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Lord Hanningfield: My Lords, I should like to add one further point in support of my noble friend Baroness Hanham. We discussed this in Grand Committee and I should like the Minister to clarify this point. We have a prudential borrowing regime that is accepted by the professional bodies. We spoke about this at considerable length in Grand Committee. This regime is generally supported by local government. That should be enough power for the Government. The whole point of the new system is that local authorities would not be able to borrow if they could not afford it. We all recognise that this regime could be a good way forward for capital borrowing in local government. This particular power is encapsulated in the prudential borrowing regime. The noble Baroness, Lady Hamwee, described the Minister's approach as "iron fisted". I believe it could be a slightly sinister approach where Ministers could target particular

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authorities when they should already be covered by the borrowing regime. We shall come back to this again because we still have not had a satisfactory response.

Lord Bassam of Brighton: My Lords, this amendment is identical to one put down by the Conservatives in Grand Committee. It was supported by the Liberal Democrats as they said this afternoon and reported in Hansard cols. GC90 to GC92. It partly reflects the recommendations in Paragraph 14 of the report on the draft Bill by the Transport, Local Government and Regions Committee. The amendment has integrity behind it. However, its main effect is to require the approval of both Houses of Parliament—and require local government to be consulted—before regulations are made setting a national borrowing limit under Clause 4(1). The ODPM response was that no statutory requirement for parliamentary approval was necessary, given that any national limit would be implementing policies on public expenditure that had already received parliamentary scrutiny.

If noble Lords opposite think about it, that is a very logical and sound approach. I am surprised that they have chosen to argue their case in the way that they have. I think back to the Conservative period of government. In local government we were concerned about the impact of the very tight capital and revenue expenditure limits to which we were subjected. Although I found them very hard to live with, they were a logical part of a national economic strategy and they were argued in those terms. We were told that local government should be no different from the rest of the public sector and that the public sector had to play its part in a particular economic approach. One can argue about the ideology and the principles behind it, but it rested on logic.

I am surprised at the way in which the Opposition have moved this amendment. It would have—will have—far-reaching economic implications. It is essential that the freedom to borrow is balanced by safeguards to protect both the national economy and local taxpayers. Clause 4 gives the Government reserve powers that I do not see as sinister. Governments often have reserve powers in these situations enabling them to impose borrowing limits which would override the affordable borrowing limits set by authorities themselves under Clause 3. But those powers are for national economic reasons—the state of the economy.

The amendment has other unacceptable side effects. By deleting Clause 4(2) it would prevent a limit being set for an individual authority to stop imprudent borrowing. This would remove a valuable safeguard for local taxpayers. By deleting subsection 4(3) it would prevent different limits being set for different kinds of borrowing. It would remove a flexibility that could benefit local authorities. By deleting subsections (4) to (6), the amendment would prevent authorities from transferring spare borrowing headroom between and among themselves, something which I am sure noble Lords opposite would see as a useful and valuable flexibility within the community of local government.

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Moreover, the amendment also seeks to disapply Section 122 which allows different provisions to be made in regulations for different classes of authorities. We think that that could be needed to spread more fairly and properly the impact of any national limit. For all those reasons, we think that the amendment is unwise.

I turn now to the points raised about consultation. It needs to be said simply and honestly that of course we consult with local government on matters relating to financial regulation. We do so all the time. Indeed, many noble Lords and noble Baronesses on both the Opposition Benches are well aware of that through their long involvement in local government. We listen to and take such consultation seriously because we want to get things right. We accept the advice we are given by local government representatives because, after all, they deal with these matters day in and day out. They have a clear sight and understanding of what goes on in local government. Consultation is a given and we try to ensure that it is as open and transparent as possible.

Taking all these reasons together, I cannot accept the amendment. I hope that noble Lords, in particular those on the Conservative Benches, will understand why we feel that under the circumstances this amendment is exceptionally unwise.

7.15 p.m.

Baroness Hanham: My Lords, I thank the Minister for that reply. I am conscious of the response he gave in our previous debate in Grand Committee on 2nd June 2003 at col. GC 92 of Hansard. At that point he made it clear that, with regard to consulting local authorities, the Government had given a firm commitment to do that. However, as I understand it, that commitment applies to general local authorities and does not deal with what is set out in Clause 4(2) on the direction to a particular local authority.

I do not think it would be possible to impose a borrowing limit without some form of consultation, but having said that, perhaps it could be done. It may be a power that the Secretary of State will take to himself so that he could decide to impose it. That is not an unreasonable assumption. However, working as always on the assumption that, while Ministers in this House are nothing but reasonable and understanding, I am not so sure about the other place; and it would not be a Minister in this House who made the decision. Therefore under the terms of Clause 4(2), I hope to see that individual local authorities will be consulted.

Of course we understand that, in a national crisis, borrowing limits might have to be imposed. However, Clause 1 is very specific and has come to be regarded as a serious totem by local government: it will now have the power to borrow. That is a very new and fresh responsibility and it is one that has been warmly accepted. Then to put caveats on that freedom requires the most thorough justification—I think only for national economic reasons. Within those, there has to be proper discussion with local authorities.

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I hear what the Minister has said and I have read his remarks made on the last occasion. I appreciate that he has given us a full response. For today's purposes, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 8 [Control of credit arrangements]:

Lord Rooker moved Amendment No. 28:

    Page 4, line 35, leave out subsection (4).

The noble Lord said: My Lords, this amendment relates to Clause 8 which deals with credit arrangements such as leasing and hire purchase contracts. It empowers the Government to make regulations about the cost of such transactions so that they can be treated like borrowing and brought under the prudential and any other national limits set in accordance with Clauses 3 and 4. All of that is essential to the new system. However, Clause 8(4) contains a further regulation-making power, allowing us to impose additional restrictions on the power of a local authority to enter into credit arrangements.

An Opposition amendment in Grand Committee sought to delete subsection (4). In resisting the amendment, we tried to allay concerns about the scope of the power. To explain how we intended to use the power, we drew the Committee's attention to regulation 7 in the draft capital regulations, which we have placed in the Library.

We had in mind one, specific objective—to retain the prohibition that has existed since 1990 on using credit for anything other than the acquisition of capital assets. Long-term credit like borrowing should be used only to meet capital needs and not to pay for services and running costs. At present, that restriction appears in primary legislation, but has given rise to some technical difficulties. We therefore felt that the rule could be more effectively dealt with by regulations, and that is the reason for Clause 8(4).

The debate in Grand Committee was most helpful. We fully understand the anxieties about the provision. It is drafted in broad terms and could conceivably be used in the future to achieve ends very different from our present intentions. Though we resisted the amendment on the day, the debate persuaded us to reconsider the means of implementing this policy objective.

It is a key aim of the Bill, and one that I know has general support, to base the capital regime as far as possible on standard accounting principles rather than on special rules devised by the Government. We have therefore been examining the accounting background and we are now satisfied that modern accounting practice offers sufficient safeguard against the use of credit for revenue purposes.

An authority receiving some form of service and having the fees deferred for several years would be required to make a charge to revenue during those years, so there would be no perverse incentive to acquire services on credit. We believe, therefore, that we can now do without the additional legislative safeguard. This means that regulation 7 can be deleted from the draft capital finance regulations and

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therefore the power to make such a regulation is no longer needed. Accordingly, the amendment seeks to delete subsection (4), which I hope will meet with the support of the House. I beg to move.

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