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Mr. Ronnie Campbell: Is it not the case that, when local authorities have money to invest, they will go to wherever they can get the highest interest? Obviously, the Icelandic banks were offering high interest and the investments looked very good. I take the hon. Lady’s point that some of the authorities might have been encouraged to invest in those banks, and that perhaps they should not have done so, but everyone goes for the highest rate.

Julia Goldsworthy: I am not saying that councils have been reckless; I am saying that there have been some very different responses to, and interpretations of, the guidance.

David Howarth: My information is that, in many cases, the councils were not going for the highest rate when they placed their money with the Icelandic banks, and that there were other, more risky, offers being made to them. The situation is therefore rather more complex than the hon. Member for Blyth Valley suggests.

Julia Goldsworthy: I am grateful to my hon. Friend for that contribution.

Another question is whether the Government should be looking at the advice given by the credit rating companies and by those third-party organisations that advise the councils. My colleague Lord Oakeshott of Seagrove Bay has raised some issues of considerable concern. He pointed out that

He has raised the concern that there was perhaps some kind of kickback or remuneration from the banks, in relation to the payment that the councils were making. This issue needs to be urgently explored, and the Government should be taking an interest in it, rather than trying to stand back from it.

John Mann (Bassetlaw) (Lab): I do hope that the hon. Lady will do her homework a bit better. The credit ratings are available, and anyone can see that the ratings for two of the three Icelandic banks in question did not change until 22 May. Until that point, they had not changed, but on that day, they did. That information was made available to local authorities. The hon. Lady needs to distinguish precisely between local authorities that were, on the face of it, investing rationally up to 22 May—many of which were doing so over a 12-month period and were caught up in all this as a result—and certain others. She should also perhaps look in more detail into why a handful of local authorities chose, after 22 May, to invest new moneys when the special report on Iceland, produced that day, made pretty clear reading. Having read the report, I certainly would not have wanted to put my money into an Icelandic bank, and it seems strange that a handful of local authorities did so after that date. The hon. Lady needs to distinguish between the various local authorities in that regard.

Julia Goldsworthy: There is a difference between local authorities that have been caught up in the problems because of long-term investments and those that made their decisions more recently. The timing has not been
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uniform across the ratings agencies, and the drafting of Treasury reports also seems to have triggered different responses. For long-term investments, ratings from AAA all the way down to BBB are considered to indicate a low to moderate risk. Some of the Treasury guidance to councils suggested that, as long as their investments fell within that band, they would be okay. Other councils, however, were prepared to invest only in the top rating bracket. Differences in councils’ strategies resulted in some councils responding to the rating changes when others were looking further ahead.

There are also examples of councils having genuinely been given inaccurate advice. For example, the counterparty list that Cambridge used listed Heritable as a UK bank. On the basis of Cambridge’s investment strategy, Heritable counted as a UK bank and a safe investment. In reality, however, it was not. These issues need to be investigated, and I would like the Government to take an interest in the wider effects, rather than saying that they do not want to get involved in the advice that councils seek and receive. Perhaps the Minister will also be able to tell me whether the independent advisers are regulated by the Financial Services Authority. It is not clear to me at the moment whether they would be, but that adds the matter of regulation to the advice that is supposed to have been given.

I would appreciate any further information from the Government on whether they have a full picture of who is affected. We know from what the Minister said this afternoon that the LGA has a pretty clear picture of all the councils involved: it is not yet finalised, but there are no blanks in the number of councils affected. What about other public organisations, however? There are concerns that registered social landlords and regional development agencies might be affected. When will the Minister be able to tell us categorically whether they are?

Many people are concerned at the prospect of the problem migrating to other public bodies. What was particularly disturbing for many was the fact that all this came out of the blue. Many of my constituents said, “I did not know that my council had that kind of money to put in a bank in the first place”. People do not want any further nasty surprises.

Dan Rogerson (North Cornwall) (LD): My hon. Friend is making some excellent points about the recent crisis. I, too, have been contacted by a number of constituents concerned about bank problems. There is a lack of understanding of local government in the wider community, but we expect the White Paper to help people to understand how local government functions, so that when something like this occurs it is not such a big surprise to them. The extent to which certain councils are exposed might still be a surprise to them, but they should not be surprised at the way in which local government functions. People need to be far more involved in their councils’ decisions.

Julia Goldsworthy: My hon. Friend is absolutely right. The situation is not helped by the fact that council tax funds such a small proportion of local services. Many people still think that business rates fund local services, whereas the council simply collects them on behalf of the Government. Given that councils make payments only twice a month and that much is invested, has the Minister made any assessment of how much of the
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money caught up in Icelandic banks is earmarked for the Government? It was their income that the councils were investing before they passed it on to the Treasury. I wonder whether the Government have any sense of the extent to which they will be affected.

