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6ABecause it would affect the levy of local revenues, and the Commons do not offer any further reason, trusting that this reason may be deemed sufficient.

Lord Rooker: My Lords, I beg to move that the House do not insist on their Amendment No. 6 to which the Commons have disagreed for their reason numbered 6A.

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As it is self-evident, I do not need to remind noble Lords that the Commons reason relies on the privilege of that House to determine matters relating to the financial arrangements of the country. That is the principle on which our relations exist. I have a massively long note to put to the House on why we are inviting noble Lords not to insist on their amendment. As the amendment was passed with seriousness, I shall take it seriously and use the note to put on the record again why we do not want to accept the amendment and think that the House should agree with the view of the Commons.

The amendment agreed by this House at Third Reading inserted a new clause, Amendment No. 6, at the beginning of Part 2 of the Bill. The clause said that Part 2 could be applied only to an authority that has been identified by the Audit Commission as at risk of overspending its total budget by more than 10 per cent. We explained at Third Reading the perverse and highly undesirable effects of this overspending test.

To summarise, the amendment requires the Audit Commission to undertake an entirely new task that will be costly and potentially very contentious. Every local authority budget will have to be scrutinised and assessed to prepare a blacklist of potential overspenders. Inclusion on the list might amount to a statement that an authority had set an illegal budget. In other circumstances, inclusion would tarnish the reputation of an authority that had perfectly adequate reserves to cover the overspend. Authorities at financial risk would not be reliably identified, and it would deny most authorities the use of Clause 30 to deal with a financial crisis, a provision universally welcomed in local government.

We cannot see how any responsible person could support the inclusion of this clause in the Bill. On the other hand, I could have said that about the previous amendment. We are told that its supporters' interest is not in the precise form of the clause, but in the fact that it will restrict the impact of Part 2. So I should turn to Part 2, and why it was included in the first place.

The Government's intention to introduce legislation on reserves was signalled in the December 2001 White Paper. It was announced there as part of a package that included the new freedoms and flexibilities—the "bonfire of controls" to which I have already referred which affect local authorities—which we are also implementing in this Bill, if it ever reaches the statute book. If the Bill does not receive Royal Assent tomorrow, then everyone's aspirations for a new local government finance system starting in the next financial year will be down the plughole. That is not a threat; it is, as we have said all along, simply the position that we are in. Local government understands that as well. Unless that happens, the new system of freedoms and flexibilities cannot start in the next financial year. But I digress.

We regard the financial management provisions as an essential complement to the new freedoms. On the one hand, there is a whole host of freedoms; on the other, Part 2 is available for reasons which I shall explain.

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The prudential system will allow local authorities to borrow up to the amount that they assess they can afford. That is an immense new freedom for authorities and places great trust in their financial competence. Of course safeguards have been built in, largely in the form of requiring authorities to comply with professional good practice. Some authorities have no problem with this approach in Part 1, but see it as an affront to their competence in Part 2. I invite the House to look at the Bill and these changes as an overall package. In that respect, without Part 2, there could have been no Part 1.

The prudential system will allow authorities to make full use of their borrowing capacity, in a way that the present system does not. Authorities will need to ensure they are adequately resourced to meet the revenue consequences of this borrowing and cope with the uncertainties involved. It is therefore equally important that there are safeguards against risks affecting the revenue account, and the principal ways to do that are to ensure that there are adequate reserves and a rigorous system for monitoring the budget during the year. That is what Part 2 is all about and what it does.

There are also more subtle links between borrowing and revenue account. Under the former rigid system, there was a ceiling on borrowing set by government for each authority. If an authority was in financial difficulties on revenue account, central government have, in the most difficult cases, allowed revenue expenditure to be capitalised and financed by borrowing. However, under the prudential system, every authority will fix its own prudential limit based on what it assesses it can afford to borrow. An authority would be entitled to borrow up to that limit. If a crisis on revenue account were then to hit them which could not be covered by reserves, there would not be room to accommodate additional borrowing. Borrowing and revenue spending are therefore intimately linked, and it is irresponsible to place safeguards on one and completely ignore the other.

We will also be giving authorities new powers to trade, a freedom that has met with a general welcome. Trading will of course be carried out with the objective of making a profit, but all trading operations are inherently risky, and an authority can make losses as well as profits. They will need to ensure that reserves are adequate to cover that happening if they are to avoid the risk of their mainstream services being damaged.

The point we are making is that greater financial freedoms for councils inevitably carry with them greater financial risk. Part 2 is there to reinforce the processes that any well-managed council would follow anyway to safeguard against those risks. However, for the Government not to have taken measures to strengthen those safeguards would, we think, have been irresponsible.

