Examination of Witnesses (Questions 660
THURSDAY 11 JULY 2002
MP, MS PAM
660. Can I quote from the memorandum we received
from the Audit Commission? It says, "Our auditors are often
asked by authorities for their view on what constitutes a recommended
minimum level of reserves. To date, auditors have resisted making
recommendations about minimum levels because it is rightly the
responsibility of the authorities to determine this for themselves
based on the risk assessment of their operational business needs."
That is what the Audit Commission is telling the Committee but
they are obviously telling you something different.
(Mr Raynsford) If you continue with the quote, they
do say, "However, as part of our recent development of the
comprehensive assessment process, we have suggested that authorities
might want to regard five per cent of net forecast operating expenditure
as a guide for minimum level of reserves."
661. That should be left to the local authorities.
(Mr Raynsford) The figures we have are that 17 authorities
have less than zero per cent of net operating expenditure as reserves.
In that situation, it would be in our view imprudent not to have
this as a reserve power. It is not something we intend to use
in general but as a reserve power for extreme cases this does
appear to us to be prudent.
662. The Audit Commission are aware of the authorities
that you have referred to and they still think it should be left
with the local authorities and a minimum reserve of five per cent.
Why do we need regulation? This Bill is bristling with regulations.
(Mr Raynsford) This Bill is giving substantial, additional
freedoms to local government but within a framework that allows
the local authority to borrow more against proper, prudential
guidelines. In the case of setting its budget, the authority is
expected to operate in a responsible way and quite rightly that
discretion is largely left to the local authorities.
663. Why do you not accept the recommendations
of the Audit Commission?
(Mr Raynsford) We are working in close consultation
with the Audit Commission and if we move on to paragraph eight
of the Audit Commission's submission they say, "We can see
the desirability for the government to have the flexibility to
be able in exceptional cases to set a minimum level of reserves
in support of intervention." That is what we are doing.
664. But if you read on, ". . . the expectation
that they should themselves determine an appropriate level of
reserves and be more transparent than at the moment should be
(Mr Raynsford) That certainly is the norm but in exceptional
cases, as the Audit Commission themselves state in their submission,
paragraph eight, they can see the desirability of the government
having the flexibility to be able to set a minimum level.
665. The norm is that it should be left with
the local authorities and no regulation.
(Mr Raynsford) Absolutely. The norm is that it should
be left to the local authorities.
666. And no regulation?
(Mr Raynsford) The norm is that the local authority
itself should take the decision. This is a reserve power for use
in exceptional cases.
667. And no regulation? That is what they are
suggesting, that it should be left to local authorities.
(Mr Raynsford) In normal circumstances, it will be.
668. We have been told that the Audit Commission
has an influential part to play in monitoring and observing the
finances of local authorities. This is one area in which I consider
the Audit Commission has an important part to play and local authorities
should not be subject on minimum reserves to regulation from the
(Mr Raynsford) This is a reserve power for use in
exceptional circumstances. Given our experiences, in a small number
of authorities where the absence of adequate reserves has resulted
in serious financial difficulties as and when the authority has
found it does not have the means to meet the costs that it has
faced, we felt this was prudent, to include this provision so
that we would have the power in those exceptional cases to intervene
to require a minimum level of reserves.
669. Coming on to capital receipts, the White
Paper seems to address capital receipts purely from housing. The
Bill makes it appear that we are talking about all capital receipts.
Do you intend this to be about all capital receipts?
(Mr Raynsford) No. This is about housing capital receipts
and we will clarify it to make it clear that that is the case.
670. You will clarify it or you are clarifying
(Mr Raynsford) I am clarifying it now and we will
make absolutely sure when a final Bill is presented that it is
clear it applies to housing capital receipts.
671. The initial impression that was given from
these proposals was that this was a vehicle to take money from
rich authorities and give it to poor authorities in areas of deprivation.
We took evidence this morning from Wolverhampton who said they
were one of the authorities who expected to lose out as a result
of these proposals. Can you clarify what the purpose of the exercise
is? Why are you doing this?
(Mr Raynsford) The current arrangement of housing
set aside does involve authorities being required to set aside
a proportion of their receipts and, as you know, we do take those
into account when making capital allocations. The effect does
redistribute some of those resources from authorities that are
receipts rich and do not have the same need to spend to other
authorities that have a high need to spend and do not have the
same level of resources. I was surprised frankly to hear the evidence
given by Wolverhampton. We will look into that but our view is
that the new pooling mechanism will have exactly the same effect
as the current housing set aside mechanism and will benefit those
authorities that have a real need to invest and do not have resources
on a substantial scale.
