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Lord Hanningfield: Before the noble Lord sits down, the Minister referred to the LGA. Clause 26 on minimum reserves is the one to which the LGA had the most objection in the whole of the legislation, and in a moment I shall oppose the question that Clause 26 stand part. The Minister very kindly said that he was surrounded by local government figures. Those of us

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who have been through the CPA process this year will be aware that the rigour of the auditing part of that is immense. The Government have set in place that process. To put in this further piece of legislation is rather offensive to local governments. Before we reach the final stages of the Bill I hope that the Government will think again as to how this section is dealt with.

Lord Smith of Leigh: I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 25 [Budget calculations: report on robustness of estimates etc]:

[Amendment No. 73A not moved.]

Clause 25 agreed to.

On Question, Whether Clause 26 shall stand part of the Bill?

Lord Hanningfield: I shall speak at some length on this matter. As I have just said, this is the part which the LGA finds the most difficult of the whole legislation.

This clause gives the Secretary of State the power to set a minimum level of reserve for a local authority. It is a power that is wrong in principle for the Secretary of State to seek to take and a power that will be ineffective in practice.

As the Minister has just said, I understand that Ministers are seeking this power as a reserve to enable them to deal with a small number of authorities. However, there is surely a question as to whether the powers will enable the problems in those authorities to be tackled. The Select Committee did not think that those powers would prove effective. It stated that it did not receive any evidence that had those particular measures been in place they could have prevented financial imprudence. We have just referred to cases in Hackney, Walsall and so forth.

In the light of that it would be interesting to hear from the Minister exactly how and in what circumstances those powers might be exercised. However, I note from the ODPM's memorandum to the Select Committee on Delegated Powers and Regulatory Reform that those circumstances cannot be foreseen at present. So the Secretary of State is taking power which no experts think will work, which local authorities oppose, and which he is not quite sure how to exercise.

I also noted with interest that the same memorandum states that the exercise of that power would be through the negative resolution procedure as the powers might have to be exercised rapidly. However, looking at the Bill these powers cannot be exercised rapidly. The Bill does not prevent an authority from running down its reserves to a level below that set by the Secretary of State during the course of a year. The Bill refers only—we have not discussed this before—to an out-turn position at the year end. By that time the damage will have been done.

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We might then have a situation in which local authorities required to meet a statutory obligation at the year end have to scramble around to make the necessary savings. It is conceivable that under those circumstances the focus will be on meeting the short-term target and not on what the long-term implications for the community or for the financial health of that authority may be. One can see some extremely painful decisions being taken by local authorities: the closure of elderly people's homes; the withdrawal of grants to voluntary bodies, and reductions in services simply to meet a figure stipulated by the Secretary of State. In the long term, breaching this minimal level of reserve might save an authority money if the alternative is to take drastic action in the short term to meet it.

That is why reserves are a highly sensitive local issue, a point recognised by CIPFA in its evidence to the Select Committee on the Bill. I wonder how the Secretary of State will set the level of reserve and whether he will take into consideration and take responsibility for the effect on services that having to meet this requirement will mean.

Local people will find it very hard to understand why homes are being closed and services cut because the Secretary of State believes that the authority should keep a certain amount of money in the bank. I urge the Government to think again on this provision. Perhaps I may add that this is the part of the Bill about which I feel most strongly. It is an intrusion on local democracy. I regret very much that the Government feel that they need this power in the Bill. I hope they will think again.

6.45 p.m.

Baroness Hanham: I want to continue the comments made by my noble friend Lord Hanningfield. The suggestion under Clause 2 is that a minimum amount would be determined in accordance with regulation by the appropriate person, neither of which is defined in the Bill in Clauses 2 and 3.

As leader of a council I spent a disproportionate amount of time at any budget meeting defending the position of any reserves. My council was very prudent. It insisted on having at least three months' worth of salaries in reserve so that if a crisis arose it would have something on which to fall back. That was a political decision taken after advice from the then director of finance that that, in his view, was the minimum that should be in any reserve. But that might not be the view of any other director of finance—I am sure that the Minister is listening—who might have different ideas on what the level of reserve should be.

I agree with my noble friend Lord Hanningfield. This section undermines the authority of a local council to decide what it will do with its money and what it believes it requires to ensure prudence so that it will not fall into difficulties. It has been said that some of these provisions have come about because of the well-known and well-vaunted problems of some less than prudent councils. I accept that there have been a few and probably there will be a few more, but

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of all those of which we know setting a level of minimum reserve would have had not the slightest effect. They were well beyond any minimum reserve by the time they were in difficulties. It was not a problem associated with minimum reserves.

This is a tendentious clause. It is a matter about which local authorities need to make their own decisions. It is politically highly contentious as to what those levels of reserves should be. But, indeed, that is probably correct—that is what it should be—because what is in reserve is not being used for expenditure and all kinds of decisions have to be made as regards that. I support the comments of my noble friend Lord Hanningfield.

Baroness Hamwee: My name is also down to oppose the question that Clause 26 stand part. As I said on the first day of Committee, the only reason that my noble friend's name does not appear also is to leave the gap for number four.

When I first read Clause 26, I felt that it was a bit rich of the Government—

Lord Rooker: That is the problem. It is not rich.

Baroness Hamwee: It is a bit rich. I have experience of seeing organisations coming into the control of a new sphere of government in London. The Metropolitan Police and Transport for London were handed over by the Government without reserves. Frankly, their finances were in a state such that, particularly in the case of the Metropolitan Police, it was difficult even to understand what assets they had. They would accept that now. The state of finances of such bodies and their lack of reserves—presumably because they would just turn to the Government and say, "Can we hold out our hand and ask for a bit more as we need it from central government?"—was appalling.

This again is about central government not leaving local authorities to carry on their own affairs, subject to the decision of the electorate as periodically stated. The electorate is not concerned only about a minimum; it is sometimes concerned about a maximum, which is not dealt with in the Bill. The experience of administrations building up a war chest in order not to have to increase the council tax by much or at all—or even to be able to reduce it in election year—is certainly not unknown. That is not something which I have done, but I have observed it. It is perfectly right that it is a matter for the democratic process to state, "We are not funding this". I support the opposition to Clause 26 stand part.

Baroness Maddock: I, too, support the opposition to Clause 26 stand part. As with many other things, as Liberal Democrats we believe that it is up to the local electorate to make a judgment about how many aspects of local authorities are run. When my noble friend referred to a war chest I was reminded of the war chest that was left behind in Southampton by the Conservatives. The present Member of Parliament for Southampton Test, Dr Alan Whitehead, was able to put a lot of money into saving what was a bingo hall

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and is now the Mayflower Theatre. So, it was put to good use. That is the kind of thing which happened. We were able to spend money on other things, too, not just the theatre, because there were rather larger reserves than were needed. It is important that we consider not only the minimum but the maximum.

My question to the Minister concerns how this would play out if the Bill were enacted now. Let us consider what happened recently as regards money for education when instructions were given to dip into reserves. Some of those would have been in individual school budgets, some would not. I refer to capital reserves for repairing buildings which have been under-funded for quite a long period of time. However, the recommendation from the Government was, "Do not make teachers redundant; use that money". Could that have happened if this Bill had been on the statute book?

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