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Baroness Hanham: I do not feel at all confident about it. What the Minister said has made me feel even more uncomfortable.

The thrust of the chapter is that local authorities will be able to borrow outside the box and will have greater powers to borrow. They must make decisions about what the borrowing will be required for. It could be a capital programme or any number of things about which they need some confidence before they can go forward with the borrowing. Not all of that borrowing will come from government sources such as the Public Works Loan Board; some will come from outside. Funding that does come from government sources will still need to be secured elsewhere, and it may be only a part of what the local authority is borrowing. It is not unreasonable to suggest that if, for whatever national economic reasons, the Government decided to curtail local government borrowing, they should do so only while curtailing their own borrowing. Thus, there would be a level playing field for any decisions to lower or curtail local government borrowing in some way.

I hear what the Minister says, but I am not happy with his remarks. However, for the time being, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Hanham moved Amendment No. 21:

The noble Baroness said: I shall deal with Amendments Nos. 21 and 24 together. The purpose of Amendment No. 21 is to probe the circumstances in which the Government would use the sweeping power to set limits not only for the borrowing of local authorities, but for individual local authorities. Here we move from advocate down to the individual.

Controls of local democratic accountability already affect such limits: prudential advice from directors of finance and scrutiny by the district auditor, while the regulations we discussed earlier add a further layer of potential intervention. In general terms we believe that

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we should be trying to move away from powers where central government can interfere unequally with different local authorities. Amendment No. 21 seeks to discover the Government's intentions.

Amendment No. 24 seeks to address the issue that Clause 4 would give the Secretary of State power to impose a barring limit on a local council irrespective of whether the power to set a national limit is taken up. The amendment would leave in the power to impose a borrowing limit, but would require that the Secretary of State can act under Clause 4(2) only where he believes that a local authority has failed to have a proper regard to the codes when determining its borrowing limit under Clause 3(1).

Given that, in the extraordinary circumstances of a national economic crisis, the Minister already has the power to impose individual borrowing limits under Clause 4(1), I should like the Minister to explain under what other circumstances an authority that complies with the requirements under Clause 3(1) and has proper regard to the codes of practice specified by the Secretary of State should be subjected to a special sentence issued by the Secretary of State. Perhaps I am missing something, but it is not apparent how any such circumstances would arise outside of a time of national economic crisis.

If the Minister drew a comparison based on the current regime of capital approvals and said that local authorities might find ways of avoiding those approvals, which was why the Secretary of State required these wide-ranging powers, I suggest to him that a regime based on a code of practice which reinforces standard accounting practices is not susceptible to avoidance in the same way as a prescriptive regime of capital approvals might be. The power in its unqualified form is wholly unnecessary and is merely an example of the instinct to keep hold of reserve powers. I beg to move.

5.30 p.m.

The Deputy Chairman of Committees (Lord Elton): If this amendment is agreed to, I shall be unable to call Amendments Nos. 23 and 24 by reason of pre-emption.

Baroness Hamwee: Given our procedures in Grand Committee, I suspect that the amendment will not be agreed to. I have added my name to Amendment No. 21, and the only reason that the name of my noble friend Lady Maddock is not included is that we thought that another noble Lord might take the fourth place.

My honourable friend Edward Davey tabled a similar amendment in the Commons, and certainly the Liberal Democrats and the Conservatives agree on this point. Clause 4(2) seems to be inconsistent with Clause 4(1). Subsection (1) refers to "national economic reasons", while subsection (2) allows particular local authorities to be fingered. That does not seem to support the reasons of national economy that the Secretary of State might seek to apply under this subsection.

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At col. 85 in the Standing Committee the Minister spoke of,

    "building a good, new relationship with local government, based on responsibility and a shared concern to tackle and turn around the relatively small number of authorities in real difficulty whose failures, sadly, give the whole of local government a bad name".—[Official Report, Commons Standing Committee A, 21/1/03; col. 85.]

Yes, but is this the way to do it? This is not the way to bring struggling local authorities up to scratch.

Clause 4(2) states that the Secretary of State can give a direction. We have more than touched on what is meant by "direction" in this context and I shall certainly look again at the comments made on that to see how they might apply here. However, I wonder what will be the sanction if a particular local authority does not observe the direction. Perhaps the Minister can explain what would happen in that situation. We have the protection of lenders under Clause 6, so that money would be repaid, but what would be the effect of a direction made under Clause 4(2)?

