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Lord Bassam of Brighton: My Lords, I appreciate why noble Lords have tabled this amendment. The noble Lord, Lord Hanningfield, has made the point that it is perceived as an unnecessary burden on well managed authorities. I shall explain very carefully why we are continuing to resist this amendment to the new clause. I must set out why Part 2 needs to remain of general application andthis is importantwhy the particular form of the new clause makes it an undesirable addition to the Bill.
We have argued throughout that the powers and duties in Clauses 25 to 29 should apply to all authorities. I will come to Clause 30 later. We are not doing this because we wish to impose additional duties on authorities. These duties need to apply to all authorities because no criteria for selection will reliably identify the authorities that are in danger. The well run authorities with sound finances and sound procedures will automatically be complying with these duties and will feel no extra burden. The authorities that the noble Lord leads and the noble Baroness, Lady Hanham, has worked so tirelessly for, like the noble Baroness, Lady Hamwee, and many others, will experience no additional burden. But authorities change, and we regard these requirements as too important for their application to depend on anyone's assessment of the past performance of the authority or forecasts of its future.
All these clauses do is require authorities to comply with good practice. Most authorities already do so, but we have set out on a number of occasions during these debates the evidence that has led us to conclude that this good practice must be backed by statute. The need for sound finances is all the greater when major new financial freedoms are being given. Let me say again that the Government regard the provisions of Part 2 as an essential complement to the freedoms given elsewhere in the Bill and in particular to the prudential system.
Turning now to the specific requirements of the new clause, the trigger for the application of Part 2 will be identification by the Audit Commission that the authority is at risk of overspending by more than 10 per cent. Assuming that was a practical proposition for the Audit Commissionand that is a very big assumptionwhat would be the implications of this risk for the finances of the authority? Say there was a risk of overspending by less than 10 per centsay 8 per centbut the authority only held reserves of two per cent of its budget. The authority would be at serious financial risk, but the new duties and powers of Part 2 would not be available.
Perhaps a real life example would help noble Lords to focus on this issue. When the chief finance officer of Hackney issued his Section 114 report in October 2000 he estimated an overspend of between £14.5 million and £22 million. The reserves were £6.5 million. The general fund budget for the year was £264 million. The reserves were therefore insufficient, but the projected overspend was less than 10 per cent of the budget. The Audit Commission, even if it could have foreseen that development, would not have identified Hackney under the new clause. So the Part 2 provisions would not have applied in one of the most serious financial crises to have hit a local authority in recent years. On the other hand, authorities at risk of overspending by more than 10 per cent might hold reserves adequate to cover this risk. There would be no reason to put them on what would certainly be seen as an Audit Commission blacklist.
The amendment runs into precisely the objection to crude rules of thumb that we have been accused of in Government. The advice on reserves that a chief finance officer will give under Clause 25 will be tailored to the circumstances of the authority. As the noble Baroness said, these chief finance officers are very wise people. And we have made clear that Clause 26 will not be used to impose blanket minima, but will be applied only to specific authorities. If a minimum was set under Clause 26, we would only do that after considering the advice of the chief finance officer and any observations of the auditor.
I would now like to turn to Clause 30. Clause 30 is a facility that helps authorities in serious financial difficulty deal with their problems. It has received a warm welcome in local government and from the LGA in particular. But the new clause says that it would only be available to authorities on the Audit Commission blacklist. Yet unforeseen financial crises can hit any authority. A major legal case, for example, might be lost unexpectedly and the authority be unable to cope with the damages awarded. It would be absurd to deny an authority the benefits of Clause 30 because it had not been put on the blacklist. This is another example of the perverse effects of this amendment. I seriously caution the noble Lord to think long and hard about those perverse effects.
To sum up, this amendment does not achieve its aims. It does not accurately identify the authorities in financial danger. It risks prejudicing the financial reputation of authorities with sound finances, and it denies most authorities the benefit of Clause 30. It would be a highly undesirable change to introduce into the Bill, and I hope the noble Baroness and the noble Lord will rethink this carefully and agree to withdraw their amendment. I fear its consequences.
Lord Hanningfield: My Lords, I am very disappointed in the Minister's reply. It shows how out of touch he is with local government since he came to the Government Front Bench. Local government has changed a lot in the last two or three years, due to the policies of this Government. We have comprehensive performance assessment. I am a leader of a local authority as well as a Member of your Lordships' House. I see an auditor who looks after Essex County Council and all the district authorities in the county and meets with them about once a month. This is something new. We discuss the finances and the problems of that authority with the Audit Commission, so a report goes straight back all the time. Therefore, all the authorities in the land have a regular assessment of what they are doing, almost monthly. That is very new and operates in such a way as to make one feel that one is having an exam every month by the Audit Commission, which I do not feel is necessarily the right way to run local government.
This is the part of the Bill that local authorities dislike the most. Local authorities are increasingly being told by the national government how they should spend their money and what they should do. That has inevitable consequences for council tax. The noble Lord, Lord Rooker, argued in his first response about higher taxes, but this clause means higher taxes. Once we start off with one or two authorities, all authorities will be affected. Authorities are told how much they have to give schools and how much they have to have in their reserves, and the consequences are higher council taxes. Judgments about council taxes are much better left to the local authority. Decisions on levels of reserves are better left to the local authorities and their professional advisers, as the noble Baroness, Lady Hamwee, said.
The Minister's reply was disappointing. It shows that he does not really understand the unhappiness that local government feels about this part of the Billwhich is supposedly about freedoms and flexibilitiesor the effect that CPA has had on the monitoring of local authorities, or how different the situation is now.
The amendment that we have tabled would at least limit the scope, and one hopes that it would be less than 6 per cent. The scope that the Government wish to take in the Bill is very dangerous. The amendment would limit the possibility of damage. I wish to test the opinion of the House on the amendment.
Resolved in the affirmative, and amendment agreed to accordingly.
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