Mr Philip Hammond (Runnymede & Weybridge, Conservative)

As the Minister said, the clause is not highly controversial. Its intention is to restate the power of local authorities to borrow for a purpose that is relevant to any of their functions and to elaborate that they may also borrow for the purposes of prudent management of financial affairs—that is to say, to borrow in the course of normal Treasury operations.

The relevance of my question to the Minister will become clearer when we discuss clause 2 and amendment No. 26. Has it been established that there is no power at present to borrow for normal Treasury operations? By that, I mean short-term borrowing for prudent management of financial affairs. The explanatory notes do not make it clear, but it may have been established by the courts, for example, that no such power exists. I should be grateful if the right hon. Gentleman could explain why the Government have found it necessary to elaborate that specific power under the Bill.

Mr Nick Raynsford (Minister of State (Local and Regional Government), Office of the Deputy Prime Minister; Greenwich & Woolwich, Labour)

The hon. Gentleman was true to his word. He was brief and to the point, and asked a pertinent question. I, in turn, shall not give the Committee a detailed explanation of the clause, but it is important to clarify the significance of the two parts of it. The major innovation under part 1 of the Bill is the introduction of what is now referred to as the prudential system for local authority borrowing. The logical starting point for that is the general power to borrow, which is the subject of the clause.

Local authorities have always been able to borrow. Clause 1(a) preserves their existing broad power to borrow

''for any purpose relevant to''

any of their statutory functions. Subsequent clauses, to which we will turn shortly, make provision for borrowing procedures and the level of borrowing. However, none of them restricts the wide-ranging purposes for which borrowing may be undertaken in accordance with clause 1(a).

Under the current legislation, which was introduced in 1990, there are technical doubts about the lawfulness of borrowing to repay existing debt—which comes to the meat of the concern raised by the hon. Member for Runnymede and Weybridge. Clause 1(b) deals with that concern. The refinancing of debt is a widespread practice and has full Government approval. Indeed, a large part of the money lent by the Public Works Loan Board to local authorities is for that very purpose. It gives local authorities flexibility over the timing of loan repayments and makes it possible to negotiate more favourable interest rates.

Many members of the public do something very similar with the mortgages on their homes. The practice is current and widespread, but current legislation does not confer an explicit power on local authorities to borrow for such a purpose.

Local authority lawyers have widely and, I suspect, wisely concluded that there is an implicit power; we see no reason to dissent from that judgment. However, that situation is not satisfactory, so, in clause 1(b), we make it clear that local authorities will have an explicit power to borrow for the prudent management of their financial affairs. That will enable them to borrow to repay existing debts, provided that they are satisfied that it is prudent to do so.

Clause 1(b) is also needed because certain other borrowing procedures may not be fully covered by clause 1(a). One issue that arises is that individual loans cannot easily be linked to particular statutory purposes of the kind referred to in clause 1(a). Authorities aggregate their borrowing requirements and a single loan may help to fund several capital projects as well as meeting temporary cash flow needs and, perhaps, refinancing old debts. The ability to relate loans to specific statutory purposes may not therefore be easy.

In addition, there is no close link between the timing of borrowing and expenditure. Borrowing for capital projects is sometimes postponed if interest rates seem likely to fall; in the meantime, expenditure is met out of temporary surplus cash. On the other hand, if interest rates seem likely to rise, loans may be taken out some months ahead and invested until spending need arises. Clause 1(b) confirms the lawfulness of such Treasury management practices—subject, in all cases, to the requirement of prudence being met.

I hope that I have answered the hon. Gentleman's question and that he is happy with my recommendation that the clause stand part of the Bill.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

That clarification was useful, as the hon. Member for Runnymede and Weybridge will, I hope, confirm.

I want to raise an issue that will overshadow all aspects of this morning's debate on the prudential capital regime. The Minister will readily admit that freedom to borrow, as laid out in clause 1, is useful only if one has the resources to back it up—to pay the interest on the debt and then, in due course, the capital. A key issue in the Select Committee's report, and in evidence that it heard from bodies such as the Chartered Institute of Public Finance and Accountancy, is that the Government have not yet made clear the regime of revenue support that they will provide for local authorities to back up the new prudential capital regime. It is all very well for us to debate and support clause 1—as we will do—and for us to say that it is great and that it clarifies the legitimacy of local authorities to borrow in those circumstances. However, the Government have not yet told the Local Government Association—or CIPFA, Parliament or anyone—what the new revenue regime will be to back up the freer capital regime. Will the Minister take this opportunity to clarify that? Many

local authority treasurers want to know what the revenue regime will be. When will the Minister tell them? He says that the new prudential regime will be in place by April 2004. To prepare for that, local authorities will need to know about the new revenue regime much earlier.

Mr Nick Raynsford (Minister of State (Local and Regional Government), Office of the Deputy Prime Minister; Greenwich & Woolwich, Labour)

The hon. Gentleman raises a fair point. He will be aware that we have had lengthy and detailed discussions with the LGA and other interested parties about the appropriate basis for Government support for local authority capital investment. No decision has yet been taken, but we will, of course, decide in good time, so that local authorities can plan for the implementation of the new arrangements from April 2004. The principle is that Government support will continue on the same basis on which it has been available for the great majority of local authority capital spending. There is no intention to change that.

The additional freedoms implicit in the Bill will allow local authorities to extend their borrowing to cover unsupported projects, and the authorities will be responsible for the revenue payments. That is what would apply to any person considering their personal budgeting. If they decided to take out a new loan for some purpose for which they had no current income stream, they would obviously have to be satisfied that they had the means to repay that loan. That is a proper element of prudential planning. It is right that local authorities should have that freedom, but it would be wrong to imply that Government should provide additional support for that extra flexibility; that is not the intention. I hope that that clarifies the matter.