Our points are not only technical or practical. There is the whole principle of local democracy and accountability to consider. We have already made it clear, and no doubt will do so again, that we believe that it is for local authorities rather than central government to deal with these matters.

At this point, I wonder whether I might ask a question with regard to Clause 4(3) rather than asking it during the clause stand part debate. Subsection (3) provides for different limits to be set,

    "in relation to different kinds of borrowing".

Can the Minister explain what that means, because if "national economic reasons" require restraint, why should different restraints apply to "different kinds of borrowing"? Furthermore, what is meant by that phrase in this context? When I first read it I assumed that it meant borrowing for different purposes, but it might mean long-term or short-term borrowing. We do not yet know what kinds of borrowing would be covered by this.

Lord Rooker: I shall seek to answer the point about Clause 4(3), which is not the subject of the amendment before the Committee. We need to go through the Bill as best we can, and if we can avoid debating matters on the clause stand part debate, as my noble friend said, we shall give answers as we go along.

I turn to Amendments Nos. 21 and 24. I realise that even the title of the clause, "Imposition of borrowing limits", must generate apoplexy: "Is that nasty Government coming along again to stop us being reckless?". However, I hope that I will be able to satisfy the concerns of both noble Baronesses. There is no question that this is an important provision, and Amendment No. 21 seeks to remove it completely.

I do not think there are any differences between us as regards Part 1 of the Bill. It would give local authorities the freedom to borrow without government consent, provided they can afford to service the debt without extra government support. That is a massive extra freedom for local authorities. No one would contradict that. But that freedom must

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be balanced by safeguards for local taxpayers, and that is why Clause 4(2) provides a reserve power for the Government to set a borrowing limit for an individual authority overriding any locally set limit.

In response to concerns expressed by local government about the terms of the draft Bill, we have now made it clear on the face of the Bill that the power can be used only to prevent an individual local authority from borrowing more than it can afford. We would use this power very much as a last resort and only if there was strong evidence of a real risk of imprudent borrowing. It is not a question of the Government moving in at the first sign of an authority doing something with which they disagree. That is not the case. In fact, the Government will not even police the system. As at present, scrutiny will rest in the first instance with the external auditor. But concerns could come to light through the process of the comprehensive performance assessment. We could then consider using the power.

Without the power, the Government would be unable to stop an authority from borrowing recklessly and thereby imposing a long-term burden of unaffordable debt on its local taxpayers. I do not have loads of examples, but I recall reading about the Western Isles some years ago. What that authority had done caused considerable difficulty for its local taxpayers.

Amendment No. 24 proposes another approach to Clause 4(2). As drafted, the amendment states that the power to set an individual borrowing limit is to apply only where an authority has not had proper regard to the requirements of Clause 3(2). There may be an error of reference here due to the renumbering of the subsections since the Bill was first published. Clause 3(2) in fact deals with the borrowing limit of the Greater London Authority. The intention might have been to refer to Clause 3(5), which would be consistent with the effect of a similar amendment debated in another place. I shall proceed on that assumption.

Clause 3(5) provides a power for the Secretary of State to make regulations about the way that authorities should set their affordable borrowing limits. The power may be used to specify a code of practice to which authorities are to have regard. We intend to specify the CIPFA prudential code which will lay down the guidelines on deciding how much borrowing is affordable.

The effect of the amendment is that an individual borrowing limit could only be imposed on an authority which had disregarded regulations made under Clause 3(5). In practice, therefore, that would mean an authority which had disregarded the prudential code and was borrowing unaffordably. That may seem to be the right result.

However, the present wording of Clause 4(2) is much more transparent. It makes it absolutely clear that the aim of the power in subsection (2) is to prevent unaffordable borrowing. There is an explicit link with Clause 3(1), which requires authorities to set an affordable borrowing limit. Clause 4(2) comes into

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play only if that duty is at risk of being breached. It is desirable to have that policy brought out as clearly as possible on the face of the Bill. The amendment would conceal the policy intention. I hope that those remarks provide a reassurance.

I turn now to subsection (3) of Clause 4. This could be helpful in taking account of the varying needs of authorities if a national limit was needed. It could allow greater borrowing capacity for specified projects considered to be exceptionally urgent, of which housing is an example. In other words, this covers different kinds of borrowing for specified projects. It would only arise in respect of the imposition of borrowing limits, but obviously we hope that Clause 4 as drafted is not used, that it will not be made operable. It is a provision of last resort. However, I hope that that gives an example of fall-through, but I shall be happy to return to this on Report if my explanation does not satisfy any potential Opposition amendment.

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