Select Committee on Delegated Powers and Regulatory Reform Sixteenth Report


Annex 1

LOCAL GOVERNMENT BILL

Memorandum by the Office of the Deputy Prime Minister

INTRODUCTION

1.  The Local Government Bill was brought from the House of Commons on 11th March 2003. This Memorandum identifies the delegated powers in the Bill, describes the purpose and proposed use of those powers and explains the choice for the particular form of Parliamentary control over them.

SUMMARY AND BACKGROUND

2.  The Local Government Bill contains 128 clauses and 7 Schedules and is divided into 8 Parts:

  • Part 1 (clauses 1 to 24 and Schedule 1) deals with capital finances and related matters of local authorities. It makes provision for borrowing, credit arrangements, the use of capital receipts, investments and accounting practices to be followed by local authorities. It replaces Part 4 of the Local Government and Housing Act 1989.
  • Part 2 (clauses 25 to 30) imposes various financial duties on local authorities. It makes provision for ensuring minimum reserves in the calculation of an authority's budget requirement, budget monitoring and reporting on the robustness of estimates by chief finance officers. It also provides for the authorisation of agreements in certain circumstances by the chief finance officer.
  • Part 3 (clauses 31 to 42 and Schedule 2) provides for a number of grant-making powers and provision for the National Assembly of Wales to make two local government finance reports for a year.
  • Part 4 (clauses 43 to 61) deals with business improvement districts (BIDS). It makes provision for a new local levy in respect of BIDS.
  • Part 5 (clauses 62 to 74) also deals with business rates. It makes provision for the adjustment to revaluation timetable; the introduction of a new rate relief for smaller businesses; the introduction of a new power to adjust the non-domestic multiplier; amendments to transitional relief powers; changes the rating of certain types of meters; amends the exemption in respect of agricultural land and buildings and places of religious worship; removes the power to prescribe rateable values; adjusts the hardship relief regime; provides for the local retention of rates and provides for the introduction of a civil penalty regime instead of the current criminal regime in relation to the provision of rating information to valuation officers.
  • Part 6 (clauses 75 to 87) deals with the council tax. It provides for a statutory council tax revaluation cycle, power to change the number of council tax bands and make transitional arrangements to smooth the effects of revaluation and changes to bands on council tax bills. It gives local authorities discretion to reduce the amounts of council tax payable in individual cases, or classes of case, and to reduce or remove council tax discounts for classes of dwellings prescribed in regulations. It allows local authorities to use information collected under council tax powers to identify, and take steps to reduce the number of, empty homes. It extends existing powers to make regulations to enforce council tax payment, by allowing such regulations to require information to be supplied to the debtor when distress is levied, or an attempt to levy distress is made, and to allow an attachment of earnings order to be made for a sum including the costs of any application made for commitment to prison. It allows regulations to provide for the quashing of liability orders which should not have been made (and substitution of liability orders for the correct amount) and for liability orders to be aggregated for the purposes of applying for a charging order over a dwelling. It makes combined fire authorities in England major precepting authorities and gives the National Assembly for Wales power to make an order to make combined fire authorities in Wales major precepting authorities. It ends joint and several liability of students for council tax and repeals section 31 of the Local Government Act 1999 which section allows regulations to be made providing for payments between different tiers of authority for the purposes of the now abolished council tax benefit limitation scheme. It removes the requirement for a full council meeting to be held to set the tax base for council tax calculations.
  • Part 7 (clauses 88 to 93) deals with local authority housing matters. It provides for statutory housing strategies and housing revenue account business plans; Housing Revenue Account subsidy (taking account of business plans in its calculation, payments by authorities to the Secretary of State/National Assembly for Wales, repeal of Treasury consent requirement); and local authority rent setting. It also allows orders to be made to modify provisions in Part 6 of and Schedule 4 to the Local Government and Housing Act 1989
  • Part 8 (clauses 94 to 128 and Schedules 3 to 7) deals with miscellaneous matters including a general charging power in respect of discretionary services for best value authorities, including local, police and fire authorities, national parks and certain town and parish councils; for the Secretary of State to grant a trading power to these authorities (but not police authorities or the London Development Agency); the establishment of the Valuation Tribunal Service, a body to provide administrative services to the 56 Valuation Tribunals in England; provision for different powers to be given to authorities relating to their performance; power for the Secretary of State to move the date of local elections in 2004; changes in the financial year of the Audit Commission; a general power for the Audit Commission to delegate its functions; a duty for Auditors to disclose their reports and a shortening of the time period for the authority to consider such an auditors report; a power confirming the ability of authorities to hold advisory local polls on matters connected with service delivery and budgets; provision for voting rights of co-opted members on overview and scrutiny committees; power for local authorities to retain any sums which they receive from fixed penalties for leaving litter and dog faeces. It provides for partial repeal of section 19 of the Fire Services Act 1947 (Secretary of State's functions in respect of fire brigade establishment schemes) and for the repeal of section 2A of the Local Government Act 1986 (prohibition on promotion of homosexuality). It introduces Schedule 6 which makes minor and consequential amendments to a number of enactments, including some which amend powers to make secondary legislation.

