Select Committee on Transport, Local Government and the Regions Minutes of Evidence

Examination of Witnesses (Questions 640 - 659)



  640. Could you tell the Committee what action you are going to take to monitor the small business rate relief?
  (Mr Raynsford) We will, like other major initiatives, obviously monitor it but it is probably too soon for me to describe the actual monitoring arrangement. We have not yet got to the stage of introducing the legislation and we will need to think about what the right way to monitor it is as and when we have got to that point.

Mr Betts

  641. On the issue of prudential guidelines, the principle is something many of us involved in local authorities in the past have argued for a long time. To pick up on one particular concern that has come across to us, that is in clause 4, the potential for government to limit the operation of prudential guidelines, why do you want such broad powers?
  (Mr Raynsford) If I can say this slightly facetiously at the start, it is really good to hear that you recognise this as something that many people thought would never come and then I put against it the view that this is a disappointing Bill. I would have thought this was a cause for congratulation. However, we think there is a need for a safeguard against a possible position where, in the national, financial interest, the government had to take action to limit the overall extent of public borrowing. It would be odd in the extreme if local government borrowing, which accounts for something like 25 per cent of the total nationally, were to be wholly excluded from any controls or safeguards which government exercised in such a situation. We do not think it is likely to happen. It is very much a back-stop but we think it is prudent to put it in place. As far as individual authorities are concerned, this is a safeguard against an extreme situation where an authority might otherwise get into very serious difficulty. As I said in response to an earlier question from Mr Cummings, had earlier action been taken, for example, in the case of Hackney, some of the rather serious consequences in terms of financial difficulties might have been avoided. In extreme cases, I think this is a necessary safeguard but it is just that: a back-stop, not part of the normal, day to day operation of the scheme.

  642. That is good to hear. On the question of the overall limit of the powers you may have to impose, it says in the White Paper words to the effect that this was something that was only going to be considered necessary by macro-economic circumstances and the sort of crisis we had in the past as a nation. If that is the case, why cannot that be made explicit in the legislation?
  (Mr Raynsford) I hope I have made it explicit this afternoon. I do not know whether parliamentary counsel could draft that or not but if it helps I will put it on the record here that that is the intention.

  643. If parliamentary counsel could draft it, would it be passed?
  (Mr Raynsford) I would have no objection but I suspect parliamentary counsel would feel this was unnecessary to spell out exactly—


  644. Your problem is parliamentary draftsmen, not the Treasury?
  (Mr Raynsford) No. The problem would be trying to encapsulate in legislation a full explanation of why any particular provision was necessary, which I think would probably produce very over-cumbersome legislation in the future. It is normal for ministers to make a clear declaration of the purpose of legislation when presenting it and for legislation to give effect to those policy intentions. I hope I have done that.

Chris Grayling

  645. You have referred to the need to cut borrowing but obviously alongside this is the question of off balance sheet debt, whether it be through the form of long term PPP commitments, whether it be in the form of leasing and other forms of off balance sheet debt. Have you considered within the confines of the Bill taking any steps to control the ability of local government to surpass your constraints by going off balance sheet?
  (Mr Raynsford) No, because the revenue implications are on balance sheet in those cases.

Mr Betts

  646. Going back to the powers to limit the ability of individual authorities, it is said it is to stop rogue authorities who want to go off the rails. If they find themselves in breach of the CIPFA code, they are going to be in breach of the law. Why do you need extra legislation as well in clause 4?
  (Mr Raynsford) It is quite clear to us now that the situation in the London Borough of Hackney has deteriorated over a series of years and CIPFA guidance which should otherwise have been followed was not.

  647. They are in breach of the law anyway.
  (Mr Raynsford) If we are removing the existing borrowing approvals, which we are, and allowing greater freedom to borrow, it is necessary to have a safeguard as a back-up to avoid individual authorities in such circumstances borrowing where they are in breach of the CIPFA code.

  648. If they are in breach of the CIPFA code, they are in breach of the law. I was getting a nod from your left when I asked the question. Why do we need something else in the legislation if they are already in breach of the legislation by the CIPFA code?
  (Mr Raynsford) We think it is right and prudent to have that safeguard in place to deal with circumstances where an authority might otherwise get itself into a serious position of indebtedness. I do not think it is any particular advantage to fall back on the reassurance that the authority has broken the law after the event. It would seem to be better to prevent that happening in the first place.

  649. People are not certain how this new freedom is going to operate. The government may say that, as long as you keep within the prudential guidelines, you can borrow but authorities have a choice about how they go about capital investment. It could be straightforward borrowing; it could be a PFI scheme and if the government is so determined that the PFI scheme comes with grant regimes attached and the borrowing does not, the government has to effectively determine what an authority can and cannot do. How is that going to operate?
  (Mr Raynsford) Under a PFI or PPP scheme, there has to be a proper, rigorous assessment of the financial advantages of that as against a traditional framework. This public sector comparator principle will continue so a PFI scheme will only get the go ahead if it can demonstrate that it is going to be value for money.