I have made it clear that the Government need to review and update their guidance. Treasury strategies need to be updated in the context of vastly changing economic circumstances. It seems ridiculous that, in the light of recent changes and the impact of the crisis, the Government do not believe that they should do the same as councils. I appreciate the Minister saying that the Government have allowed councils to capitalise losses in the past, but I think that a statement saying that councils will be able to do so in future would provide some certainty so that people, councils and council tax payers would know that if, at the end of the day, the councils cannot recover all the money, it will not impact on council tax next year. That sort of backstop should be used only as a last resort, but it should be there.

Local authorities also need to provide clarity. I hope that all the affected councils will conduct a review into their circumstances. Depending on the timing and the extent of their exposure, it might need to be an independent review, but it could be an internal one. I know that some councils have already initiated such a process. Kent county council, for example, has initiated a review from PricewaterhouseCoopers and I know that North-East Lincolnshire is planning an internal review. I would encourage all other councils to do the same.

Flagging up some of these structural issues might help, and best practice can be shared. I have spoken to councils that pulled out. The successful ones are not those that simply ratify their Treasury strategy at the time of the full Budget; they may have twice-yearly full council meetings to discuss their strategy; some have member panels to review the position regularly; representatives and third-party advisers may look at what is going to happen in the future. As I say, best practice can be spread and I hope that the LGA will focus on it because it is really important to restoring confidence.

I shall move on to some broader issues. I know that many Members still wish to speak, so I will not dwell on them too long, as I know that the hon. Member for Bromley and Chislehurst has already touched on them.

The current problem highlights a much wider lack of transparency and a huge complexity in the workings of local government finance. Councillors have told me, “We assumed that those in the treasurer’s department knew what was going on, so why did we need to do anything?” Similarly, the public do not understand how the system works. They ask “How come the council has all this money?”

Susan Kramer: Is there not a deeper problem? When a millionaire with a millionaire’s lifestyle is living in a high-grant authority area and paying very low council tax while a postman is living in a low-grant area and paying very high council tax, it is clear that deep unfairness is built into the system and that it requires a major overhaul.

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Julia Goldsworthy: My hon. Friend is right: unfairness is built into the system. It is also very difficult for people to understand what they are getting in return for the money they pay at local level. Council tax finances only a small proportion of local government spending in most authorities, although I know that it is the other way around for my hon. Friend. The rest is determined by a complex funding formula that has floors and ceilings and enables gives councils to claw back money. The system is confusing enough for councillors, let alone the taxpayer.

Business rates should be raised and spent locally. That would be a very good way of increasing the revenue that councils can raise and spend. Every year people see their council tax rise above the rate of inflation, while also hearing about pressures on their key services. Furthermore, through the complexities involving Iceland people are learning that their council is having to invest money to secure additional revenue. There are so many complexities before we even start thinking about all the other public services that are funded locally with no democratic accountability and with huge sums being spent.

Handing over many of those resources to local authorities would simplify the process and make it much more transparent for the users of local services. How can we expect people to have confidence in the system if they do not understand how it works? The problem with the financial system at the moment is that it is so complicated that people have no confidence about the future.

We have seen some action from the Government. The Minister referred to the removal of ring-fencing in some instances, but there is still far too much ring-fencing. Yesterday I attended the launch of the Sustainable Communities Act 2007. The Act has the potential to make a huge difference to the way in which the allocation of resources is decided and to return power to local communities, but real concerns remain about how the Government will deliver that, and in particular about how effective local spending reports will be in casting a spotlight on where public money goes at local level.

The empowerment White Paper is all motherhood and apple pie—there is very little in it with which to disagree—but unfortunately it does not change the relationship whereby so many resources trickle down from central Government. That fundamental issue must be addressed, along with the need for councils to understand that they are expected to push more resources down to people. It is a two-way process, but the empowerment White Paper is only about what councils should be doing; it does not say what the Government should be doing.

There has been no action on council tax. As my hon. Friend the Member for Richmond Park (Susan Kramer) said, the present system is fundamentally unfair. Council tax is not a buoyant form of taxation. It does not keep pace with inflation, which is the reason for the above-inflation increases that we have seen. It is also currently based on property valuations that are 20 years out of date. Those who seek to defend council tax as the most appropriate system cannot continue to do so unless they acknowledge that there must be property revaluations at some point. That is the fundamental flaw in the Conservatives’ arguments. They will have to say something about revaluation, or their policies will not be credible.

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There are other authorities in which there is no democratic accountability. Police authorities, for instance, are not directly accountable. Why are the Government not doing more to drive the agenda forward so that people can see who is accountable for spending decisions in those authorities? More resources should be transferred to local authorities from quangos such as the regional development agencies. There should be a much more transparent funding formula, there should be a change in the balance between what is raised and what is spent locally, and council tax should be replaced by a fairer system, buoyant and based on ability. The Minister hangs his head. He has heard all the arguments before.

Council tax is becoming increasingly unacceptable. Thousands of pensioners in my constituency are struggling to pay their council tax. Some of them might even be entitled to council tax benefit but they have not applied for it and do not receive it. Many people are angry because they see no link with the services they get. There needs to be a fundamental review not only of how resources are allocated, but of how funds are raised; simply tinkering around the edges will not solve the fundamental problem.