3.  The Bill extends mainly to England and Wales. There is limited application to Scotland, Northern Ireland and Gibraltar (see clause 128).

4.  The commentary on the powers is set out by Part, with the commentary on the various Schedules included in that for the Part to which they relate. In addition to powers to make secondary legislation, we have also included details of those powers of direction which might be said to have legislative effect.

5.  Copies of draft regulations on the most important issues in the Bill and notes of policy intent on other issues have been placed in the House of Lords library and copies are enclosed with this Memorandum. It should be emphasised that the regulations are first drafts and in many cases are incomplete since many of the technical issues remain to be resolved and will need to be developed further as details of implementation are finalised. They are provided to assist in understanding the purpose of some of the delegated powers in the Bill.

PART 1: CAPITAL FINANCE ETC. AND ACCOUNTS

6.  In considering whether provisions should be specified on the face of the Bill or dealt with by delegated legislation, the ODPM has balanced the importance of the matter against the need to avoid too much technical and administrative detail in the Bill and the need to ensure sufficient flexibility to respond quickly to changes. The existing capital finance system contained in Part 4 of the Local Government and Housing Act 1989 ("the 1989 Act") is highly prescriptive and prevents local authorities from raising finance for capital expenditure without Government consent. The new system will allow authorities to borrow any amount - without Government consent - which they determine is affordable (subject to any national borrowing limit). The new system relies heavily on professional regulation, accounting practice and codes of practice rather than legislative rules. But it is supported where necessary by secondary legislation. This is a new legislative approach to local government capital finance and it is important to retain flexibility to deal with matters that may not be dealt with where it is necessary for wider public expenditure control purposes to depart from or modify such practice.

7.  Apart from the powers of direction, all of the delegated powers contained in Part 1 are subject to the negative resolution procedure. We consider that this is an appropriate level of Parliamentary scrutiny given the nature of those powers, none of which amend primary legislation, are powers to increase or raise taxation or are other powers of special importance. In general, the delegated powers deal with the technical details of the capital finance system - the broad principles being established on the face of the Bill. In relation to some clauses we have given additional reasons why the negative resolution procedure is appropriate.

8.  Any reference to the Secretary of State is, in relation to Wales, to be treated as a reference to the National Assembly (see clause 24).

Clause 2: Control of borrowing

9.  Clause 1 restates the existing power of local authorities to borrow money. Clause 2 provides that a local authority may not borrow if this would result in breach of its affordable borrowing limit (set under clause 3) or breach of a national borrowing limit imposed by the Secretary of State under clause 4. Clause 2(2) enables the Secretary of State to disapply by direction a national borrowing limit in relation to specific borrowing by a particular local authority.

