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Noble Lords: Oh!

Baroness Hanham: I knew that noble Lords were waiting and poised for me to refer to the euro. I did not want to disappoint Members of the Committee. So the "euro" word has slipped in. We want to know whether the power could be used as a back-door transfer to the wider use of the euro in the economy. Such a major decision could be taken only in the context of general legislation on currency change. However, it is clear from what is proposed that it is expected that at some point borrowing could take place in other currencies. Without being too humorous about it, the euro area would be a logical choice and therefore I should like the Minister to explain further what this proposal would empower the Government to enable local authorities to do. I beg to move.

Lord Dixon-Smith: I support this voyage of exploration. Investing in international currencies is quite a dodgy business, but of course investing in a currency is different from borrowing for revenue purposes. It would not be unreasonable to suppose that, if the power to constrain borrowing abroad was not in place at the Treasury, local authorities could at present borrow more cheaply if they were permitted to borrow in Europe, which might produce an interesting side-effect.

An even more interesting side-effect is that, at present, sterling is relatively weak against the euro. If sterling were to appreciate over the duration of the debt, not only would an authority benefit from the lower interest rate, it would be able to repay a considerably lower sum when the debt finally fell due. So I do think that it is worth exploring this. However, I should like the Minister to go into the details of investment in foreign currencies.

Every local authority has a large pension fund. It is not unknown for them to spread their investments across equities, gilts, property and foreign currencies. I had some painful experience of that with certain investment advisers and I would be wary of it.

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However, the question I want the Minister to answer is whether this proposal would affect that position. I seek a reassurance that it will not do so.

Lord Rooker: I can answer the final question put to me by the noble Lord, Lord Dixon-Smith, without advice. The answer is that no, it would not, because the Bill refers to local authorities borrowing "otherwise than in sterling". I see no connection between that and pension funds.

It is my first time in the Moses Room, but I know that when the noble Lords, Lord Stoddart of Swindon and Lord Pearson of Rannoch, find out that we are debating the euro, there is going to be trouble. I can reassure noble Lords on this point because, first, this clause simply carries forward a provision already in place under the present legislation. The Treasury's power of consent has never been used, and therefore no examples can be given. However, I can say in response to the noble Baroness that if the UK ever adopted the euro, primary legislation would be needed to deal with statutory references. It would be a monumental piece of legislation.

Borrowing in a foreign currency involves exchange rate risks as adverse movements in rates could result in a local authority owing more than it had borrowed. We would be reluctant to allow an authority to expose itself to such a risk. However, as local authorities increase their dealings with contractors and partners outside the UK, it is conceivable that in certain special circumstances an authority might make a case for such consent. Given that, it is worth preserving the flexibility. However, I stress that it would be most exceptional.

The Treasury has never used this power so there are no examples to cite. I know of no applications in the pipeline. With that reply, I hope that the amendment can be withdrawn.

Baroness Hanham: I thank the Minister for that reply. I wish to say only that quite often adverse risks are associated with investing in this currency, let alone investing in currencies elsewhere. Unless they are cautious, which I am sure they would be, local authorities could trip over their own feet even with sterling, let alone with currencies elsewhere. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 2 agreed to.

Clause 3 [Duty to determine affordable borrowing limit]:

Baroness Hanham moved Amendment No. 4:

    Page 2, line 6, leave out "keep under"

The noble Baroness said: In moving Amendment No. 4, I shall speak also to Amendments Nos. 5, 6 and 7 because they all address the same matter. The purpose of these two sets of amendments, the first of which applies to local authorities and the second to the Mayor of London and his functional bodies, is to explore what the Government mean by "keeping under review" the level of affordable borrowing. Will

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the Minister spell out what kind of regime he envisages a local authority should follow and how much he expects it to do to show to the department that it had complied with this function?

All prudent authorities already review their finances and borrowing on an ongoing basis. In most local authorities that is underpinned by quarterly monitoring. Certainly every authority should undertake such a review at least annually, which is sought in Amendments Nos. 5 and 7. It is important, first, to get to the root of what is the expectation of "keeping under review" and then to ensure that such a review has some teeth.

This also applies to the Mayor of London and the second group of amendments would have the same effect on what is suggested that he should do and how to keep it under review. I beg to move.

Baroness Hamwee: I wish to put a short question. While I accept that the amendments tabled by the noble Baroness may be probing, are not authorities required to conduct an annual review as part of the annual budget-setting process? That must be the case, whether or not one states it.

