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Lord Dixon-Smith: I did not intervene at Second Reading, although I have some experience of finance

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in local government. It was a long time ago, and it is possible that I am hopelessly out of date. The Minister will forgive me if I am.

I too am fascinated by the wording of the paragraph:

    "the prudent management of its financial affairs".

I know that the Bill is, in theory, about capital expenditure, but the prudent management of an authority's financial affairs describes a wider area than, I suspect, the Bill is directed at. Even in the management of an authority's capital affairs, it is not unusual for revenue expenditure to be applied directly to capital. Therefore, one can turn the question round and ask whether, in certain circumstances, it might not be legitimate to apply borrowed moneys to revenue affairs. That is the real sting in the tail.

In national finances, there is nothing unusual about the power to borrow money to defray revenue expenditure. I do not know whether the power should go that far, and I am sure that the intention is that it should not. However, the wording of the clause implies that that might be a reasonable thing to do. The clause refers to the prudent management of the authority's financial affairs. That is different from the prudent management of the authority's capital financial affairs.

I am a little concerned about the matter. I support the thrust of the Bill. I am all for giving authorities the maximum financial independence and freedom. The only way that my son learnt financial discipline was by being given complete freedom. He soon learnt to be discreet about what he did with his money. I am all for letting authorities get themselves deeply into the mire, if they are unwise enough to do so. It is the only way in which they will learn. I am all for it. However, I have a sneaking feeling that what I am describing and thinking about goes wider than the Government intended with the Bill, which deals here with capital finance and accounts. The phrase in the clause implies something far wider.

The Minister of State, Office of the Deputy Prime Minister (Lord Rooker): I promised myself that I would enthuse so much about the Bill that I would stick ruthlessly to the groups of amendments. Considering the debates that are about to come up, it is clear that one could be repetitious, so I shall also stick to the notes that have been provided for me. I hope that I will be able to answer the questions from noble Lords and noble Baronesses.

Amendment No. 1 relates to Clause 1, which deals with the power for local authorities to borrow. Paragraph (a) simply preserves the existing wide-ranging power for an authority to borrow for any purpose relevant to its statutory functions. Paragraph (b) is new, and the amendment would replace it.

Under the current legislation, introduced in 1990, there have been technical doubts about the lawfulness of borrowing to repay existing debt. The aim of paragraph (b) is mainly to deal with that concern. The refinancing of debt is a widespread practice and has

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full government approval. A large part of the money lent by the Public Works Loan Board to local authorities is for that purpose. It gives local authorities flexibility over the timing of loan repayments and often makes it possible to negotiate more favourable interest rates. Something similar is done by many members of the public with mortgages on their homes. They often find that they can replace an existing mortgage loan with a new one on more favourable terms.

The present law does not, however, confer an explicit power on local authorities to borrow for such a purpose, although it is generally assumed that an implicit power exists. To clarify the matter, paragraph (b) of Clause 1 gives authorities power to borrow for the prudent management of their financial affairs. That will empower them to borrow to repay existing debts, provided that they are satisfied that it is prudent to do so.

The removal of the existing words in Clause 1(b) would allow the uncertainty about refinancing to remain. That is why the provision is there in the first place. The words offered as a replacement are superfluous. There is no need to say that authorities will have power to borrow subject to the provisions of the Act, as that is already the overall effect of Part 1.

Amendment No. 67 relates to the similarly worded borrowing power for parish councils in paragraph 2(1) of Schedule 1. The amendment proposes the same change as Amendment No. 1, and the objections to it are identical.

Amendment No. 53 make an analogous change to Clause 12, by replacing the words in paragraph (b). The clause concerns local authority investment powers. It remedies a deficiency in the present legislation, which does not give authorities an explicit power to invest. Since 1990, authorities have had no choice but to assume that there is an implicit investment power. Understandably, they have often called for clarification. Clause 12 therefore confers such a power. It is in very broad terms, and the wording deliberately mirrors that of the equally wide borrowing power in Clause 1.

The basic power in Clause 12(a) is to invest for any purpose relevant to the authority's functions. However, investment activity cannot easily be linked to a specific function. It is unusual for an authority to have an investment account earmarked for an identifiable kind of expenditure. In Clause 12(b), power is conferred on an authority to invest for the purposes of the prudent management of its financial affairs. That allows authorities to invest simply because they have temporarily surplus cash and must keep it safe until it is needed for spending.

The proposed amendment to Clause 12(b) would allow the uncertainty about investment to remain. The words offered as a replacement for those in the Bill would not address the long-standing concerns and would add little, if anything, to what is already covered in Clause 12(a).

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I have stuck to the purpose of this set of amendments, without going into the other areas that we will come to. I hope that, with those reassurances, the noble Baroness will withdraw the amendment. The noble Lord, Lord Dixon-Smith seemed to imply that he would like local authorities to get into the mire, as that would teach them a lesson. When that happens, it is the citizens who pay the cost. We do not want local authorities to get into the mire; we want them to be as active and independent as possible, within the big picture. We cannot encourage them to get into the mire, for it is the council tax payer who suffers at the end of the day.

I hope that there will be a set of powers in the Bill that will give greater powers to local government. There is a consensus across all parties in the House, in another place and in local government generally that the powers are a good replacement for the existing set-up. People will obviously want to broaden and deepen them here and there but, by and large, it is a good package for local government. It is designed to keep them out of the mire, not get them in it.

3.45 p.m.

Lord Dixon-Smith: I hope the noble Baroness, Lady Hamwee, will forgive me if I say that although I accept the Bill's intentions, I have found that if we want people to behave responsibly, we have to treat them as if they are responsible, not as if they need limits and have to be tied down.

The point that the Minister has not answered is perhaps more significant, regarding whether the prudent management of an authority's financial affairs permits the borrowing of money for revenue use. That was the point at which I was aiming my remarks. I would be delighted to hear that that was so, but I suspect, because of the Bill's title, that it is not.

Lord Rooker: It may not be, but I can assure the noble Lord that what local authorities do with their money in terms of revenue and capital will form a considerable part of some of our later debates. We can go into that in some depth at the appropriate time.

Lord Dixon-Smith: I hear what has been said but I wonder if, when all that is over, the noble Lord might be prepared to concede that he might need to think a little more carefully about that particular phrase at this particular stage of this particular Bill.

Baroness Hamwee: I agree with the noble Lord, Lord Dixon-Smith, on his comments about local authorities but I might not apply the analogy of teaching his son a lesson. I do not want to take up the Committee's time in investigating the affairs of the Dixon-Smith family.

I confess to remaining a little troubled by this. Perhaps we can pursue it after the Committee stage. The Minister says that the present law does not confer an explicit power with regard to both borrowing and investment but that it is accepted that there is an implicit power. It would be wise to consider whether any wording might be inserted to make it clear that the

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power is not new. Might the legislation otherwise not open up the possibility of challenges regarding previous accounts which have not been closed for local authorities? I have already mentioned the difficulties that can be caused, sometimes rightly, by a council tax payer inspecting accounts and raising matters with the district auditor. If this is not a new power, it would be comforting to say so.

The Minister also said that an authority could borrow provided that it regards the borrowing as prudent. That is not quite verbatim, but I think it was his thrust. I agree that the local authority should judge whether its borrowing or its investment is prudent, but the clause suggests an objective rather than a subjective test, which could contain the seeds of later difficulties.

I appreciate that I am being particularly technical, and that is a pity because one would rather start a Bill on a political note. We will be political later, no doubt. Having made those remarks, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 1 agreed to.

Clause 2 [Control of borrowing]:

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