10.  The power in clause 2(2) would be used in exceptional circumstances if an authority urgently needed to borrow an amount which was affordable but which would breach the national limit. For example, an authority might be under a contractual obligation to purchase something which could only be funded by borrowing. The power allows the Secretary of State to deal with such problems quickly and effectively. The power of direction is not subject to Parliamentary scrutiny - given the limited nature of the power to disapply the national limit and the need to act quickly, we think that this is appropriate. Its effect is similar to the existing power of any Minister of the Crown to issue supplementary credit approvals under section 54 of the 1989 Act - the practical effect of which is to increase the amount which an authority can borrow. Directions under Chapter 1 must be in writing (clause 20).

Clause 3: Duty to determine affordable borrowing limit

11.  Clause 3(1) imposes a duty on a local authority to determine and keep under review how much money it can afford to borrow. Clause 3(2) to (4) empowers the Secretary of State, by regulations, to make provision about the performance of this duty by, in particular, making provision about the timing of any determination, factors to which the local authority must have regard in making the determination and monitoring. It allows the Secretary of State to specify codes of practice which the authority must have regard to. The powers of the Secretary of State do not affect the basic duty in clause 3(1).

12.  It is the Government's intention that this power will be used primarily to specify the prudential code for capital finance in local authorities issued by the Chartered Institute of Public Finance and Accountancy ("CIPFA"). Provisions on the factors to have regard to, the procedure to follow, monitoring and the timing of determinations are dealt with either expressly or by implication in that code. However, the Secretary of State needs the wider powers to make regulations for the following reasons -

(a)  there is no guarantee that CIPFA will continue to issue its code (and it would be inappropriate to require it to do so, since it is an independent body). The provision needs to be flexible so that different codes can be specified as necessary;

(b)  in the absence of an appropriate code, the Secretary of State

(c)  would need to be able to specify the factors to have regard to, through regulations;

(d)  while it is hoped that reliance on an accounting code will be

(e)  sufficient in practice, it might prove necessary to regulate particular aspects of the duty (such as monitoring) by regulation; the proposed powers would give the Secretary of State flexibility to respond to any change in circumstances.

13.  The power to make these regulations will be subject to the negative resolution procedure which we believe is appropriate given the overriding duty in clause 3(1) and the subject-matter of the regulations.

Clause 4: Imposition of borrowing limits

14.  Clause 4(1) empowers the Secretary of State, by regulations, to set borrowing limits for local authorities. This would override any limit determined by an authority under clause 3 but could only be imposed for national economic reasons. Where an authority does not wish to undertake the full amount of borrowing permitted to it under a national limit, it would have power to transfer the spare 'headroom' to another authority, which would thereby have its borrowing capacity increased (subject to still complying with its own prudential limit). This would ensure that borrowing capacity is distributed efficiently and not wasted. Clause 4(5) gives the Secretary of State power to make provision about the exercise of this right, and in particular the circumstances in which an authority is to be regarded as having headroom and the amount of headroom it has. Clause 4(2) empowers the Secretary of State to set the affordable borrowing limit of a local authority by direction.

15.  Clause 4(1) is a reserve power. It can only be exercised for national economic reasons and would only be used if it ever appeared that local government borrowing, albeit prudent at the local level, might increase public expenditure to a level which was unaffordable at the national level. We consider that it is appropriate that the Secretary of State has this reserve power to deal with particular economic circumstances which cannot be foreseen at present. We also consider that the negative resolution procedure is appropriate given that the power might have to be exercised rapidly.

16.  Clause 4(5) is also a reserve power and could not be exercised unless regulations under 4(1) were made. The power to make regulations is necessary to deal with any anomalies or difficulties that may arise.

17.  The purpose of clause 4(2) is to allow the Secretary of State to intervene in cases where an authority has either failed to set an affordable borrowing limit or has set a limit which is clearly unaffordable. This is an important reserve power which will enable the Secretary of State to act quickly in such cases. The power is not subject to Parliamentary scrutiny but its limited nature and effect makes this, in our view, appropriate.