There are technical and complex issues involved in any change to the current revenue support framework, and we need to be satisfied that such issues are fully covered before we reach a decision. However, I give the hon. Gentleman an assurance that that will be done in good time to enable local authorities to implement the new arrangement expeditiously.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

I have two points of clarification. First, will the Government make their decisions before the Committee has finished its deliberations? Clearly, the revenue regime that will support the capital regime is a rather important part of the equation. [Interruption.] I think that I have just destroyed part of the parliamentary furniture; no doubt the cost will be deducted from my pay.

On the second point, the Minister gives a fair explanation of the technical issues that his Department has to grapple with, and I hear what he says. However, is he saying that there may well be a sort of shadow credit approval system in place beneath the prudential regime? Will the Government be telling local authorities that they will support so much borrowing, but for anything above that sum, the authorities are adrift?

Mr Nick Raynsford (Minister of State (Local and Regional Government), Office of the Deputy Prime Minister; Greenwich & Woolwich, Labour)

I sincerely hope that the hon. Gentleman's parliamentary salary will not be subject to deductions to meet the loan charges on the cost of replacing the furniture that he appears to be vandalising so early in the proceedings. We know that frustration in the later stages of Committee can lead to all sorts of intemperate behaviour, but in my

experience it is unusual for Opposition Members to break up the furniture in the first sitting. Be that as it may, a remedy is at hand: if the hon. Gentleman has to meet the costs, he will be able to borrow, and he will work out whether his parliamentary salary is sufficient to cover that borrowing.

We will consult later in the spring on the framework for Government support of local authority borrowing, so I am afraid that it is unlikely that the consultation will be completed before the end of the Committee's proceedings. However, I repeat that the intention is that the Government will continue to support local authority borrowing on the same basis as they do currently—that is, supported borrowing. We are giving local authorities the freedom to borrow in support of their policies without Government support. That is a perfectly reasonable freedom, but they should not expect the Government to have to produce additional support for that borrowing. I believe that the prudential regime is sensible and meets that objective.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I, too, would find it outrageous if the hon. Member for Kingston and Surbiton were to have his salary docked merely for destroying a piece of parliamentary furniture when, as my hon. Friend the Member for New Forest, West says, we are faced with a Government who appear intent on destroying the entire parliamentary structure, and they have not, so far as I know, had any of their salary docked.

The Minister talks about two classes of local authority borrowing: supported borrowing—in which the Government will support the cost in revenue terms—and unsupported borrowing. I do not want us to get too far ahead of ourselves, but if I understand correctly, all borrowing by a local authority is essentially in one pot. Local authorities cannot create mortgages, or dedicate revenue streams to particular forms of borrowing. Is there not a danger that we will have a situation in which local authority borrowing that is unsupported by revenue from central Government is seen as a higher risk class of borrowing carrying a higher coupon? Owing to the inability of local authorities to ring-fence parts of their borrowing, the effect might be a downgrading of overall local authority credit ratings. Has that been extrapolated by the Minister and his officials? Is he satisfied that there is no risk that unsupported local authority borrowing by some authorities will drag down the credit rating of all local authority borrowers?

Mr Nick Raynsford (Minister of State (Local and Regional Government), Office of the Deputy Prime Minister; Greenwich & Woolwich, Labour)

I wholly reject the hon. Gentleman's suggestion that the Government are breaking up the parliamentary structure. He should be careful about using such analogies because many people believe that his party is in the process of breaking up what was once a great party of government. Let us not take the analogies any further.

The hon. Gentleman made a distinction between supported and unsupported borrowing. The key purpose of the reforms is to allow local authorities greater discretion to determine their borrowing. However, they are required to do that in a prudential framework, which is the safeguard against

the hon. Gentleman's fear about possible downgrading of local authority credit ratings. He will know that all local authority debt is treated comparably. There is no question of ring-fencing any debt to specific revenue flows or repayment means. That gives the security that he wants to ensure that local government credit ratings should not be undermined—providing that local authorities act prudently. That is the obverse side of the coin: we are giving greater freedom, but that is in a framework that rightly expects authorities to operate a prudential framework.

Mr. Andrew Turner (Isle of Wight) rose—

Mr Nick Raynsford (Minister of State (Local and Regional Government), Office of the Deputy Prime Minister; Greenwich & Woolwich, Labour)

I give way to the hon. Gentleman.

Mr Win Griffiths (Bridgend, Labour)

Order. This issue can be debated under a subsequent amendment, so unless the Minister wishes to conclude his remarks on clause 1 stand part, I would prefer to put the Question.

Mr Nick Raynsford (Minister of State (Local and Regional Government), Office of the Deputy Prime Minister; Greenwich & Woolwich, Labour)

Under that guidance, I shall say that the framework is coherent and achieves the objectives that the hon. Member for Runnymede and Weybridge set out. I hope that he will agree that the clause should stand part of the Bill.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I am grateful to the Minister for his clarification. We will need to return to several issues raised by his past few comments when we consider clause 3, although the Liberal Democrat amendment to clause 2 will provide a vehicle for that.

I do not want to take up more of the Committee's time, but may I draw the Minister's attention to the fact that we have been sensibly debating clause 1 for 18 minutes, although the clause was his example of a clause on which we would not need to spend any time. There has been no time wasting and no unnecessary debate. The debate has been valid and it clarified many issues. That underlines the real difficulty of considering the Bill under the timetable before the Committee.

Question put and agreed to.

Clause 1 ordered to stand part of the Bill.