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

Examination of Witnesses (Questions 660 - 679)



  660. Can I quote from the memorandum we received from the Audit Commission? It says, "Our auditors are often asked by authorities for their view on what constitutes a recommended minimum level of reserves. To date, auditors have resisted making recommendations about minimum levels because it is rightly the responsibility of the authorities to determine this for themselves based on the risk assessment of their operational business needs." That is what the Audit Commission is telling the Committee but they are obviously telling you something different.
  (Mr Raynsford) If you continue with the quote, they do say, "However, as part of our recent development of the comprehensive assessment process, we have suggested that authorities might want to regard five per cent of net forecast operating expenditure as a guide for minimum level of reserves."

  661. That should be left to the local authorities.
  (Mr Raynsford) The figures we have are that 17 authorities have less than zero per cent of net operating expenditure as reserves. In that situation, it would be in our view imprudent not to have this as a reserve power. It is not something we intend to use in general but as a reserve power for extreme cases this does appear to us to be prudent.

  662. The Audit Commission are aware of the authorities that you have referred to and they still think it should be left with the local authorities and a minimum reserve of five per cent. Why do we need regulation? This Bill is bristling with regulations.
  (Mr Raynsford) This Bill is giving substantial, additional freedoms to local government but within a framework that allows the local authority to borrow more against proper, prudential guidelines. In the case of setting its budget, the authority is expected to operate in a responsible way and quite rightly that discretion is largely left to the local authorities.

  663. Why do you not accept the recommendations of the Audit Commission?
  (Mr Raynsford) We are working in close consultation with the Audit Commission and if we move on to paragraph eight of the Audit Commission's submission they say, "We can see the desirability for the government to have the flexibility to be able in exceptional cases to set a minimum level of reserves in support of intervention." That is what we are doing.

  664. But if you read on, ". . . the expectation that they should themselves determine an appropriate level of reserves and be more transparent than at the moment should be the norm."
  (Mr Raynsford) That certainly is the norm but in exceptional cases, as the Audit Commission themselves state in their submission, paragraph eight, they can see the desirability of the government having the flexibility to be able to set a minimum level.

  665. The norm is that it should be left with the local authorities and no regulation.
  (Mr Raynsford) Absolutely. The norm is that it should be left to the local authorities.

  666. And no regulation?
  (Mr Raynsford) The norm is that the local authority itself should take the decision. This is a reserve power for use in exceptional cases.

  667. And no regulation? That is what they are suggesting, that it should be left to local authorities.
  (Mr Raynsford) In normal circumstances, it will be.

  668. We have been told that the Audit Commission has an influential part to play in monitoring and observing the finances of local authorities. This is one area in which I consider the Audit Commission has an important part to play and local authorities should not be subject on minimum reserves to regulation from the Department.
  (Mr Raynsford) This is a reserve power for use in exceptional circumstances. Given our experiences, in a small number of authorities where the absence of adequate reserves has resulted in serious financial difficulties as and when the authority has found it does not have the means to meet the costs that it has faced, we felt this was prudent, to include this provision so that we would have the power in those exceptional cases to intervene to require a minimum level of reserves.

Chris Grayling

  669. Coming on to capital receipts, the White Paper seems to address capital receipts purely from housing. The Bill makes it appear that we are talking about all capital receipts. Do you intend this to be about all capital receipts?
  (Mr Raynsford) No. This is about housing capital receipts and we will clarify it to make it clear that that is the case.


  670. You will clarify it or you are clarifying it now?
  (Mr Raynsford) I am clarifying it now and we will make absolutely sure when a final Bill is presented that it is clear it applies to housing capital receipts.

Chris Grayling

  671. The initial impression that was given from these proposals was that this was a vehicle to take money from rich authorities and give it to poor authorities in areas of deprivation. We took evidence this morning from Wolverhampton who said they were one of the authorities who expected to lose out as a result of these proposals. Can you clarify what the purpose of the exercise is? Why are you doing this?
  (Mr Raynsford) The current arrangement of housing set aside does involve authorities being required to set aside a proportion of their receipts and, as you know, we do take those into account when making capital allocations. The effect does redistribute some of those resources from authorities that are receipts rich and do not have the same need to spend to other authorities that have a high need to spend and do not have the same level of resources. I was surprised frankly to hear the evidence given by Wolverhampton. We will look into that but our view is that the new pooling mechanism will have exactly the same effect as the current housing set aside mechanism and will benefit those authorities that have a real need to invest and do not have resources on a substantial scale.