Clauses 7 and 8: Credit arrangements

18.  The Bill seeks to control certain transactions (such as leases) in the same way as borrowing. The affordability assessment under clause 3 must take account of the cost of such "credit arrangements". The definition of credit arrangements is less prescriptive than under the present system, relying on the accounting concept of "long-term liabilities". Clause 7(2)(b) and (3)(c) gives the Secretary of State power to amend that definition to include or exclude specified transactions. Clause 8(3) empowers the Secretary of State to make provision by regulations about the cost of credit arrangements and clause 8(4) empowers him to impose additional restrictions on the power of a local authority to enter into or vary such arrangements.

19.  The power in clause 7(2)(b) is necessary so that other transactions which are akin to borrowing but which may not be automatically caught by the accounting practice tests can be treated as credit arrangements for the purpose of the controls. Although it is possible to identify at present some transactions which would need to be included, such as certain long-term leases, it is not possible to identify all as circumstances will change over time and it is important that the Secretary of State retains flexibility to supplement the basic definition of credit arrangement as the circumstances dictate. Even those which can be identified at present may change over time, and it is important to retain flexibility as to how precisely the liabilities are defined or whether it is still necessary to control them. For example, it is likely that, as is presently the case, "private finance transactions" would be included in the regulations under clause 7(2)(b). But the definition of such transactions has evolved over time as the nature of the contracts have changed. It is important that there is a mechanism for ensuring that such contracts continue to be treated as credit arrangements and so subject to the controls in Part 1 - which might not be possible if such transactions were defined in the Bill. The power in clause 7(3)(c) to exclude certain transactions is similarly necessary to deal with changing circumstances.

20.  Clause 8(2) provides that the entry into or variation of a credit arrangement is to be treated as the borrowing of an amount of money equal to the cost of the arrangement or variation. Clause 8(3) gives the Secretary of State power to make regulations as to how the costs are to be calculated and to make provisions for options. It is considered appropriate for the technical detail of how the cost is to be calculated to appear in regulations as this does not affect the basic principle set out in clause 8(2). In practice, the starting point will be the amount of the liability shown in the authority's accounts, but there may well need to be modified to take account of the many different factual possibilities - dealing with cases where the accounting treatment of the liability is not clear cut or where, for whatever reason, the full amount of the liability does not appear in the authority's accounts. It is also important to retain flexibility to respond quickly to changing circumstances which cannot be foreseen at present.

21.  The power in clause 8(4) might be used to limit the purposes for which credit arrangements were entered into (for example limiting it as now to purposes which, if the authority incurred expenditure for that purpose, would be capital expenditure). But there needs to be flexibility to respond quickly to changing circumstances or to make provision for certain cases. For example, the current restriction to capital expenditure might need to be relaxed for private finance transactions. Alternatively we might need to prohibit transactions which were being used as a device for avoiding the controls under Part 1. We consider that the negative resolution procedure is an appropriate level of Parliamentary scrutiny for these detailed technical provisions.

Clause 9: "Capital receipts"

22.  Clause 9(1) defines "capital receipts" as sums received by an authority in respect of the disposal of an interest in an asset. This is subject to the power of the Secretary of State in clause 9(3) to make regulations to determine that certain sums received should, or should not, be treated as capital receipts. The power is analogous to the existing power of the Secretary of State in section 58(9) of the 1989 Act.

23.  The basic rule is set out in clause 9(1). As with clause 7, it is necessary to retain flexibility to amend the basic rule to deal with particular situations. For example, the power might be used as now to exempt certain small transactions. Or it might be used to ensure that certain transactions which might not be caught by the basic rule but where the financial effect on the authority is the same, are included in the definition. An example of this would be the disposal by an authority of its mortgage portfolio which might not otherwise fall within clause 9(1). Without the power to make regulations, it would be difficult to deal with such potential loopholes which cannot be foreseen at present.

Clause 10: Non-money receipts

24.  Clause 10 is a necessary anti-avoidance measure to ensure that the controls on capital receipts in clause 11 cannot be evaded by an authority agreeing to receive consideration otherwise that in the form of money. There are numerous ways in which this might be done - clause 10(1) therefore addresses the problem by giving the Secretary of State power to apply section 9 to non-money receipts i.e. to treat the receipts as if they were money. The principle that non-money receipts can be controlled in the same way as capital receipts is established in clause 10(1). The precise technical details of the amount which the authority is to be treated as having received and the time when received, is left to the regulations under clause 10(2).

