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Lord Rooker: My Lords, the classic phrase to use in response to the noble Baroness is to say, "If we did not do this and something went wrong, the public in those local authorities would say, 'You saw this coming and you did nothing about it'". That would be the charge laid against the Government and we are not prepared to be put in that position.

We have made it clear that Clause 26 will be applied only to councils that are disregarding the advice of their chief financial officers and heading for serious financial difficulty. There would be no blanket minima and the advice given by the chief financial officer and any observations made by the auditor would be taken into account in setting the minimum. The authority would be consulted before the minimum was set.

I turn now to the other myth that has developed about this clause. The suggestion has been made that the minimum applies to the reserves that an authority must actually hold throughout the year. It does not. It applies to reserves which an authority must allow in its budget. Those with far more expertise in local government than I—everyone has far more expertise than I because I have never been in local government—will understand the distinction. Reserves are put in the budget to be used if they are needed to deal with unexpected contingencies that may arise during the year. There is nothing in Clause 26 to stop that happening. That is the whole reason for having reserves and insisting that authorities make adequate allowance for them.

Let me say a little more about why the Government have included this clause. The current concerns I have already outlined, but when the new freedoms and flexibilities contained in the Bill—which have received almost universal welcome—come into force, there will be a new situation. I say to the noble Lord, Lord Peyton, that they represent an absolute bonfire of red tape up and down the country, giving authorities the

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freedom to borrow, to charge and to trade. However, all those activities involve financial risks. Therefore it is essential that authorities operating the new freedoms have fundamentally sound finances. This is the purpose of Part 2 as a whole, and Clause 26 forms a vital part of that.

In the December 2001 White Paper, in which we announced the new freedoms, we also set out our policy on authorities that got into financial difficulties. We made it clear that in the most extreme cases financial assistance would be available from central government. But in return the Government are entitled to expect that authorities will themselves hold sufficient reserves to deal with less serious problems.

We would like to think that the CIPFA guidance and Clause 25 would be sufficient. We are sure that in the majority of cases that will be so, but the CIPFA guidance has been available since 1995 and we still have the situation described in the Audit Commission reports. Given that, no responsible government, when putting forward the extent of the new freedoms in this Bill, could ignore these concerns. By the way, I believe that this was understood in the other place, where no Division was called on this clause. Members saw this as a quid pro quo for the bonfire of regulations currently in place on local authorities.

Lord Peyton of Yeovil: My Lords, I am interested to hear that. However, I have always suspected that red tape is one of the most non-combustible materials known to man.

Lord Rooker: My Lords, I can assure the noble Lord that the bonfire of red tape goes beyond the wildest dreams of those in local government as regards what they will be able to do with their new freedoms—without government interference or diktat. That is the whole thrust of the Bill and there is wide consensus on it between all the parties concerned in both Houses of Parliament as well as outside in local government. So a major change in local government finance is being brought about, starting, it is hoped, in the next financial year if the Bill receives Royal Assent in time.

This clause represents a modest, technical protection just in case things go wrong in a small number of authorities.

Lord Hanningfield: My Lords, speaking for a moment as a local authority leader, I think that the Minister has exaggerated the effect this legislation will have on the wildest dreams of local authority leaders. If he would like to see a piece of legislation that goes beyond the wildest dreams of local authority leaders, please let me write it for him.

Obviously certain parts of the Bill will allow more flexibility, in particular on borrowing under the prudential arrangement. But I am disappointed that the Minister does not seem to realise that this clause negates a tremendous amount of goodwill that the Government have generated through the Bill. All parties in the Local Government Association regard Clause 26 as offensive and not really necessary.

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The Minister said that he does not understand local government finance. When a local authority sets its budget at the beginning of the year, it has to say how much it has in its reserves and how much it expects to have in its reserves at the end of the year. Along with trading, payments and other activities, that is a part of the budget process. Because Essex is a large authority, its reserves as stipulated by the Audit Commission would be around 15 million, which is a lot of money. If we hold 15 million at the beginning of the financial year, we might aim for a reserve of 17 million according to our trading performance. The reserve might rise or fall during the course of the year, but that is the way in which most local authorities operate. That is why we feel that the clause is unnecessary.

