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Lord Smith of Leigh: In reply to the noble Baroness, Lady Hamwee, my treasurer did his thesis upon the level of local tax rises in county councils and found, remarkably, that in an election year they were a lot lower than in other years. I am sure that that was entirely coincidental.

I rise to give a sincere warning to the Minister. Is this a power that the Government really want? I think it is a power that will be very difficult for them to exercise. The figures he quoted earlier and in his letter demonstrate that. They show not that the level of reserves was necessarily dangerously low in a large number of authorities but perhaps that there is a difference of opinion between local authorities and their auditors about what is an adequate level of reserves.

The question we should ask is in how many cases did that create problems in the following financial year for local authorities. Clearly, running down reserves to a ridiculous level could create serious problems—and no one is advocating that—but how do we define what the level of reserves should be? Is it a percentage of total spending? Does that cover schools' budgets? Schools also have their own reserves, which they keep. In a sense, if we do that we are double counting that particular amount of education spend.

Without stating that some authorities are more reckless than others, those of us who know local authorities could state that some are more careful about budget monitoring than others. So those authorities—the auditor would probably endorse this—could have a lower level of reserves because they have a very finely tuned system of monitoring the budget. If things started to get out of kilter they could rapidly bring them into line. Clearly that sophistication is probably not available to the Office of the Deputy Prime Minister to be able to understand that particular case.

In future Ministers may regret this clause. They may regret having to impose minimum reserves on local authorities and getting themselves into endless wrangles. In how many cases will this be a significant problem?

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Lord Rooker: This is another clause which we sincerely hope we do not have to use. On the other hand, it is nonsense to say that the local electorate are in charge—we are talking of local governments which are elected once every three or four years—as though they can influence what happens with reserves on a yearly basis. That is nonsense. It is paying lip service to a mythical system of local democratic control by the electorate. I will not have that.

If there were annual elections and if local government raised 100 per cent of its money, then there would be real accountability, but it is not like that.

Lord Smith of Leigh: It is in metropolitan districts.

Baroness Maddock: In the authorities to which I referred it happens every year.

Lord Rooker: It is not like that all over the country. The metropolitan districts have a year off and I know what happens in that year off. So there are not debates every year, even where they have third elections.

As I said, we hope that we do not have to use this clause. No one who has spoken has made the point—perhaps because they do not agree with it—that guidance to local authorities on this subject of minimum levels of reserves has been available for many years from CIPFA.

I presume that that is irrelevant and it is up to the local authority to decide what its reserves should be. No one has said, "Oh, by the way, we have the Audit Commission, which was put there to do a job and is as independent from government and local government as possible. That gives the electorate, the population, a degree of comfort". Its recent report, to which I referred, states that 12 per cent of authorities have inadequate reserves, not low reserves, and that the proportion is the highest among the largest authorities. Twenty-one per cent of English county councils were assessed as having inadequate reserves, and 31 per cent, almost one-third, of the London boroughs. That is an unacceptably high level.

Lord Hanningfield: Perhaps—

Lord Rooker: I shall give way in a moment. Having got that information from the Audit Commission, if the Government then put through a local government Bill and did nothing about it, and did not take some reserve powers if things were to go wrong, the electorate would say, "You saw this coming. You were warned about it by the Audit Commission. You did nothing about it. We have this difficulty"—this situation might arise; we hope that it does not—"and you, the Government, did nothing about it. Yet you knew about it; you were told about it by the Audit Commission and you did nothing about it". We will not be in that position.

We want to have the power on the statute book so that it is there if needed. We hope that it is not, but we have to send a signal to local government that the auditors are there for a purpose. We should like CIPFA's guidance to be followed and it is not being

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followed. I cannot believe that I am more or less hearing—it is not being said but it is being implied—"Don't bother with CIPFA's guidance. Do what you want yourself". I shall give way to the noble Lord.

Lord Hanningfield: I am rather sad to hear the Minister make those comments. He does not really understand how local government works. I want to go back to the comments of the noble Lord, Lord Smith. I do not like quoting my own example, but we have a budget of 1.2 billion. We have reserves of only 15 million. Sometimes our auditors say we should have a bit more but we have 70 million of cash in the bank for road maintenance and building maintenance. If things do not go quite right, as has just been said, we review our budgets every month and we might use some of that cash for the reserves. So, although we have 15 million nominal reserves, we have 65 to 70 million. Our schools have 50 million in reserves. So, there is a lot of money in the system.

The nominal CIPFA reserves, our auditors' reserves, would be 15 million. The auditors come and see me and say, "You should have a nominally higher figure". I would rather put the money into schools. I do not believe in taking money from the council taxpayer and sitting on it in the bank. I believe in providing services. Although we have all this cash around, if there are problems we look at our budget every month. We have taken corrective action and used some of the building maintenance money to bolster reserves temporarily. We are professional people.

I was sad to hear the Minister make those comments just now because he clearly does not understand, in particular, large county councils and the way we professionally operate. When we saw this clause in the draft Bill I believe that it angered people more than the Minister understands. We are professionals. We have our members and our political element. We decide what we want to do. We are under tremendous pressures now to help schools. Therefore, we are dipping into reserves to do so. That is what local democracy is about.

I believe the Minister should consider this matter again. It is an offensive part of the legislation. By his comments the Minister shows that he does not really understand how local government operates. The auditors, CIPFA, have their code of conduct and so forth, but we know how much money we have and what we can do with it.

7 p.m.

Lord Rooker: I like the term "we noticed" the CIPFA code of conduct. We are expecting local government to operate to those professional codes. It was the very purpose of our first few debates. We want to operate to independent codes of advice. Local government must do more than notice CIPFA's codes. The provision was not a surprise to anybody. Let us not talk about the draft Bill; the proposal was in the White Paper. It did not appear from nowhere. It has been opposed all the time. But there has not been a substantial argument against it that has caused us to

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change our opinion, bearing in mind the report from the Audit Commission, which we cannot ignore. We do not want to use the power. We have included it in case authorities do not remedy the deficiencies set out in auditors' assessments, in which case action could be taken. We are working on the basis that the regulations would apply only to authorities that disregarded the advice of their chief financial officers.

That gives a long-stop measure to local government, not just the Audit Commission and the auditors. If the chief financial officer has told an authority that it is ready for serious trouble but it ignores the warning, action can be taken. I cannot conceive of a local council doing that. Just because we cannot conceive of it happening—with reasonable professional people, as the noble Lord said—does not mean that it will not happen. There have been financial difficulties with some authorities. I am not saying that the problems would be strictly analogous.

I do not wish to wind up the noble Lord, Lord Hanningfield, any further but I cannot accept that, when a little local problem arises, the authority should stop running the roads. Just because another difficulty has arisen, we should not knock out a service that people expect and that their council tax has paid for.

Lord Hanningfield: I did not say "knock out"; I said that you might reduce expenditure elsewhere if there was a problem. For example, if an authority were spending 50 million on road repairs, it might spend 48 million and put 2 million into reserve. That is why flexibility is built into our system. Authorities take the advice of their professional officers. That is why we do not need such a clause. We must trust local government more. I thought that part of the legislation was about freeing up local government and trusting it more.

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