Finally, I seek a few thoughts from the Minister. We have been busy dealing with the current crisis, and there has been a huge change in the stability of financial institutions throughout the world. I do not think anybody expected local authorities to be a victim of some of these changes, but I wonder how much time the Department are dedicating to looking ahead to identify other possible impacts. The Minister spoke about fuel costs and a potential increase in borrowing costs. Clearly, housing will be a major issue in future; if the predictions about the numbers of people who are struggling to pay their mortgage or who are likely to be evicted from their property are proved right, there could be huge increases in housing pressures.

What other areas is the Minister looking at as potentially presenting future problems for local government as a result of the credit crunch? I know that some councils are already reporting concerns about large-scale capital projects, often where they are dependent on the sale of property to part-fund them. They are also concerned about private finance initiative schemes, particularly those under negotiation at present, because increased borrowing costs are suddenly making them a lot more expensive.

I am also concerned about a lot of the excellent joint working undertaken across local authorities. Local health and education services and local authorities have often worked well together to provide services. My concern is that this is always seen as the added bonus, and that as soon as the funding settlement gets tight such joint working is often the first thing to go—I am seeing that on the ground in my constituency.

It would be helpful to hear any comments the Minister might have on what is being done to try to pre-empt these potential problems so that we can see them coming down the line rather than having to respond to them after the event, because one thing is certain: while our local communities are very important, we are operating in a changed world now, and we need reassurance that everything is being done to understand what those changes mean to local communities.

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5.42 pm

Mr. Hugo Swire (East Devon) (Con): It is regrettable that this debate is so thinly attended, not only because the problems with the Icelandic banks will have a difficult knock-on effect on our local authorities, but because the general economic situation is creating tremendous uncertainty. It is unfortunate that the Minister has just left the Chamber because I am about to be polite to him: I agree with much of what he said—albeit with some caveats that I shall outline in my speech—not least the fact that for a lot of people local government is the only kind of government they encounter.

My hon. Friend the Member for Bromley and Chislehurst (Robert Neill) was candid enough to admit that successive Governments of all political persuasions have tinkered with local government, usually to its cost. However, although sins were committed in the past, that is no excuse to visit the sins of our forefathers on our successors, and that is why I shall devote my comments this evening to why the Government must re-examine their drive towards forcing unitaries on various parts of the country, not least in Devon in my part of the world.

In Devon, unitary status was originally the idea of Exeter city council, which wished to achieve it based on its existing city boundaries. That proposal was given huge endorsement at the time by the Minister for the South West, who is the Member for Exeter, but he has gone strangely silent now that the proposal is no longer an option. Probably, his thinking was that he could create a citadel city from which to defend himself against the creeping Tory votes that, I suspect, will cause him some trouble at the forthcoming general election.

The issue of local government reorganisation is the elephant in the room this afternoon. It has been touched on only briefly, perhaps because of the presence of the Minister for Local Government. I wish that he were still in his place, because I think that having been at the Treasury, when he wears his Treasury hat—or hairshirt—he views a move towards unitary status and its implied costs with a wry sense of déj vu at best. I do not believe that he is a roving ambassador for unitary status, and in that I submit that he is entirely right.

The situation in which we find ourselves is that the boundary committee will report just after Christmas, I believe, to the Secretary of State and will come up with one of two solutions. The favoured solution is a unitary Devon without Plymouth and Torbay, both of which have already been accorded unitary status. An alternative hybrid scheme, which seemed to me to come out of nowhere and make no sense at all, is a combined Exeter and Exmouth unitary and the rest of Devon in another unitary. I do not know where these people get their ideas from, but it is certainly not from anyone to whom I have spoken in the county of Devon.

I believe that the committee can recommend to the Secretary of State that there is no better alternative than the status quo. Everyone’s suspicion is that it will not do that, and that it will recommend some kind of unitary status—I suspect for the whole of Devon. At that point, the Secretary of State will be able to listen to those of us who represent that part of the world and make her judgment. I shall explain why, in the changed circumstances in which we find ourselves, she should make the judgment that the status quo should be preserved, with enhanced working of the two-tier system.

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It is worth mentioning briefly the five criteria for a review of local government. The first is that it must attract a broad cross-section of support, which the proposals in my county certainly did not. The original proposal for unitary status came not from a groundswell of opinion and public support but, as I have said, from Exeter city council. The bid was flawed, and its finances were called into question. It was thought that Exeter would not be able to repay the costs of the change within the statutory five years, and we are all having to suffer this period of uncertainty as a direct result. The Minister will know that there have been an enormous number of representations from all kinds of stakeholders— much as I loathe that word, there is perhaps no better word in this context—including district councils and Members of Parliament, who it seems to me are often overlooked in such matters, to say nothing of parish councillors.

The second criterion for a review of local government is that it should provide for

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