Much has been made in our debates of the opposition to these clauses from local government. I should like to provide some balance to what was said in earlier debates, which often relied on selective

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quotation. Clause 30, which I have mentioned, has been universally welcomed. That has not been acknowledged. The Audit Commission, it is said, is opposed to Clause 26. In fact, in evidence to the Select Committee, the Audit Commission said:

    "We can see the desirability for the government to have the flexibility to be able, in exceptional cases, to set a maximum level of reserves in support of intervention".

That is how Clause 26 would be used—in exceptional cases—a point which we have made repeatedly.

CIPFA's opposition has been quoted, and it is true that CIPFA opposed Part 2 in its evidence to the Select Committee. However, I ask the House to look at what it said. Referring to the setting of reserves, CIPFA said:

    "it is a very local decision and judgement as to what that level of balances should be".

We agree. We introduced Clause 25 to help ensure that a very carefully considered judgment is made in the light of local circumstances. We have also made it clear that we will not use Clause 26 to impose blanket minima.

I repeat what we said about the use of Clause 26. We will make regulations under it only if an authority is disregarding the advice of its chief financial officer and heading for severe financial difficulties. In deciding the level to set, we would have regard to the chief financial officer's advice and any observations of the auditor. I cannot see how we could go further in ensuring that the minimum would be appropriate to the specific circumstances of that particular authority. We have listened to what CIPFA said, and we have acted on its views.

Part 2 has been thoroughly debated in both Houses and at all stages of the Bill in this House. In another place no Division was moved against it on its initial consideration. The Conservative spokesman, Mr Geoffrey Clifton-Brown, referring to decisions on reserves said:

    "We must all accept that there will be occasions when elected representatives will get it wrong. The problem arises when they get it so badly wrong that the authority cannot deliver its statutory level of services. The higher authority, the Secretary of State and the district auditor have a role to ensure the continuance of services".

That is an absolutely first-class summary of the role of Clause 26. The removal of Clause 26 was specifically considered by your Lordships at Report stage and was voted down on a Division.

Another place has disagreed with this House's amendment on grounds that turn on the privileges of the Commons. It is for each House to decide its own privilege but I move that this House do not insist on the amendment not just on grounds of privilege and not just on the grounds of the added burdens and undesirable effects that will flow from the new clause, but principally to ensure that new freedoms in this Bill, which are welcomed on all sides, can be implemented safely and responsibly by all authorities.

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Moved, That this House do not insist on their Amendment No. 6 to which the Commons have disagreed for the reason numbered 6A.—(Lord Rooker.)

Baroness Hanham: My Lords, I have received advice that this is a privilege matter and therefore I cannot divide the House on it. All I can do is to complain again—if complaint is what it is—about the measure in Part 2 that we are discussing.

We have debated at great length the reasons behind the disagreement between us on whether the Government should be able to set minimum reserves or whether that is a step too far. The Minister went into some detail again today about local authorities which might have borrowed badly or indiscreetly or should not have borrowed as much as they had or which are running their revenue accounts into difficulties. However, our argument has always been that by the time you get round to setting a minimum reserve, it is too late. The damage is done. The relevant local authorities have got into difficulty. That is not the moment to try to bail them out with a minimum reserve.

The Minister heard me say on a previous occasion that the director of finance of the authority which I led always insisted that there should be at least two months' worth of salaries and wages in the reserve. He considered that that was the lowest limit. Most finance officers would agree with that and would give the same advice. If we say that the Bill confers freedoms and flexibility, the Government must let go. They must understand that where one confers freedom, one takes to some extent a marginal risk. The marginal risk which we have foreseen during discussion on the Bill is that some authority, somewhere will go horribly wrong. We mentioned the odd local authority that has gone horribly wrong. In those cases it would have been completely irrelevant whether one had said that they ought to have a minimum reserve as they probably would not have had one and, if they had, they would have spent it. The purpose of the measure we are discussing seems to me to be completely arcane in the light of what the Bill is intended to do.

The amendment that we put forward recognises what the Minister said today; namely, that on a very limited number of occasions it might be necessary for the Audit Commission to recommend a minimum reserve. The amendment was a bit of a compromise as regards the others that we put forward. I believe that it was debated with some vigour in the other place last night.

We could all quote selectively from CIPFA and from the Audit Commission. My quotes would back up what I wanted to say and the Minister's would back up what he wanted to say. However, that is not relevant. What is relevant is that local government thinks that the measure we are discussing is wrong and unnecessary. The Local Government Association was against the measure from the outset. We have supported local government in that and we believe that that was the proper thing for us to do.

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It has been said that this measure can be decided only by the Commons. I do not wish to disagree with that but I cannot quite understand the decision that was arrived at. However, I shall not cause even more trouble by querying it. I simply say that when the moment comes I shall not move the relevant amendment.

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