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Baroness Hanham: I do not want to embarrass the noble Lord, Lord Smith, by overstating our enthusiasm for what he has proposed. However, I know him well enough to know that he is perfectly able to shoulder the burden of the responsibility of our support.

When I first read the thrust of Part 2 I found it absolutely astonishing. In most senses, most authorities would consider the aspects of budget monitoring, the calculation of reserves and so forth to be par for the course. They come absolutely naturally. It is nine-tenths of any senior cabinet member's responsibility to ensure that it is all carried out above board. As the noble Lord, Lord Smith, said, it is probably only a few authorities in which there is a problem. In the past there may have been many authorities with problems. Mostly it was the ones run by the party opposite which caused the difficulties.

The noble Lord, Lord Smith, put his case well. Now that we have in being a system of comprehensive performance assessment, if the purpose of the Bill is to take the dead hand of government off local government then the whole of Part 2 is quite extraordinary. I support the amendment.

Baroness Maddock: We are not quite unanimous. I understand what is behind the amendment and I have great sympathy with not wanting any interference from national government in local matters and in allowing local authorities to look after their own finances. But this would still allow the Government a bit of control.

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In an ideal world we would say that local authorities look after their finances well and that there are various other bodies to ensure that they do so. When I was in local government I can remember the district auditor coming along. As we have said many times, there is a lot of flourish in the Bill about how local authorities will be given freedoms, and then, as we go through it, they are taken back again.

We have some sympathy with the amendment but we would not want this part of the legislation to apply to local authorities but to rely on the mechanisms that have worked satisfactorily in the past.

6.30 p.m.

Lord Rooker: But they have not worked satisfactorily; that is the point. I understand the reason for my noble friend tabling the amendment. I hope that I have a sufficiently robust and practical answer in defence of this part of the Bill. Clearly, there is an attempt to reduce the burden of regulation on local authorities. I sympathise with that objective. I keep repeating that it is one of the main purposes behind the Bill. We have given a yard but now they have come for the marathon. The idea that the Bill is not reducing burdens is not true; it is.

We do not believe that the amendment would improve the Bill. Indeed, it would not reduce burdens on authorities and will leave authorities uncertain in some cases as to whether or not Part 2 applies to them. To explain that I need to consider the effect of the amendment on each of the clauses it will affect. There are not many. I shall take Clauses 25, 28 and 29 together.

These three clauses put into statutory form some of the basic elements of good financial practice. The point has been made that well-managed authorities will follow this good practice anyway. We agree, and for these authorities the clauses will impose no extra burden. However, we know that other authorities have not made proper provision for reserves and have not followed good budget monitoring practice. When we consider authorities which have experienced severe financial problems in recent years, for instance Hackney, Walsall or North Tyneside, some combination of those failings will always be involved. But the problem is not confined to those extreme cases. The Audit Commission's auditors identified 12 per cent of authorities in England and Wales as having inadequate reserves.

The duties on reserves and budget monitoring are so basic that they should apply to all authorities without exception. A duty similar to Clauses 28 and 29 has applied to the housing revenue accounts of all authorities that keep such accounts since 1990. If Amendment No. 73 were accepted, the duties would apply only once financial management had deteriorated. It would then be too late; the damage would have been done. Once that has happened, it is far more difficult to restore sound finances.

As regards the effect on Clause 26, this is a power for the Secretary of State or the Assembly to require authorities to budget for a minimum level of reserves.

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We have made clear the very limited circumstances in which we would intend to use the power. Regulations would apply only to particular authorities that were disregarding the advice of their chief financial officers and heading for serious financial difficulty. Amendment No. 73 would prevent the power being used until an authority had been formally identified as having poor financial management. Remedial action would be delayed and we would lose the chance to catch a developing problem at an early stage.

In the case of Clause 30, we suspect that its inclusion within the purview of the new clause was an oversight. Clause 30 concerns the most extreme situations, where it appears an authority may not have the resources to meet its spending needs. The chief financial officer in those circumstances already has a duty to report under Section 114(3) of the Local Government Finance Act 1988. If I remember correctly that is the poll tax Act. I was on the committee, helping my friend Dr Jack Cunningham lead for the opposition. I can remember the powers that were put in that Act for the whistle blower; that is, the duties of some of the officers in local government to blow the whistle before the problems arose so that we could nip them in the bud.

The effect of the report under that section is to oblige the full council to consider the situation within 21 days and in the mean time to impose a prohibition on new financial commitments. That prohibition has been found in practice to delay vital action required to deal with the financial emergency. Therefore, Clause 30 provides a tightly-controlled gateway through the prohibition to let remedial action be taken without delay. That is crucial.

I repeat that Clause 30 has been generally welcomed in local government and by the Local Government Association in particular. In this Room I am surrounded by experts, representatives and practitioners of local government. I have never been a councillor and I cannot understand why local government associations support particular clauses. I accept that it is good to get things on the record. However, the effect of the amendment would be to restrict its application to the authorities where we have received adverse assessments.

As I said, I understand the reasons for my noble friend tabling the amendment, so that the good and excellent authorities, such as the one he leads, do not have any burden. But an excellent authority will not suffer. An excellent authority should not be affected by this part of the Bill.

It is true that Section 114 reports are generally associated with poorly-run authorities that have brought about their own financial troubles. But other authorities not covered by the new clause may also be subject to Section 114 action. Perhaps an authority has lost a court case that results in substantial damages being awarded against it. The effect of Amendment No. 73 would be to deny such an authority the flexibility permitted by Clause 30.

Amendment No. 73 is therefore unnecessary and would have undesirable consequences for the application of Part 2. It would create uncertainty for

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authorities in knowing whether Part 2 applied to them. It is in some instances difficult to say whether an auditor's report is adverse; I accept that. Auditors will usually include elements of criticism and praise within a report to give a balanced view of an authority. A subsequent report may refer to improvements, but they may not be sufficient improvements.

In the light of the problems that the new clause would create, I hope that on further consideration my noble friend will agree to withdraw the amendment. It may be that there are elements of this which should be discussed on Report. Nevertheless, I repeat what I have said. Excellent, well-run authorities carrying out proper financial procedures should not find this measure a burden. It is there to be used in a small, limited number of examples. As I said as regards Part 1, it is a measure of last resort.

Lord Smith of Leigh: I thank my noble friend for his response, although I am nevertheless disappointed. Perhaps what he does not understand is that what local authorities do naturally most of the time is to listen to good, sound advice from officers. Suddenly, that has become part of legislation. Are we to have a new clause in the Bill which states that we have to listen to the advice of a chief education officer or a director of social services? That is what councils do daily to implement their business. Suddenly there is an element here that is treated as different from the rest.

I accept the point made by my noble friend at the beginning. There is a problem that the current legislation has not dealt with. That is why I do not agree with the comment made by the noble Baroness, Lady Maddock, that this can be left to local authorities. There have been problems with local authorities of all political persuasions which have not taken a grasp of their financial situation. I understand that there is a problem.

My noble friend said that we need to nip this in the bud. If I really felt that the Office of the Deputy Prime Minister was best located to nip the problem in the bud I might be more sympathetic to what he said. Frankly, I do not believe that that is the case. I believe that the district auditor, who is hands-on, working with the local authorities, is the best person to discover the sudden change in circumstances that my noble friend suggests. Those authorities in which there is a systematic problem, to which he referred earlier, will be shown in a CPA result and can be regularly monitored. But where there is something that has changed, surely it is the role of the district auditor to understand problems on the ground and to deal with them.

I am disappointed by my noble friend's response. However, I shall read what he said—

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