Clause 11: Use of capital receipts

25.  This clause gives the Secretary of State power to make regulations to control how capital receipts can be used (clause 11(2)(a)) and for pooling of housing receipts (clause 11(2)(b)). We consider that it is appropriate to make provision for the use of receipts through delegated legislation as this allows controls to be applied flexibly as circumstances require. In general we would want to limit the use of capital receipts to meeting capital expenditure or repaying debt, but there may well be situations in future where we need to relax those controls for particular transactions. The power to make regulations allows us to do that. In relation to pooling, the principle is established in clause 11(2)(b) (as limited by clause 11(3)) while the amount which is to be pooled is left to regulations. This is appropriate as over time, the amount may well need to be changed to deal with changes in circumstances. It is also important to retain flexibility to exempt certain classes of receipts and to provide for administrative measures in relation to pooling. For example, we intend to exempt receipts, where the money is to be spent on certain projects (for regeneration of land etc,). We need to have flexibility to extend the range of projects to meet needs which will change over time.

Clause 13: Security for money borrowed etc.

26.  Clause 13 contains provisions on security for money borrowed. Clause 13(5) empowers the High Court to appoint a receiver in relation to the local authority on application by a person who is owed £10,000 or more. Clause 13(9) gives the Secretary of State power to change the threshold of £10,000. Although it is unlikely that this amount would need to be raised in the foreseeable future, such a power is desirable to allow the amount to be changed without need for further primary legislation. The equivalent provision in the 1989 Act is section 47(5) which sets a threshold of £5000. There is a similar power to alter the amount, although that has never been done. The application of the negative resolution procedure follows the precedent set by the 1989 Act.

Clause 15: Guidance

27.  Clause 15 imposes a duty on a local authority, in carrying out its functions under Chapter 1 of Part 1, to have regard to any guidance issued by the Secretary of State or issued by another person (and specified by the Secretary of State in regulations). The power in clause 15(b) will be used initially to specify the code on treasury management issued by the Chartered Institute of Public Finance and Accountancy. This code covers, in particular, the management of investments, an area where we consider prudent practice can more effectively be promulgated by professional guidance than by detailed legislation. It may be used to specify other guidance in the future as it becomes available.

Clause 16: "Capital expenditure"

28.  This clause defines "capital expenditure" for the purposes of Chapter 1. The starting point is clause 16(1) and accounting practice. As with clause 7, the Secretary of State has power to make regulations to amend the normal accounting definition to deal with anomalies and grey areas. It also allows him to provide for the capitalisation of certain items of expenditure. For example, it would allow him to capitalise expenditure on computer programs.

29.  Clause 16(2)(b) also gives the Secretary of State the same power in relation to particular expenditure of a local authority, exercisable by direction. The delegated powers in clause 16 match the existing powers of the Secretary of State under section 40(5) and (6) of the 1989 Act. Use of the negative resolution procedure follows the precedent of the 1989 Act.

Clause 18: Local authority companies etc.

30.  The purpose of this clause is to enable the activities of local authority companies to be treated as the activities of the relevant local authority for the purposes of Chapter 1. It is an anti-avoidance measure and is similar in effect to section 39(5) to (7) of the 1989 Act which also uses the negative resolution procedure.

31.  In determining its own affordable borrowing limit, a local authority will normally be required to take account of the activities of any companies which it controls or has influence over. However, regulations under clause 18 would be required if a national borrowing limit were imposed under clause 4 since borrowing by local authority companies would have an effect on public expenditure, which the national limit would be aimed at controlling.

32.  Clause 18(1) establishes the principle that the activities of local authority companies (as defined in Part 5 of the 1989 Act) might be treated as the activities of the relevant authority. The details of how this applies is left to regulations as it is difficult to foresee exactly what controls would need to be imposed - given that clause 18 is only relevant to the reserve power in clause 4(1).