672. You will look into that. Would it be possible
to let us have a note on that, preferably for Monday or Tuesday,
because it would be a pity if we relied on Wolverhampton's evidence
in our report if you can genuinely refute it.
(Mr Raynsford) We will do so.
673. The concern that I would have resulting
from your proposalsyou will be aware that some of the areas
that were classified as richer authorities are those most affected
by the shortage of affordable housing and indeed we have seen
much talk of next week's comprehensive spending review addressing
that issue. If you take capital receipts out of areas where there
is a shortage of housing and put them into areas where pressures
on the housing stock and housing market are much less great, are
you not in effect carrying out a redistribution which goes directly
against the needs of the nation at this moment in time?
(Mr Raynsford) No, because in general the prime call
on capital receipts for local authorities is the improvement and
renovation of their existing stock; whereas the provision of new
housing to meet the needs of additional households in areas of
shortage is predominantly met through the Housing Corporation's
budget and by registered social landlords. I obviously cannot
anticipate what is going to be in next week's spending review
but you will have read the press coverage on that and clearly
there is a need to provide more for additional housing in areas
of shortage, but that will predominantly come through registered
social landlords and the Housing Corporation's budget rather than
through capital receipts. I accept that to a degree capital receipts
may be used to support registered social landlords through local
authority social housing grant, but it is a relatively small proportion
of the total application of those receipts.
674. For example, we have taken evidence from
Waverley who say that they have been consciously pursuing a programme
over the past few years directed towards balancing their debt
budget in order to enable them to spend a greater proportion of
their receipts on affordable housing. They are extremely concerned
that, as a result of the proposals you are putting forward, having
been prudent with a view to trying to solve their affordable housing
problem, you are going to take the money away.
(Mr Raynsford) We have no intention to make this clause
retrospective, so there will be no question of any authority like
Waverley being penalised for decisions
675. This is money they are now looking to spend
over the next few years, having over the last few years sorted
out their financial position so that they are allowed within the
current restrictions to spend money on affordable housing. You
are now going to introduce a measure that will take away some
of the capital they would then use for affordable housing.
(Mr Raynsford) They would have been subject to the
housing set aside mechanism before they were debt free. It is
not introducing a new element. We do think it would be slightly
odd that an authority should benefit just because it happens to
be debt free and should not be subject to the same requirement
that applies otherwise to ensure that the receipts are used as
a national resource to support investment in those areas where
there is a particular high need to spend without the availability
of those receipts.
676. Why should it be odd that a council that
has been prudent in managing its affairs in order to invest in
affordable housing within the current rules? Why should that council
be penalised and those resources turned into "a national
(Mr Raynsford) The authority will not be penalised.
It will not be any worse off, but it is buckshee gain that it
previously would have been able to achieve because it happens
to have got into the debt free position so is treated in a more
favourable way than other authorities that will not be there in
677. Can you assure Waverley Council that they
will have the same amount of money over the next few years to
invest in affordable housing that they would otherwise have had?
(Mr Raynsford) I cannot give a forecast off the top
of my head about an individual authority without looking at their
finances but this is not going to penalise them by taking away
from them resources that otherwise are available. What it will
do in future is apply rules that make them subject to the same
rules that they are currently subject to as an authority with
debt, even if they become debt free.
678. Under clause 26 of section 3, we refer
to the duties of the chief financial officer and the question
of the report on the robustness of the budget. What effect will
clause 26 have on the actions of any local authority that was
determined to behave imprudently?
(Mr Raynsford) What it will do is give greater confidence
to chief financial officers if they do have doubts and concerns
about the robustness of a budget to set those out before the local
authority reaches a decision. That is right and proper, that they
should be able to act in a professional way without any fear of
consequence to their own position. It is our experience that in
some instances warnings have not been given sufficiently early
to local authorities about financial difficulties that they might
face. It has not happened in any significant number of cases,
but we believe it is right that there should be a framework that
makes it absolutely clear that chief financial officers should
have that obligation, that responsibility and that right.
679. Ones, for instance, other than Hackney
(Mr Raynsford) We go back to the same names again.
In those cases, the councillors who currently are wrestling with
the huge financial problems that have followed on from previous
mistakes are probably bitterly ruing the fact that safeguards
of this nature were not in place at an earlier stage.