The draft Bill appeared some time ago now, and whatever one thinks about comprehensive performance assessments, they have had an effect. I say that because before I came to the House this afternoon, I spent an interesting morning with the newly appointed monitoring auditor from the Audit Commission to my own local authority. During the CPA process, those monitoring auditors now talk to leading authority members and officers about the level of reserves. Indeed, we are given performance stars on it. Whether we like it or not, it is a part of the CPA process. Since we are all striving for more stars—fortunately my own authority has four stars in this respect—that alone provides a new protection. Audit Commission monitoring auditors talk to local authority members about the level of reserves and look at the way the money is being managed.

That is why it is so very offensive that the Government want to take the power in Clause 26 when the Bill is supposed to be a deregulatory measure. I was pleased to hear the new chairman of the Audit Commission say that he would "die for deregulation" and that he wants to see more of it. But this provision means further red tape. It is very disappointing that the Government are persisting with this power, which they keep on saying they do not want to use, but could be used. It should be remembered that if money has to be used to top up the reserve, it has to come out of services. The money cannot come out of thin air. If it is essential to retain the level of reserves, that often means reducing the level of services. We think that that should be a local decision, made with the guidance and assistance of auditor.

Lord Rooker: My Lords, the noble Lord has completely ignored my point. We have made it clear that Clause 26 will be applied only to councils that disregard the advice of their chief financial officer. That is what we are talking about here. I repeat: it will be applied only to councils that disregard the advice of their own chief financial officer.

Lord Hanningfield: My Lords, apart from two or three authorities that I know of—and I have been involved in this—none has ever done that. Therefore, why do we need this kind of clause in the Bill? I repeat, it is offensive to local government. It is seen as an extra piece of unnecessary red tape when the Bill is supposed to provide freedoms and flexibilities. It would not have

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received unanimous condemnation from all political parties in the LGA if they believed it was a piece of legislation the Government should put into the Bill. I wish to test the opinion of the House.

5.40 p.m.

On Question, Whether the said amendment (No. 34) shall be agreed to?

Their Lordships divided: Contents, 111; Not-Contents, 117.

Division No. 2

CONTENTS

Addington, L.
Alderdice, L.
Alton of Liverpool, L.
Ampthill, L.
Astor of Hever, L.
Attlee, E.
Barker, B.
Blackwell, L.
Blaker, L.
Blatch, B.
Bowness, L.
Bradshaw, L.
Bridgeman, V.
Brittan of Spennithorne, L.
Brougham and Vaux, L.
Byford, B.
Carnegy of Lour, B.
Chalker of Wallasey, B.
Chan, L.
Chester, Bp.
Clement-Jones, L.
Colwyn, L.
Cope of Berkeley, L. [Teller]
Craigavon, V.
Crathorne, L.
Cumberlege, B.
Dixon-Smith, L.
Eden of Winton, L.
Elliott of Morpeth, L.
Elton, L.
Falkland, V.
Ferrers, E.
Flather, B.
Garel-Jones, L.
Geddes, L.
Gilmour of Craigmillar, L.
Glentoran, L.
Goodhart, L.
Hamwee, B.
Hanham, B.
Hanningfield, L.
Harris of High Cross, L.
Harris of Richmond, B.
Hayhoe, L.
Henley, L.
Hodgson of Astley Abbotts, L.
Hooper, B.
Howe of Aberavon, L.
Howell of Guildford, L.
King of Bridgwater, L.
Knight of Collingtree, B.
Lester of Herne Hill, L.
Lucas, L.
Luke, L.
Lyell, L.
McColl of Dulwich, L.
MacGregor of Pulham Market, L.
Mackie of Benshie, L.
McNally, L.
Maddock, B.
Mar and Kellie, E.
Marlesford, L.
Mayhew of Twysden, L.
Methuen, L.
Miller of Chilthorne Domer, B.
Montagu of Beaulieu, L.
Montrose, D.
Moynihan, L.
Newby, L.
Northbrook, L.
Northesk, E.
Norton of Louth, L.
Oakeshott of Seagrove Bay, L.
O'Cathain, B.
Palmer, L.
Peyton of Yeovil, L.
Redesdale, L.
Rennard, L.
Renton, L.
Roberts of Conwy, L.
Rodgers of Quarry Bank, L.
Roper, L.
Russell, E.
Saltoun of Abernethy, Ly.
Sandberg, L.
Seccombe, B. [Teller]
Selsdon, L.
Sharp of Guildford, B.
Shaw of Northstead, L.
Shrewsbury, E.
Skelmersdale, L.
Smith of Clifton, L.
Soulsby of Swaffham Prior, L.
Stewartby, L.
Strathclyde, L.
Swinfen, L.
Taverne, L.
Thomas of Gwydir, L.
Thomas of Walliswood, B.
Thomson of Monifieth, L.
Tope, L.
Tordoff, L.
Trumpington, B.
Ullswater, V.
Vivian, L.
Waddington, L.
Wakeham, L.
Wallace of Saltaire, L.
Walmsley, B.
Wilcox, B.
Williams of Crosby, B.

