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Lord Rooker: So what is the problem? If the authority followed the advice of the chief financial officer we would not operate the clause. I do not see the problem. If, in certain circumstances, an authority ignores the advice of its chief financial officer—we shall not name authorities—bearing in mind what we know about the inadequacy of reserves, we are duty bound to do something about it. If an authority follows the advice of the chief financial officer, there is not a problem.
I could make a much longer speech, but obviously I have upset people. It is being put across that I do not understand how local government works, is it not? I speak here on behalf of the Minister for Local Government and the Regions. I know enough about how local government works, having spent 27 years in another place, to know about how treasurers and others manipulate accounts. I know how budgets get raided. Education budgets get raided, as do social services budgets for building grandiose projects. I have seen it happen and its effects on people. Nobody understands what is happening to start with because of the accounting method.
I am not saying that that approach is wrong or bad. But there is such an enormous amount of flexibility that things can go wrong. When the Audit Commission produces a report about the inadequacy of reserves, we can say that we are including the provision just as a long stop. If there were a problem, we would rather not have to rush through emergency legislation.
If an authority operates prudent financial management processes, and its chief financial officer says that it is doing OK, we will not operate the clause. I do not see the problem. There is no extra burden, nor any need for the Local Government Association or anyone else to be worried about the provision. It is a little sensitive that the Audit Commission has picked on an area and said that it thinks that the operating reserves are inadequate. They are on a big scale, given the London boroughs and the overall effect of English and Welsh local government. We must take some action in the form of this precautionary legislation. It is precautionary legislation; it is not intended to operate, save in the most exceptional circumstances.
We consulted local authorities as we said we would do in the White Paper. We would argue that different levels would be set for different authorities—we are not talking about the situation if that were ever the case. Relevant factors include the ability of larger authorities to spread risk more than smaller ones, as the noble Lord has said, and on which he gave an example. Some types of authority have services that carry high levels of financial risk.
The power in subsection (3) to specify which reserves would be subject to control would be used to exempt reserves that cannot be adjusted as part of the process of deciding the council tax. The examples would be school balances and housing revenue accounts. Immediately that gets rid of the argument about schools, as they would not be covered. The clause does not cover schools, so what is the problem? There is not a problem.
These red herrings are being raised simply because we are taking a precautionary approach. Local government feels "offended"—that was the word—that we have had the temerity to say that a problem has been identified that may affect a few authorities and that we need to include a clause in the Bill. We hope that the clause will not be necessary, but it is a safeguard against the risk that some authorities, in spite of all the statutory duties and professional guidance, continue to allow their reserves to fall to dangerously low levels. If the Government did not include the clause, they would be failing to fulfil their duties.
Baroness Hanham: We will clearly return to the matter on Report. There are no draft regulations on what minimum reserves should amount to. Everyone will have a different view on what the adequate minimum reserve should be. It would be extremely helpful if the Audit Commission indicated what it believed a minimum reserve should be—the proportion of any local authority budget—and the factors that it should take into account. Should it take
into account, as the noble Lord, Lord Hanningfield, said, budgets for road works? All sorts of reserves are put aside for specific purposes? The draft regulations do not contain anything relating to this clause. It might help the Minister's blood pressure—I rather doubt it—if we could have an indication of what the regulation might amount to. If the regulation is not there, it will be a case of the Audit Commission's judgment against that of local authority members as to what the reserve should be.Again, I think that the Minister's blood pressure was probably getting away on him, as people were not saying that all Members of Parliament are accountable to those who elect them. But, in the interim, between elections, they must act in their democratic role. We said that there was democratic accountability within local councils on the making of budgets and on decisions about reserves. The Government have made those functions more directly the responsibility of a directly elected councillor—one person is now responsible rather than the whole council, as was the case in the initial stages.
There are also restrictions whereby the full council could call in any budget about which it was concerned. The Audit Commission is dipping into only one small area. There are areas of financial concern that might be far greater than this. I am astonished that the Audit Commission has got itself stuck on this issue. We ought to know what it thinks it is talking about.