  650. Currently, the revenue costing of a PFI scheme to a local authority attracts government grant to help fund it. If the government in the future still funds the revenue streams of a PFI scheme through grant but does not give the same support to a borrowing local authority for the same project, the government is still going to determine what form of capital project goes ahead and there will not be a level playing field for local authorities to choose. The government has a lot of controls over the capital projects and how they are carried out through the revenue implications and how the government supports that.
  (Mr Raynsford) It is not our intention to change the fact of support for capital investment by local authorities. We have said in the White Paper—indeed, that was said in the earlier Local Government Finance Green Paper of two years ago—that we were looking at different possible arrangements, either a capital as against revenue support for capital borrowing, but that will continue, whichever formula is adopted. Any supported borrowing will continue to receive support. It will only be unsupported borrowing that does not get a subsidy. That is a freedom that we are extending to local government by giving the opportunity for unsupported borrowing in addition to that which would otherwise qualify for support.

Mr O'Brien

  651. Clause 25, section 2, says, "In the case of controlled reserve it shall be regarded as appropriate for the balance of the reserve at the end of the financial year under consideration to be less than the minimum amount determined in accordance with regulations made by the appropriate person." Why does the Department think that the appropriate person, the Secretary of State or the Minister, knows best for the level of reserve that authorities should have?
  (Mr Raynsford) This again is an important safeguard and the reason that we are introducing this is that the evidence we have had from the Audit Commission is that the level of reserves in a number of authorities is dangerously low. A year ago, the Audit Commission reported some ten per cent of authorities had reserve levels that they were concerned about the adequacy of. The latest indications we have from the Audit Commission is that the figure is now around 12 per cent.


  652. That is the figure the Audit Commission gave you. Have any of those local authorities run into difficulties in the period since the Audit Commission gave you those figures?
  (Mr Raynsford) The financial position in Walsall has been one of the main factors leading to the Audit Commission's recommendation that intervention should be considered.

  653. What about the rest?
  (Mr Raynsford) This is very much a provision to deal with exceptional circumstances where there may otherwise be a serious problem. It is not our intention to use this power in the vast majority of cases.

  654. You have told us that the Audit Commission is worried about a series of authorities. Apart from the exceptions of really badly run authorities, why should you be saying to us that the warning from the Audit Commission should be listened to when there does not appear to be any evidence, other than from those two authorities, that there has been a problem?
  (Mr Raynsford) It is slightly wider than that. The problem is in north Tyneside, Hillingdon and Corby. In all of those cases, the level of reserves available to cope with unforeseen difficulties has been a factor. I do not think it is right to say that this is so small a problem that no action should be taken. We do not think it is a large problem; we think it is only going to occur in a relatively small number of cases but we think it is right to have that safeguard against a situation where an authority could leave itself highly exposed and in consequence get into very serious financial difficulties.

Mr O'Brien

  655. In view of the comments about certain authorities, there are other ways of raising revenue. The Royal Institution of Chartered Surveyors argued that this Bill should be used to amend section 123 of the 1972 Local Government Act to take account of the well-being power. If we are looking at other sorts of revenue to ensure that there is a minimum reserve, are you prepared to take the advice of the Royal Institution of Chartered Surveyors and to consider the question of section 123 of the Local Government Act 1972 and bring it up to date under the Local Government Act 2000?
  (Mr Raynsford) I am certainly prepared to take that away and consider it. I cannot give you an instant answer now.


  656. Can I take you back to the reserves? Supposing in setting the budget for the following year, the November/December period, a council has to say to people that the hours for the library are going to have to be cut because we need extra reserves. Are most of the local electorate going to understand that? Is it not better to wait until there is a call on those reserves some time in the year when you can say, "Look, these cuts have to occur because we have not got the money"?
  (Mr Raynsford) I do not think it does any service to set artificially low reserves and then subsequently have to close services in the course of the year because the authority simply does not have the resources to be able to cope.

  657. You think it is better to close the services early so that you have the reserves?
  (Mr Raynsford) No. I believe it is much better for authorities to plan prudently on the basis of an adequate reserve to cope with eventualities that might occur in the course of the year.

Mr O'Brien

  658. Have you consulted the Audit Commission on this?
  (Mr Raynsford) We have indeed.

  659. What do they say?
  (Mr Raynsford) It is partly because the Audit Commission has highlighted the concerns expressed by district auditors that currently some 12 per cent of authorities in their view have set reserves that they regard as potentially insufficient.

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