Examination of Witnesses (Questions 640
THURSDAY 11 JULY 2002
MP, MS PAM
640. Could you tell the Committee what action
you are going to take to monitor the small business rate relief?
(Mr Raynsford) We will, like other major initiatives,
obviously monitor it but it is probably too soon for me to describe
the actual monitoring arrangement. We have not yet got to the
stage of introducing the legislation and we will need to think
about what the right way to monitor it is as and when we have
got to that point.
641. On the issue of prudential guidelines,
the principle is something many of us involved in local authorities
in the past have argued for a long time. To pick up on one particular
concern that has come across to us, that is in clause 4, the potential
for government to limit the operation of prudential guidelines,
why do you want such broad powers?
(Mr Raynsford) If I can say this slightly facetiously
at the start, it is really good to hear that you recognise this
as something that many people thought would never come and then
I put against it the view that this is a disappointing Bill. I
would have thought this was a cause for congratulation. However,
we think there is a need for a safeguard against a possible position
where, in the national, financial interest, the government had
to take action to limit the overall extent of public borrowing.
It would be odd in the extreme if local government borrowing,
which accounts for something like 25 per cent of the total nationally,
were to be wholly excluded from any controls or safeguards which
government exercised in such a situation. We do not think it is
likely to happen. It is very much a back-stop but we think it
is prudent to put it in place. As far as individual authorities
are concerned, this is a safeguard against an extreme situation
where an authority might otherwise get into very serious difficulty.
As I said in response to an earlier question from Mr Cummings,
had earlier action been taken, for example, in the case of Hackney,
some of the rather serious consequences in terms of financial
difficulties might have been avoided. In extreme cases, I think
this is a necessary safeguard but it is just that: a back-stop,
not part of the normal, day to day operation of the scheme.
642. That is good to hear. On the question of
the overall limit of the powers you may have to impose, it says
in the White Paper words to the effect that this was something
that was only going to be considered necessary by macro-economic
circumstances and the sort of crisis we had in the past as a nation.
If that is the case, why cannot that be made explicit in the legislation?
(Mr Raynsford) I hope I have made it explicit this
afternoon. I do not know whether parliamentary counsel could draft
that or not but if it helps I will put it on the record here that
that is the intention.
643. If parliamentary counsel could draft it,
would it be passed?
(Mr Raynsford) I would have no objection but I suspect
parliamentary counsel would feel this was unnecessary to spell
644. Your problem is parliamentary draftsmen,
not the Treasury?
(Mr Raynsford) No. The problem would be trying to
encapsulate in legislation a full explanation of why any particular
provision was necessary, which I think would probably produce
very over-cumbersome legislation in the future. It is normal for
ministers to make a clear declaration of the purpose of legislation
when presenting it and for legislation to give effect to those
policy intentions. I hope I have done that.
645. You have referred to the need to cut borrowing
but obviously alongside this is the question of off balance sheet
debt, whether it be through the form of long term PPP commitments,
whether it be in the form of leasing and other forms of off balance
sheet debt. Have you considered within the confines of the Bill
taking any steps to control the ability of local government to
surpass your constraints by going off balance sheet?
(Mr Raynsford) No, because the revenue implications
are on balance sheet in those cases.
646. Going back to the powers to limit the ability
of individual authorities, it is said it is to stop rogue authorities
who want to go off the rails. If they find themselves in breach
of the CIPFA code, they are going to be in breach of the law.
Why do you need extra legislation as well in clause 4?
(Mr Raynsford) It is quite clear to us now that the
situation in the London Borough of Hackney has deteriorated over
a series of years and CIPFA guidance which should otherwise have
been followed was not.
647. They are in breach of the law anyway.
(Mr Raynsford) If we are removing the existing borrowing
approvals, which we are, and allowing greater freedom to borrow,
it is necessary to have a safeguard as a back-up to avoid individual
authorities in such circumstances borrowing where they are in
breach of the CIPFA code.
648. If they are in breach of the CIPFA code,
they are in breach of the law. I was getting a nod from your left
when I asked the question. Why do we need something else in the
legislation if they are already in breach of the legislation by
the CIPFA code?
(Mr Raynsford) We think it is right and prudent to
have that safeguard in place to deal with circumstances where
an authority might otherwise get itself into a serious position
of indebtedness. I do not think it is any particular advantage
to fall back on the reassurance that the authority has broken
the law after the event. It would seem to be better to prevent
that happening in the first place.
649. People are not certain how this new freedom
is going to operate. The government may say that, as long as you
keep within the prudential guidelines, you can borrow but authorities
have a choice about how they go about capital investment. It could
be straightforward borrowing; it could be a PFI scheme and if
the government is so determined that the PFI scheme comes with
grant regimes attached and the borrowing does not, the government
has to effectively determine what an authority can and cannot
do. How is that going to operate?