Lord Bassam of Brighton: Clause 3 is central to the prudential borrowing system. Local authorities are to be free to borrow whatever is prudent, in other words, whatever they can realistically afford. Clause 3(1) therefore requires authorities to determine and keep under review how much money they can afford to borrow. Clause 3(2) makes a similar provision in relation to the Greater London Authority and its functional bodies. I am sure that the noble Baroness is well apprised of that.

Amendments Nos. 4 and 5 to Clause 3(1) would specify that the authority must determine and review its own borrowing limit at least annually. We agree that it is important that these processes are undertaken at least once a year, but there is no need to say that in the Bill. Clause 3(5) provides a power to make regulations about the procedures for setting and reviewing the borrowing limit, and Clause 3(6)(a)(i) makes it clear that such regulations may cover the timing of those decisions. So if we thought it necessary to include this timing issue in legislation, we could deal with it by way of regulation.

However, the alternative option is to cover all such procedural details in a code of practice, and that is the course we favour. Clause 3(7) provides that regulations may specify codes of practice to which local authorities are to have regard when setting their affordable borrowing limits. We have made it clear from the outset that we intend to specify the prudential code that is being specially prepared by CIPFA, the Chartered Institute of Public Finance and Accountancy.

The latest draft of the CIPFA prudential code has been placed in the Library of the House together with a draft of the regulations that refer to it. The code makes it perfectly clear that the borrowing limit is to be determined each year as part of the annual budgeting process and then to be kept under continuous review.

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Dealing with such matters as timing in the code will allow greater flexibility and, in our view, much less legalistic framework and language. However, authorities will still be subject to a clear statutory duty to have regard to that code.

In the case of the Greater London Authority and its functional bodies, Clause 3(2) provides that the affordable borrowing limit is to be set and kept under review by the Mayor of London. Amendments Nos. 6 and 7 would oblige the Mayor to undertake those procedures at least annually. However, the CIPFA prudential code already embodies such a requirement and the Mayor, like local authorities, will be under a statutory duty to have regard to that code. If the noble Baroness, Lady Hamwee, is in the GLA, her political edge will ensure that it is kept much more up to speed and regularly reviewed.

4.15 p.m.

Baroness Hanham: My only comment last time was, "Don't count on it". The noble Baroness, Lady Hamwee, keeps a very tight notch on things. However, I am not sure that she always wins, although she might like to.

The amendment would have been less necessary if we had seen the draft regulations and the code of practice. I am mindful of the fact that they were sent to me while I was on holiday, so they were a bit late for catching up with as the amendment had already been drafted. I am prepared to accept the explanation. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 5 to 7 not moved.]

Baroness Hanham moved Amendment No. 8:

    Page 2, line 14, at end insert "of which at least two-thirds of the members must approve his determination as to the maximum borrowing level affordable in each financial year"

The noble Baroness said: Amendments Nos. 8 and 10 aim give the Greater London Assembly and its functional bodies a lock on the exercise of the Mayor's powers to set his own borrowing limits. Part 1 of the Bill gives the Mayor of London power to set limits for borrowing only after consulting the London Assembly and the functional bodies. There is no provision that requires him to heed the Assembly's views or any power for it to make him do so.

The amendments give the Greater London Assembly and the Members of the functional bodies power to veto a high limit of borrowing being determined by the Mayor. I ask: what, in the Mayor's career so far, gives the Government the idea that he alone should have the power and the common sense to set appropriate borrowing limits? The GLA precept has already risen by 29.6 per cent this year and by other sums in previous years. Most boroughs would probably say that they would be very nervous about the borrowing being able to be increased without the Assembly having a role in it.

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Amendment No. 10 proposes that at least two thirds of the Members of the Assembly must approve the Mayor's,

    "determination as to the maximum borrowing level affordable in each financial year".

The Mayor already needs a two thirds' approval by the Assembly for his GLA budget proposal. There is no doubt that any increase in borrowing would have an impact on the revenue implications of the Mayor's budget. By definition, that would then have an impact on the London boroughs. Therefore, we think that this is a sensible lock to put on the Mayor. The London Assembly could well take on this requirement to not only consider the matter, but to vote in favour of it by a considerable majority. I think that the boroughs would regard the tension that would put on the Mayor as welcome. I beg to move.

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