  672. You will look into that. Would it be possible to let us have a note on that, preferably for Monday or Tuesday, because it would be a pity if we relied on Wolverhampton's evidence in our report if you can genuinely refute it.
  (Mr Raynsford) We will do so.

Chris Grayling

  673. The concern that I would have resulting from your proposals—you will be aware that some of the areas that were classified as richer authorities are those most affected by the shortage of affordable housing and indeed we have seen much talk of next week's comprehensive spending review addressing that issue. If you take capital receipts out of areas where there is a shortage of housing and put them into areas where pressures on the housing stock and housing market are much less great, are you not in effect carrying out a redistribution which goes directly against the needs of the nation at this moment in time?
  (Mr Raynsford) No, because in general the prime call on capital receipts for local authorities is the improvement and renovation of their existing stock; whereas the provision of new housing to meet the needs of additional households in areas of shortage is predominantly met through the Housing Corporation's budget and by registered social landlords. I obviously cannot anticipate what is going to be in next week's spending review but you will have read the press coverage on that and clearly there is a need to provide more for additional housing in areas of shortage, but that will predominantly come through registered social landlords and the Housing Corporation's budget rather than through capital receipts. I accept that to a degree capital receipts may be used to support registered social landlords through local authority social housing grant, but it is a relatively small proportion of the total application of those receipts.

  674. For example, we have taken evidence from Waverley who say that they have been consciously pursuing a programme over the past few years directed towards balancing their debt budget in order to enable them to spend a greater proportion of their receipts on affordable housing. They are extremely concerned that, as a result of the proposals you are putting forward, having been prudent with a view to trying to solve their affordable housing problem, you are going to take the money away.
  (Mr Raynsford) We have no intention to make this clause retrospective, so there will be no question of any authority like Waverley being penalised for decisions—

  675. This is money they are now looking to spend over the next few years, having over the last few years sorted out their financial position so that they are allowed within the current restrictions to spend money on affordable housing. You are now going to introduce a measure that will take away some of the capital they would then use for affordable housing.
  (Mr Raynsford) They would have been subject to the housing set aside mechanism before they were debt free. It is not introducing a new element. We do think it would be slightly odd that an authority should benefit just because it happens to be debt free and should not be subject to the same requirement that applies otherwise to ensure that the receipts are used as a national resource to support investment in those areas where there is a particular high need to spend without the availability of those receipts.

  676. Why should it be odd that a council that has been prudent in managing its affairs in order to invest in affordable housing within the current rules? Why should that council be penalised and those resources turned into "a national resource"?
  (Mr Raynsford) The authority will not be penalised. It will not be any worse off, but it is buckshee gain that it previously would have been able to achieve because it happens to have got into the debt free position so is treated in a more favourable way than other authorities that will not be there in the future.

  677. Can you assure Waverley Council that they will have the same amount of money over the next few years to invest in affordable housing that they would otherwise have had?
  (Mr Raynsford) I cannot give a forecast off the top of my head about an individual authority without looking at their finances but this is not going to penalise them by taking away from them resources that otherwise are available. What it will do in future is apply rules that make them subject to the same rules that they are currently subject to as an authority with debt, even if they become debt free.

Mr O'Brien

  678. Under clause 26 of section 3, we refer to the duties of the chief financial officer and the question of the report on the robustness of the budget. What effect will clause 26 have on the actions of any local authority that was determined to behave imprudently?
  (Mr Raynsford) What it will do is give greater confidence to chief financial officers if they do have doubts and concerns about the robustness of a budget to set those out before the local authority reaches a decision. That is right and proper, that they should be able to act in a professional way without any fear of consequence to their own position. It is our experience that in some instances warnings have not been given sufficiently early to local authorities about financial difficulties that they might face. It has not happened in any significant number of cases, but we believe it is right that there should be a framework that makes it absolutely clear that chief financial officers should have that obligation, that responsibility and that right.


  679. Ones, for instance, other than Hackney and Walsall?
  (Mr Raynsford) We go back to the same names again. In those cases, the councillors who currently are wrestling with the huge financial problems that have followed on from previous mistakes are probably bitterly ruing the fact that safeguards of this nature were not in place at an earlier stage.

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