(Mr Raynsford) Under a PFI or PPP scheme, there has
to be a proper, rigorous assessment of the financial advantages
of that as against a traditional framework. This public sector
comparator principle will continue so a PFI scheme will only get
the go ahead if it can demonstrate that it is going to be value
650. Currently, the revenue costing of a PFI
scheme to a local authority attracts government grant to help
fund it. If the government in the future still funds the revenue
streams of a PFI scheme through grant but does not give the same
support to a borrowing local authority for the same project, the
government is still going to determine what form of capital project
goes ahead and there will not be a level playing field for local
authorities to choose. The government has a lot of controls over
the capital projects and how they are carried out through the
revenue implications and how the government supports that.
(Mr Raynsford) It is not our intention to change the
fact of support for capital investment by local authorities. We
have said in the White Paperindeed, that was said in the
earlier Local Government Finance Green Paper of two years agothat
we were looking at different possible arrangements, either a capital
as against revenue support for capital borrowing, but that will
continue, whichever formula is adopted. Any supported borrowing
will continue to receive support. It will only be unsupported
borrowing that does not get a subsidy. That is a freedom that
we are extending to local government by giving the opportunity
for unsupported borrowing in addition to that which would otherwise
qualify for support.
651. Clause 25, section 2, says, "In the
case of controlled reserve it shall be regarded as appropriate
for the balance of the reserve at the end of the financial year
under consideration to be less than the minimum amount determined
in accordance with regulations made by the appropriate person."
Why does the Department think that the appropriate person, the
Secretary of State or the Minister, knows best for the level of
reserve that authorities should have?
(Mr Raynsford) This again is an important safeguard
and the reason that we are introducing this is that the evidence
we have had from the Audit Commission is that the level of reserves
in a number of authorities is dangerously low. A year ago, the
Audit Commission reported some ten per cent of authorities had
reserve levels that they were concerned about the adequacy of.
The latest indications we have from the Audit Commission is that
the figure is now around 12 per cent.
652. That is the figure the Audit Commission
gave you. Have any of those local authorities run into difficulties
in the period since the Audit Commission gave you those figures?
(Mr Raynsford) The financial position in Walsall has
been one of the main factors leading to the Audit Commission's
recommendation that intervention should be considered.
653. What about the rest?
(Mr Raynsford) This is very much a provision to deal
with exceptional circumstances where there may otherwise be a
serious problem. It is not our intention to use this power in
the vast majority of cases.
654. You have told us that the Audit Commission
is worried about a series of authorities. Apart from the exceptions
of really badly run authorities, why should you be saying to us
that the warning from the Audit Commission should be listened
to when there does not appear to be any evidence, other than from
those two authorities, that there has been a problem?
(Mr Raynsford) It is slightly wider than that. The
problem is in north Tyneside, Hillingdon and Corby. In all of
those cases, the level of reserves available to cope with unforeseen
difficulties has been a factor. I do not think it is right to
say that this is so small a problem that no action should be taken.
We do not think it is a large problem; we think it is only going
to occur in a relatively small number of cases but we think it
is right to have that safeguard against a situation where an authority
could leave itself highly exposed and in consequence get into
very serious financial difficulties.
655. In view of the comments about certain authorities,
there are other ways of raising revenue. The Royal Institution
of Chartered Surveyors argued that this Bill should be used to
amend section 123 of the 1972 Local Government Act to take account
of the well-being power. If we are looking at other sorts of revenue
to ensure that there is a minimum reserve, are you prepared to
take the advice of the Royal Institution of Chartered Surveyors
and to consider the question of section 123 of the Local Government
Act 1972 and bring it up to date under the Local Government Act
(Mr Raynsford) I am certainly prepared to take that
away and consider it. I cannot give you an instant answer now.
656. Can I take you back to the reserves? Supposing
in setting the budget for the following year, the November/December
period, a council has to say to people that the hours for the
library are going to have to be cut because we need extra reserves.
Are most of the local electorate going to understand that? Is
it not better to wait until there is a call on those reserves
some time in the year when you can say, "Look, these cuts
have to occur because we have not got the money"?
(Mr Raynsford) I do not think it does any service
to set artificially low reserves and then subsequently have to
close services in the course of the year because the authority
simply does not have the resources to be able to cope.
657. You think it is better to close the services
early so that you have the reserves?
(Mr Raynsford) No. I believe it is much better for
authorities to plan prudently on the basis of an adequate reserve
to cope with eventualities that might occur in the course of the
658. Have you consulted the Audit Commission
(Mr Raynsford) We have indeed.
659. What do they say?
(Mr Raynsford) It is partly because the Audit Commission
has highlighted the concerns expressed by district auditors that
currently some 12 per cent of authorities in their view have set
reserves that they regard as potentially insufficient.