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10 Jun 2003 : Column GC47

Official Report of the Grand Committee on the Local Government Bill

(Third Day) Tuesday, 10th June 2003.

The Committee met at half past three of the clock.

[The Deputy Chairman of Committees (Lord Elton) in the Chair.]

Clause 27 [Budget calculations: report on inadequacy of controlled reserve]:

Lord Hanningfield moved Amendment No. 74:

    Page 12, line 4, leave out subsection (1).

The noble Lord said: In moving this amendment, I shall speak also to Amendments Nos. 75 to 79.

The clause lays down in statute a requirement on a local authority to have regard to reports from its chief financial officer when making decisions on its level of reserves. We had long discussions about the level of reserves in our previous sitting. Of course a local authority should have regard to the views of its chief financial officer on such matters. That is one reason why we employ a chief financial officer. We in local government would not employ someone in that role whose advice we did not seek and respect. However, to lay that down in statute is rather strange. I cannot see how the provisions could possibly be effective or warranted in principle.

In a spirit of open-mindedness, however, we tabled the amendments, which seek to work with the Bill and clarify how the provisions will operate in practice. For example, I do not understand how Clause 27(2) will work. What does it mean for a chief financial officer to report on the likelihood of reserve being inadequate for a previous financial year? We discussed that previously. The level of reserves for a previous financial year may have no bearing at all on the level of reserves that an authority intends to set for the forthcoming financial year. If we are to have that provision, why is it not directed directly at the levels of reserves that an authority intends to set for the forthcoming year? I beg to move.

Baroness Hanham: I support my noble friend's amendment. We had many discussions at our previous sitting about the purpose of minimum reserves; now we have the inadequacy of controlled reserves.

I pick up the point that my noble friend made about subsection (2), which states,

    "If in relation to the previous financial year it appears to the chief finance officer that a controlled reserve is or is likely to be inadequate".

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We all have to look back from time to time but the proposal is to look back at a reserve that was set for a previous year; it was either adequate or not adequate. If that refers to whether its adequacy should be reflected in the forthcoming year, the Bill should say so. The amount of reserves should be set for the forthcoming year and they must be set on the basis of the budget that is being considered. It appears inexplicable to us that that will be done in relation to the previous year. I am sure that the Minister will give us a good explanation in this regard.

Lord Bassam of Brighton: Amendments Nos. 74 to 79 would transform Clause 27 into a new free-standing duty on the chief financial officer to report to an authority if the officer believed that the reserves were inadequate. I entirely accept that that is a logical consequence of the opposition that the noble Baroness and the noble Lord have expressed to Clause 26. As it stands, without Clause 26, Clause 27 is redundant. However, if Clause 26 remains in the Bill, Clause 27 has an important role to play in its unamended form. Perhaps I should spell out what that is.

Regulations made under Clause 26 would require any authority to budget for at least a minimum level of reserves. But reserves are there to be used in the appropriate circumstances. Nothing in Clause 26 stops the use of the reserves, even if that brings them below the minimum level. But the fact that the actual level has fallen below the budgeted level means that some other element in the budget must have been overspent. It is right in our submission that the authority should be informed of the reasons why that has happened, so that lessons can be learned for future years.

We all learn from events in the past; they inform what we do in the future. I remember from my time in local government ensuring that we had a proper and legal budget. We had to understand what had happened in budget movements in the previous year in planning future years' budget strategy. It seemed to me to be an important piece of budgetary intelligence that we viewed what had happened, where the overspend occurred and what areas needed action in that regard. It seems plain to us that when setting next year's budget, all authorities should in any event review progress in relation to the budget to ensure sound foundations for the coming year. Clause 27 requires a report at that time if it is foreseen that the reserves at the end of the current year will fall short of the minimum.

If Amendments Nos. 74 to 79 were accepted, Clause 27 would become a duty on the chief financial officer to report if in relation to the forthcoming year it appeared to the officer that the reserves were or were likely to be inadequate. It seems that that is intended to apply to the reserves that are to be allowed for in the forthcoming year's budget. Clearly, that duplicates part of the duty placed on the chief financial officer by Clause 25 of the Bill. It is therefore unnecessary.