NOT-CONTENTS

Acton, L.
Ahmed, L.
Andrews, B.
Archer of Sandwell, L.
Ashton of Upholland, B.
Bach, L.
Barnett, L.
Bassam of Brighton, L.
Berkeley, L.
Bernstein of Craigweil, L.
Blackstone, B.
Borrie, L.
Boston of Faversham, L.
Brennan, L.
Brett, L.
Brooke of Alverthorpe, L.
Brookman, L.
Brooks of Tremorfa, L.
Bruce of Donington, L.
Burlison, L.
Campbell-Savours, L.
Carter, L.
Christopher, L.
Clinton-Davis, L.
Corbett of Castle Vale, L.
Crawley, B.
Darcy de Knayth, B.
Davies of Coity, L.
Davies of Oldham, L. [Teller]
Dean of Thornton-le-Fylde, B.
Desai, L.
Dixon, L.
Donoughue, L.
Dormand of Easington, L.
Dubs, L.
Eatwell, L.
Elder, L.
Evans of Parkside, L.
Evans of Temple Guiting, L.
Falconer of Thoroton, L. (Lord Chancellor)
Farrington of Ribbleton, B.
Faulkner of Worcester, L.
Filkin, L.
Fyfe of Fairfield, L.
Gale, B.
Golding, B.
Goldsmith, L.
Gordon of Strathblane, L.
Goudie, B.
Gould of Potternewton, B.
Graham of Edmonton, L.
Grocott, L. [Teller]
Hardy of Wath, L.
Harrison, L.
Haskel, L.
Hayman, B.
Hollis of Heigham, B.
Hoyle, L.
Hughes of Woodside, L.
Hunt of Chesterton, L.
Hunt of Kings Heath, L.
Irvine of Lairg, L.
Jay of Paddington, B.
Jones, L.
King of West Bromwich, L.
Kirkhill, L.
Layard, L.
Lea of Crondall, L.
Lipsey, L.
Lofthouse of Pontefract, L.
Macdonald of Tradeston, L.
McIntosh of Haringey, L.
McIntosh of Hudnall, B.
MacKenzie of Culkein, L.
Mackenzie of Framwellgate, L.
Massey of Darwen, B.
Merlyn-Rees, L.
Mishcon, L.
Mitchell, L.
Morgan, L.
Nicol, B.
Orme, L.
Parekh, L.
Paul, L.
Pendry, L.
Peston, L.
Plant of Highfield, L.
Prys-Davies, L.
Radice, L.
Ramsay of Cartvale, B.
Rea, L.
Rendell of Babergh, B.
Richard, L.
Rooker, L.
Scotland of Asthal, B.
Sewel, L.
Sheldon, L.
Simon, V.
Slim, V.
Smith of Leigh, L.
Stone of Blackheath, L.
Symons of Vernham Dean, B.
Temple-Morris, L.
Thornton, B.
Turnberg, L.
Turner of Camden, B.
Warner, L.
Warwick of Undercliffe, B.
Watson of Invergowrie, L.
Weatherill, L.
Wedderburn of Charlton, L.
Whitaker, B.
Whitty, L.
Williams of Elvel, L.
Williams of Mostyn, L. (Lord President of the Council)
Williamson of Horton, L.
Woolmer of Leeds, L.

Resolved in the negative, and amendment disagreed to accordingly.

16 Jul 2003 : Column 905

5.50 p.m.

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


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