Lord Rooker: May I give another example? In the same Audit Commission report, it noted that councils had been slow to address risk management issues. Fewer than one in five councils had adopted a risk management policy, and only half of those had reported on risk management to their members. That must be a failure. The Audit Commission is doing a much more rounded job than simply looking at reserves. Action must be taken.
Baroness Hamwee: I was going to make the point about regulations that the noble Baroness just made. I was also going to ask whether we could hear more about the role of the chief finance officer. The Minister referred to that officer's position and gave his opinion. I plead for draft regulations, for the assistance not only of the Committee and in due course the House, but—as I said at our previous sitting—of those who will operate the system.
The noble Lord, Lord Bassam, agreed with me that we are just through the most recent budget-making process at local level, and therefore inevitably at the start of the next one. The point was made to me in the Greater London Authority—it could have been made in a local authority—that officers are very concerned that they do not know what rules they should work to for next year. As it happens, that could be a very considerable problem within the GLA, because it has not been possible over a short period to get the reserves of the functional bodies up to the level with which, frankly, we would all be comfortable. I entirely accept that there is a problem with at least two of the functional bodies.
On Monday, the noble Lord, Lord Bassam, was not able to give us any news. Can the Minister give us any assurances about when the further draft regulations will be available? They will not only help us at the next stage—indeed, when we debate the next clause—but assist those who will be affected in reality.
Lord Rooker: Reading the clause again and my own notes, I am not sure why draft regulations are expected on a clause that we do not want to operate. I have already referred to the fact that CIPFA guidance has been out for years. There is an Audit Commission report. What is the purpose of draft regulations when we clearly do not want to operate the clause? We are not planning to issue any.
The policy intent of Clause 26 is perfectly clear. There is no secret about that. There are no draft regulations, because it is a reserve power. We hope that we do not have to use it. It is not a question of central government once more spoon-feeding local government to tell it how to do its job—the job that it already ought to be doing. That clearly relates to what was identified by the Audit Commission.
We have not invented anything. The CIPFA guidance has been available for a considerable period. I am not quite clear why more regulations are required. I have already explained the circumstances in which we would operate the clause, probably quite inadequately, but I have done my best. I have no doubt that we shall come back to it on Report, but the message will not change. Going back even to the White Paper, our preference has been not to make use of the powers. However, we would not hesitate to do so if it emerged that authorities were failing to remedy deficiencies or were running down reserves against the advice of their finance officers. That was in paragraph 10.19 of part 2.
The regulations would be made only if a minimum were imposed, but the intention would be to exclude reserves, and I have already said that the housing revenue accounts and school balances are not subject to adjustment. Subjects that have been raised, especially education, are red herrings, as they would not be affected.
Baroness Hamwee: Regulations may refer to a CIPFA code. If there are clauses in the Bill on which the Government do not intend to issue regulations, it would be helpful to have a list of them. I refer the Minister to Clause 27, which requires the chief finance officer to report to the authority if it appears to him,
- "that a controlled reserve is or is likely to be inadequate".
- "a controlled reserve is a financial reserve of a description specified by regulations under section 26(3), and . . . a reserve is inadequate if the balance . . . at the end of the . . . year . . . is less than the minimum . . . determined in accordance with regulations under section 26(2)".
7.15 p.m.
Lord Rooker: I have referred to the policy guidance. I have not checked the box, but, at the beginning of Monday's sitting, I said that the draft regulations and
draft CIPFA code were available in a box in the Library. My noble friend and I checked the box to make sure that they were there. I made the point of saying that they were contained in a box on the Bill. A free-standing note was deposited along with the draft regulations, the bids guidance and the other Bill material. The single-page note on Part 2, which deals with financial administration, relates to the power to make regulations under Clause 26. Clause 27 comes into effect only if Clause 26 regulations are made in the first place. They would be made only if we needed to operate the clause. We do not want to operate it, in which case Clause 27 will not operate anyway.
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