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With that clarification of why we regard the provision as important, I hope that the noble Lord will feel able to withdraw the amendment.

Lord Hanningfield: I still would like more clarity from the Minister. As the arrangements currently stand, what happens at budget time is that the financial officer reports to the council if he thinks that the proposed level of reserves for the coming year is inadequate. In the previous year, if reserves are used, reports are also given to the cabinet—they used to be given to a policy or finance committee. Whether reserves are used becomes obvious as the year goes on. They cannot be used secretly and they must be spent during the year. When one gets to budget time, what happened to reserves in the previous year is always obvious.

I understand what the Minister said and that there should perhaps be a report saying what had happened, but everyone who is closely involved will know what happened during the year. Surely the more appropriate information is the level of reserves for the coming year because the rest of it is history. As things stand now, that is what happens. The extra arrangements appear to be rather redundant. That was my point. The subsection appears to impose new duties unnecessarily on what happens now.

The situation involving Hackney or Walsall, if we want to discuss failing councils, would not involve the provisions. Everyone knew what has happening—the problem involved the incompetence of the members who were taking decisions. It did not involve the fact that the figures were not transparent or that people did not know. There was not much secrecy attached to them. The decision-making procedures in those councils were inadequate and no one could agree. We were supposed to be giving local government freedoms with the legislation, but in this regard we will give more restrictions. I take the Minister's point, but this involves much unnecessary work for local government.

Baroness Hamwee: I take the Minister's point about needing to have regard to the past in order to deal with the present and future. As he said, when he led a local authority, he was able to do that without having risk provisions on the statute book. Will he explain to Members of the Committee what has changed? Perhaps current councillors do not have the quality and skills of the noble Lord. I am sure that that is the case. Will he also explain what is achieved by a clause that depends so much on the chief finance officer? A chief finance officer who is worth his salt or who does the very minimum will do such work and report to members anyway. An orange flag on every local authority's calendar saying, "Keep thinking about what the reserves are", is perfectly appropriate but that need not be imposed by central government.

Lord Smith of Leigh: Will my noble friend clarify the situation with regard to Clause 28? If an authority was carrying out the duties imposed under Clause 28,

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inevitably the information that appears to be required under Clause 27 would be provided as part of the ordinary budget-monitoring process.

Lord Bassam of Brighton: Let us consider a real-world example. In my authority we used to have a real problem with the home-to-school transport budget. Each year, it seemed to balloon out of control. When I was leader, it grew from about 500,000 to 1.2 million. That had a massive impact on the LEA element of the education budget and meant that there were likely to be resource shortfalls in other parts of the authority's spending. I should have found it bizarre if we had not had a report from the finance team, including the chief finance officer, on the impact of that on our whole budget.

In this regard, we are saying that we want to ensure that retrospective reporting on those matters—providing us with the lessons—is provided across authorities. That is what the clause will achieve. Of course we see that the best comes from the best. We want to ensure that such reporting is there for everyone, so that there is transparency and a view is expressed that we can understand, so that we can plan better for the future. In ensuring that we have adequate reserves for future years for councils, we must understand what happened in previous years. After all, the auditors' annual management letter does not examine simply what is there in front of them; they look at the audit history and audit trails in the authority so that members can use the best information that is provided to plan for future budgets. That is what we are trying to achieve; it is not complicated.

The noble Lord, Lord Smith, asked about Clause 28. In that regard, we are trying to ensure that authorities follow good practice, monitor their budgets and take action if necessary when problems are identified. Why are we making budget-monitoring a statutory duty? The reason is plain. The financial difficulties that have affected some authorities recently appear to have been exacerbated by delays in detecting and picking up budgetary problems. A failure to report and understand those reports led to many of those problems. Our hope is that that will be confined to very few authorities. We must ensure that good monitoring processes are in place in all local authorities. That is what the Bill seeks to achieve. We must have such good practice so that members are given the tools with which to do the job so that they can make effective budgetary decisions for future years.

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