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Baroness Hamwee: My Lords, my noble friend Lady Maddock and I have added our names to Amendment No. 34. In a Bill about freedoms and flexibilities, this is perhaps the most indigestible clause. I was looking for an appropriately courteous adjective—having initially written "offensive". Now I have used both. The Select Committee to which the noble Lord referred with regard to minimum reserves was quite clear. It quoted evidence from CIPFA at some length. With regard to the adequacy of reserves, the CIPFA witness said:

"there is not a general problem".

On the issue of specifying reserves and balances, we believe that it is a very local decision and judgment as to the level at which balances should be set. The Select Committee report continued:

"Some councils may choose to operate with low levels of reserves—provided that they are prepared to take appropriate action as and when necessary".

It made the point that:

"A clear national statement from Ministers about what is an 'acceptable' level of reserves may also make it far harder for individual authorities to deviate from national standards".

I thought that was interesting in the light of the Minister's comment in Grand Committee that the Government should like CIPFA's guidance to be followed, but that it is not. Admittedly, he acknowledged that that was in a small number of cases, but it does not seem to lie wholly easily with the evidence quoted by the Select Committee. I confess that I have not read the whole of CIPFA's evidence.

I think that the Minister referred to the existence of balances when he rather critically said that authorities go to their balances in order to meet problems. The fact that they have balances tends to support our view that they are in control and on top of their spending. I made the point in Grand Committee that sometimes authorities build up rather more of a war chest than some people might like to see, but perhaps that is a political rather than a technical managerial issue.

In Grand Committee, the noble Lord, Lord Hanningfield, gave very practical and powerful examples about how reserves can become a sensitive local issue if the authority is scrambling around to make savings at the behest of the Secretary of State. The noble Lord, Lord Smith of Leigh—I am sorry that he is not in his place to add his voice—put it rather well when he asked whether this is a power that the Government really want because it would be very difficult to exercise.

In Grand Committee, the Minister suggested that some of us were paying lip service to what he called a mythical system of democracy. I know that democracy in action is never quite what some of us would like to

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see. Nevertheless, it is an important principle. The principles of democracy and autonomy are very important to us. They are so important that a clause—the provisions of which we are told are no more than reserve powers, but which could be applied generally and widely or even universally—needs justification, which so far we have not heard.

Autonomy requires capacity building. We were asked for reasons why we did not like this clause. So to give another reason, the capacity of individual councillors and councils is undermined by a clause such as this which states, "Look to central government. We will make sure you keep on the right lines". I support the amendment.

Baroness Hanham: My Lords, I should like to add to this debate. I do not think that I did in Committee. On recollection from when I was the leader of a council, the advice from our director of finance was that two months' salary was the minimum a council should have in reserves so that there is always money with which to pay the staff. We would have at least that, but my Labour opponents would tell us continually that we should spend all the reserves and that we should not have any. There are variable views on what minimum reserves should amount to and on what they should be based. That is a proper democratic debate. That is how a council and local authority should run.

The questions being raised for the Minister today are: how does one assess what a minimum reserve should be? How or why should it be the responsibility of the Audit Commission to define that? As with all budgetary control, the emphasis for responsibility is laid on the shoulders of local authority members. If they are given the responsibility to do everything else, there is no reason why they should not be responsible enough to decide how much is needed in minimum reserves. The point made by the noble Baroness, Lady Hamwee, is very apposite. I support what my noble friend and the noble Baroness, Lady Hamwee, said.

Lord Peyton of Yeovil: My Lords, I support my noble friend in all that he said. The reason why I pricked up my ears is that I understand this is a reserved power which the Government hope they will never use; it would be convenient to have it. I believe that, as a matter of principle, governments should not be given powers unless they have a fairly clear idea of the circumstances in which they would use them and that they would like to be able to use them for a useful purpose. As I understand this clause, it gives Ministers a power which they do not know if they will ever use and do not know how they would use it if they had to. If I am wrong, I hope that the noble Lord will correct me. But if I am right, it should not be in the Bill.

Lord Rooker: My Lords, in a Bill that is essentially deregulatory and confers freedoms and flexibilities on local government beyond their wildest dreams, I do not really feel that I have to apologise for Clause 26. I should like to say, almost colloquially before I turn to the technical aspect, that it refers to reserves that are required to be put in the budget, but are not necessarily

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held throughout the year. I do not think that the analogy exists that an old folks' homes might have to be closed in order to maintain the reserves. That does not stand the test. It may be that the reserves are needed to keep the old folks' homes open. That may be what was needed because the budget ran over. There is a defence to be made of this clause and I shall seek to do so.

Clause 26 is a vital element of the financial management framework established by Part 2 of the Bill. Most authorities know that adequate reserves are essential to the smooth provision of local services. The noble Baroness gave an example from her own experience. They are not a luxury or the imposition of the auditor. Authorities have to make their budgets in the face of uncertainty about demands which are sometimes caused by last-minute decisions of government—if I might put it that way. Budgets are made a long time in advance of the year and conditions change. So they do not always know the demands their services will face. Reserves are a means of allowing for uncertainty. Any well-managed authority would wish to be able to deal with uncertainties. Most authorities make sensible provision for reserves, but they cannot work out every eventuality. That is the whole point of the exercise. They do not know exactly what they will need to cover, but they can make reasonable provision on the basis of a responsible assessment of the risks. That is all that is asked of them.

CIPFA's guidance and Clause 25 both reinforce good practice processes for deciding on the appropriate level. But we all have to face the fact that a significant number of local authorities are not making sufficient allowance for reserves. Moreover, as I have said, in the context of the deregulatory effect of this Bill, it is quite sensible for the Government to include Clause 26.

A myth seems to have developed that the clause has been inserted because of the deficiencies of a very small number of notorious cases, so I shall not apologise for repeating the figures. Two years ago the Audit Commission reported that 10 per cent of authorities were considered by their auditors to have inadequate reserves. Last year the figure was 12 per cent, which represents no fewer than 58 local authorities. Some 21 per cent of English county councils were included in that figure, along with 31 per cent of the London boroughs, that is, 10 out of the 32 boroughs. By any calculation, those are significant numbers. Unlike some of the suggestions made in Grand Committee, we are not prepared to dismiss these assessments as auditors being overly cautious so that we may disregard their words. No responsible Government or Ministers could do so, which is why the clause has been included in the Bill.

5.30 p.m.

Baroness Hamwee: My Lords, with the leave of the House, can the Minister tell us what proportion of

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either the percentage or number of authorities reported as having inadequate reserves ran into difficulties?

Lord Rooker: My Lords, that is not the point. It is hoped that none of them ran into trouble. Even though they were holding inadequate reserves, it is hoped that none did so. The noble Baroness seems to be making the case that if no authority ran into trouble then it did not need the reserves in the first place. That, I think, is a wholly irresponsible approach from someone as senior in local government as the noble Baroness has purported to be throughout our debates.

I do not want to bring in a note of discord, but I was goaded into making that remark. I see that the noble Baroness wishes to speak.

Baroness Hamwee: My Lords, Hansard would not have recorded that I sought to put quotation marks around the term "inadequate". My point was that I wished to draw attention to inconsistencies between what really happens and the inevitable very cautious approach of professional auditors.

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