Draft Local Loans (Increase of Limit) Order 2008

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The Chairman: Order. Some of the questions—on plans to raise the £70 billion at a later date, the work of the Public Works Loan Commissioners, and the procedures for dealing with loan applications—are strictly outside the terms of the order. While I have let those questions go, I would appreciate it if the Minister answered them very briefly and stuck to the core of the order.
4.54 pm
Ian Pearson: Thank you for your guidance, Mr. Taylor. I will stick to what the order does but will, in the spirit in which they have been raised, provide answers to some of the questions asked by the hon. Members for South-West Hertfordshire, for Taunton, for Aldridge-Brownhills and by my hon. Friend the Member for Midlothian. To answer the point raised by my hon. Friend, Scottish local authorities approach the Public Works Loan Board in the same way as English and Welsh ones. Scottish local authorities work with a similar prudential regime to English and Welsh local authorities.
On the future forecasts and the actual limits of the PWLB, the balance of principle outstanding loans was £47,170 million in the 2000-01 financial year and £47,045 in 2001-02. The figures for 2002-03 to 2007-08 are: £44,589, £41,307, £42,070, £47,084, £47,911 and £57,046. As I indicated in my opening speech, in this financial year there is about £50.7 billion in outstanding loans with the PWLB. From the figures, we can see that it is variable year-on-year depending on local authority capital projects and their various positions. The estimate this year is that the net change will be an increase of £2.2 billion, which will be about the same for the next two years of the comprehensive spending review period.
I was asked where the figure appears in the accounts. The figure of £2.2 billion PWLB net lending for 2008-09 is shown in the 2008 Red Book at table C12, which concerns the public sector net cash requirement. Figures are not traditionally disaggregated beyond 2008-09, but we think that a similar increase in spending is likely, which is one reason why it is necessary to raise the £55 billion limit. Hon. Members asked why now and why the increase to £70 billion. It is necessary to increase the figure, given current circumstances and likely future demand on the resources of the PWLB from local authorities. I accept that we could increase it to £60 billion or £65 billion and come back with a statutory instrument at a future time, but we decided to increase it to £70 billion for flexibility. We see no good reason not to set it at the maximum level that we can under legislation. Any future decision to go beyond that, if it was necessary, would depend on primary legislation, which would normally be a Finance Bill.
Hon. Members asked about the factors that have led to the increase. There have been changes from year to year. I remind the Committee that, as I said in my opening remarks, there has been a 220 per cent. real terms increase in local authority capital spending over the past 10 years and that is welcome. I remember when local authorities had very strict impositions placed on their ability to borrow, and it was a cause for concern that schools, council houses and other buildings were falling into disrepair due to a lack of capital spending because of the decisions taken by a previous Administration. We have also seen significant sales of council houses over the past 20 years, the peak of which occurred a long time ago and we have seen a downward trend for years. Those asset sales have normally been put against debt—it was a requirement—and that has reduced the net position of the PWLB, which is one reason why we have not had to come to the House to debate a statutory instrument before. Some of the changes, such as extending the Public Works Loan Board maximum term for loans from 30 to 50 years, also have potential financial effects for obvious reasons which I can go into, if people wish.
As I mentioned, the prudential borrowing regime was introduced in April 2004. The Local Government Act 2003 said to local authorities that to some extent we trusted them to make sensible borrowing decisions; that regulations would be imposed through the CIPFA code on prudential borrowing but that they were best placed to take decisions on local investment. That has been widely welcomed by local authorities and is one reason why we have seen a rise in borrowing in recent years from about £47 billion in 2005-06 to an estimated £53 billion in 2008-09. This is a good thing to do.
The hon. Member for Taunton asked why this is happening now and whether it has got anything to do with current economic conditions. This statutory instrument has not been designed in the light of the current economic climate. We have not asked whether we could magic up a quick wheeze to enable local authorities to borrow more. That is emphatically not the case. Quite simply, the limit that had been set for a period of time has been approached, and this is a prudent thing to do for the future. On margins, the Public Works Loan Board rate is extremely competitive compared to commercial loans. It is marginally above gilt rates, so as to ensure that the PWLB does not operate at a loss. It is not demand-constrained or a competitive system. I know that this is outside the terms, Mr. Taylor, but a local authority has to satisfy the commissioners of the PWLB that it wants to borrow responsibly, that it is prudent and that it can afford it.
We are aware of the recommendations of the Treasury Committee regarding the role of the commissioners. Those recommendations would require primary legislation if they were to be implemented. We think that the situation works well at the moment. In statutory terms, the commissioners are responsible for deciding loan applications. They ask key questions such as, “Is your local authority complying with the appropriate requirements of the board’s current circulars?”—that is, is it acting in a prudential way?—or, “Is this application within the relevant legislation and your council’s borrowing powers?” In particular, since the introduction of the prudential regime, the commissioners’ role in approving local authorities’ loan applications has reached the stage where most decisions are of a technical nature and therefore delegated to the PWLB’s officers, although there is overall supervision.
A question was asked specifically about whether this order could be used to deal with the situation of some local authorities that have money in administration in Iceland as a result of their investment policies. I confirm that the borrowing is for capital purposes and that PWLB funds could not therefore be used in such circumstances.
I think that that covers the points raised by hon. Members. I finish by emphasising that the PWLB’s outstanding loans limit is not a control on local government capital spending, nor is the increase in the limit being sought to allow or encourage great capital expenditure and hence the borrowing to finance that. The increase is necessary to accommodate existing forecasts for borrowing, and to allow local authorities to continue to obtain value for money when financing their planned capital investment. I hope that the Committee is minded—as it seems to have indicated—to approve the order.
Question put and agreed to.
That the Committee has considered the draft Local Loans (Increase of Limit) Order 2008.
Committee rose at six minutes past Five o’clock.
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