that we will divide the Committee on these provisions. We look forward to the Minister’s response.

Mr. Jeremy Browne (Taunton) (LD): I share the view of the two Members who have already spoken about what a pleasure it is to serve under your chairmanship, Mr. Taylor.

I have a number of questions to ask the Minister, some of which overlap with or even echo those already raised. I shall try not to be excessively repetitive, but there is a body of pertinent and relevant questions to ask the Minister and his response will be interesting. The first is the crucial topical issue referred to by the hon. Gentleman who previously spoke, which is, why now? Would the Government be extending the package to such a degree if we were not in the current economic circumstances? This is a large increase of more than 25 per cent. in the money potentially available to local authorities. I, like many others, have been in the main Chamber this afternoon listening to the Prime Minister, and all the talk is about injecting extra money into the system to try to ensure that we make the effects of the recession as small as possible. This is a device for potentially doing precisely that, so I would be interested to hear the Minister’s comments on how much this is part of a wider economic picture.

Given the state of the economy here and around the world, what does the Minister anticipate will be the future demand for this provision? Does he expect to bring us all together again in six or 12 months from now to extend the package by a considerably larger amount? I am interested to know how much each local authority is potentially able to access from the fund. Would it be able to access many different overlapping loans simultaneously, or should there be only a multiple of the overall assets of that particular authority? I do not fully understand, and I do not think that the Minister made completely clear the arrangements and caveats placed upon local authorities to satisfy the criteria needed to realise this additional money.

I have a few other specific points to make. It has already been asked whether any of this money could be used to cover bad debts to Icelandic banks or other creditors. I would be interested in the Minister’s response. He talked mainly about capital projects—initiatives such as Crossrail—but there may be more pressing concerns for some local authorities.

What, if any, is the role for the Department for Communities and Local Government, which seems not to feature? It seems strange that a Department specifically tasked with overseeing the performance of local councils should not have some active part in this process.

My next point relates to the terms of the deal for central Government. I do not think the Minister has put a figure on it, but I am curious to know how much profit the Treasury hopes to make in interest on these loans. He said that the loans were extended to local councils at slightly less favourable terms than those enjoyed by central Government. Therefore, presumably there is a cross-subsidy from my constituents, who pay a bit more in council tax so that central Government can make a small profit at their expense in terms of national finances. I am interested to know precisely what those margins are.

Finally, will the Minister touch in greater detail on the role of the commissioners? In which circumstances are they likely to reject loans from local authorities? What obligations will be put on those councils, particularly those that have external pressures—whether they be Icelandic loans or elections coming up—and might seek to have more money available to them? Will the Minister indicate in which circumstances the commissioners may turn down applications from local authorities? Following on from the comments of the hon. Member for South-West Hertfordshire, who speaks for the Conservatives, I have no objection in principle to what the Government are trying to do. The Minister is generally helpful in his responses on these occasions, and if he could engage with some of those topics we would all feel sufficiently reassured so as to not press the matter to a vote.

Mr. Richard Shepherd (Aldridge-Brownhills) (Con): It is an unalloyed pleasure to serve under your distinguished chairmanship, Mr. Taylor. I am trying to get the rhythm and nuances of the Committee absolutely right, now that we are faced with a Minister of great distinction who is leading us in our exploration of this loan business.

Like the other hon. Members, I have three questions. It all seems so simple. The PWLB is a 19th-century institution that has helped to manage great investments over the past one hundred and something years, and has kept a rein on public expenditure in one sense. Is the capitalisation, the increase that is sought, for working capital; is that the correct way to express it? Here is £15 billion—a 25 per cent. increase. The explanatory memorandum does not detail why the additional £15 billion is necessary. If the body is self-financing, with a small margin taken by central Government—presumably to cover costs—what are the great projects in hand that necessitate such a large increase? I think that I am putting that the right way; it is just that, as a Back Bencher, one puzzles as to what all this means.

The Minister spoke as if the figure of £70 billion were set for ever. Is it set for ever, or do we intend, in more propitious times, to rein back? When might the limit be returned to £55 billion? These are huge sums. Only the other day we passed a statutory instrument for £40.2 billion, and here is another £15 billion. I am just puzzled, and I think that the Minister, with his usual flair, will help us to master what we want to be assured in our hearts is not just a little old ramp by the Government to get in more money.

Mr. David Hamilton (Midlothian) (Lab): The measure covers the whole of the United Kingdom, but the 32 local authorities in Scotland are covered by the devolution Act. When a loan is applied for through a local authority in Scotland, is that through the Scottish Parliament—likewise the Welsh Assembly in the case of Wales—or is it a direct loan to the local authority?