Clause 19 and Schedule 1: Application to parish and community councils

33.  Schedule 1 makes provision about capital finance in relation to parish and community councils and charter trustees. It re-enacts, with certain modifications, Schedule 13 to the Local Government Act 1972. Paragraph 4 empowers authorities to lend money to qualifying local government bodies - being such bodies with local government functions as are specified in regulations by the Secretary of State (and for Wales, the National Assembly for Wales).

34.  Clause 19(3) allows the Secretary of State (for Wales, the National Assembly for Wales) to apply some or all of the provisions of Chapter 1 to these authorities (with or without modifications) and to make a corresponding disapplication of the provisions of Schedule 1. This would allow for application of the capital finance system to parish etc councils but it recognises that modifications might need to be made to take account of the particular characteristics of these authorities. The power would also enable the controls to be applied to sub-groups of parish councils (for example, the largest ones). Clause 19(3) is similar in effect to section 39(3)(d) of the 1989 Act (and clause 23(2)(d)) to which the negative resolution procedure applies. At present, we do not want to apply Chapter 1 to parish and community councils. However we want to leave the option open and the delegated powers in clause 19(3) are necessary to achieve that.

Clause 21: Accounting practices

35.  Clause 21(1) allows the Secretary of State to make regulations about the accounting practices to be followed by a local authority, in particular as to the charging of expenditure to a revenue account. The latter re-enacts the effect of sections 41 and 42 of the 1989 Act (and in particular, section 42(4)) in a greatly simplified fashion. The power is not limited to the purposes of Part 1 but applies widely for the purposes of local authority accounting generally. It is necessary to regularise local authority accounting practice and its divergence from Generally Accepted Accounting Practice ("GAAP"). The body which oversees GAAP, the Accounting Standards Board, is prepared to accept a divergence from GAAP where a body, such as a local authority, is compelled to follow a different practice by legislation. Since accounting practice will change over time, the delegated power is necessary to achieve flexibility.

36.  Clause 21(2) re-enacts section 66(4) of the 1989 Act with certain modifications. In particular, a code of practice must now be identified in regulations by the Secretary of State. This introduces a degree of certainty as to which codes constitute proper practices. Again, it is necessary to make provision for this through delegated legislation as accounting practice will change over time and different codes of practice will become available.

Clause 23: "Local authorities"

37.  Clause 23 defines "local authority" for the purpose of Part 1. Clause 23(2) gives the Secretary of State power by regulations to specify certain other authorities, such as levying bodies and local precepting authorities. Clause 23(3) provides that the controls in Part 1 may be applied to these bodies subject to exceptions or modifications. This is similar to the existing power in section 39(3) and (4) of the 1989 Act. The principle that certain prescribed authorities may be subject to Part 1 is established by clause 23(2). The decision whether to apply it in the future is left to the Secretary of State who can apply it in a modified form. There are 3 authorities which will need to be brought within Part 1 controls from the outset - the Broads Authority, National Parks and the Lee Valley Regional Park Authority. But it is likely that certain modifications will need to be made in applying Part 1 to take account of the particular characteristics of these authorities and it is not possible to determine at this stage exactly how Part 1 will apply. The delegated powers are necessary to allow these modifications to be made and to apply the controls to other authorities in the future as circumstances dictate.

PART 2: FINANCIAL ADMINISTRATION

Clause 26: Minimum reserves

38.  Clause 26 gives the Secretary of State (or in Wales, the National Assembly) power by regulations to set minimum reserves for local authorities. Where a minimum reserve is set, authorities would have to ensure that their budgets made allowance for reserves at least equal to the minimum.

39.  This power is a reserve power. It would only be used if it emerged that authorities were failing to remedy deficiencies or were running down reserves against the advice of their finance officers. It is appropriate that the Secretary of State has these reserve powers to deal with particular circumstances which cannot be foreseen at present. As with clause 4(1) (national borrowing limits), the negative resolution procedure is appropriate, as the powers might have to be exercised rapidly.

PART 3: GRANTS ETC.

  1. There are no delegated powers in Part 3.



 
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