Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

I beg to move amendment No. 52, in

clause 2, page 1, line 13, leave out from beginning to end of line 14 and insert—

'(a) any aspect of the Prudential Code for Local Authority Capital Finance produced by the Chartered Institute of Public Finance and Accountancy under section 3; or

(b) any aspect of a regulation made by the Secretary of State under section 4.'.

Mr Win Griffiths (Bridgend, Labour)

With this it will be convenient to discuss amendment No. 54, in

clause 3, page 2, line 8, leave out from beginning to end of line 23 and add—

'(2) The Chartered Institute of Public Finance and Accountancy or another accountancy body nominated by the Secretary of State shall prepare and issue a Prudential Code for Local Authority Capital Finance.

(3) The local authority shall perform its duty under subsection (1) by reference to the Prudential Code for Local Authority Capital Finance.'.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

Having debated the borrowing powers and borrowing freedoms that local authorities will have, we will now consider three clauses about controlling those freedoms. Although Liberal Democrats accept that there should be control—prudential control and control as a backstop in the event of a macro-economic crisis—we believe that the Government's control regime in clauses 2 to 4 is too prescriptive and that the Secretary of State keeps far too many reserved powers, which could be used in circumstances far beyond prudential control or control in the event of real macro-economic crises. That is the main thrust of the debates that we are about to have.

Amendment No. 52 would make the prudential control regime the focus of the limitations. In its references to sections 3 and 4, clause (1) establishes the means by which the Secretary of State can interfere at will in local authorities' decisions about borrowing. It also establishes a way in which the Government can decide to limit local authorities' expenditure from Whitehall.

If the Government are committed to a prudential capital regime, first and foremost, they would not seek such powers. We cannot see why the Government need such broad and wide-ranging powers. The powers could be far more narrowly defined, which would give greater clarity and freedom to local authorities.

We accept that the Government are working with CIPFA. I have its draft code, to which our amendment refers. I have flicked through the code and it seems to be sensible and moves in the right direction. It shows how a code produced by a professional body can be flexible and cover all the nuances and subtleties that are inevitable in a complex capital control regime. It is best practice. To lay on top of that the Government's ability to intervene willy-nilly is unnecessary and goes against the thrust of a welcome change in the philosophy of control of local authorities' capital spending.

The case has not been made in the Bill, the Government's reply to the Select Committee or the White Paper, for the extent of powers sought by the Government to limit local authority borrowing. Amendment No. 52 would therefore help to improve the legislation.

Amendment No. 54 is linked to amendment No. 52, although it relates to clause 3. It would include the role of CIPFA in primary legislation, and local authorities would not need to rely on regulations that could be changed willy-nilly at the Minister's discretion. The amendments go well together.

The Committee should remember the controls that already exist with regard to local authority capital spending, especially under sections 32 and 33 of the Local Government Finance Act 1992. Those provisions place a duty on local authorities to calculate their budget requirements for each financial year. Annex B13 to the Government's Green Paper ''Modernising Local Government Finance'' states that the budget requirement includes calculation of

''the revenue costs, which result from the capital investment decisions of the authority. These costs include capital financing

costs (interest and loan repayment provision) and running costs. Section 33 of the Act requires the local authority to set a council tax sufficient to meet its expenditure taking into account other sources of income such as government grants and non domestic rates.''

In other words, sections 32 and 33 of the 1992 Act already give the Government significant powers to control the capital financing regime of local authorities throughout the country. Those are on top of the CIPFA code and, hopefully, more narrowly-defined reserved powers in respect of macro economic reasons.

I do not understand why the Government need to establish such an elaborate system of control when they already have those powers, which are complemented by the prudential capital regime—which we support—in the CIPFA code. The Committee should accept amendments Nos. 52 and 54 because they would implement the Government's intentions far better than the provisions in the Bill as drafted.

There is a danger that the Chancellor's love affair with prudence will be seen in towns throughout the country rather than the town halls' own prudential regime, which is what the Government promised and what they should be relying on.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I agree with much of what the hon. Gentleman said, but only a Liberal Democrat Member would regard the Chancellor in his present incarnation as prudent. Given the right hon. Gentleman's current tax and spend mode, most Conservative Members regard him as anything but prudent. The amendments are well intentioned and are driving in the right direction. I sympathise with the hon. Gentleman's view that a CIPFA code is infinitely preferable to specific rules being laid down by the Secretary of State. I am concerned, however, that the two amendments would reduce the discretion of local authorities. They would require local authorities to perform their duty of setting prudential limits by reference to the prudential code, not by having regard to the prudential code, which is the phrase used in the Bill.

Of more concern to me, apart from architecture to which I shall return in a moment, is that the CIPFA code and any subsequent changes to it will be brought into primary legislation without there having been parliamentary scrutiny. I am sure that the hon. Gentleman would not really want that. I am in a slightly strange position of having to say that it would be better to have the CIPFA code drawn into the matter by regulation. The draft regulations that the Government have published specifies the CIPFA code. That is fine. We all support that. However, I share the hon. Gentleman's worry that the Bill allows the Government to specify something other than the CIPFA code at some time in the future or to introduce additional regulations. That would be a cause for concern.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

May I clarify one point? There is no provision either in the clause or in the regulations for any changes to the CIPFA code automatically to be debated by the House. The hon. Gentleman's argument does not hold.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I guess that the hon. Gentleman is right, in that the regulations propose that, for the time

being, the CIPFA code would be the matter to which regard had to be taken. I accept his point.

My other worry about the amendments concerns architecture. The hon. Gentleman wants to place on an independent third party a duty under primary legislation. The amendment states that the Chartered Institute of Public Finance and Accountancy

''shall prepare and issue a Prudent Code''.

Will it be paid for taking such action? What will happen if it does not do that? Will it be carted off to Pentonville? What would happen if it were disbanded? There is a difficulty in the architecture of the Bill whereby it could impose a duty on an independent third party.

We must accept that the Government have published draft regulations. Incidentally, I should express the gratitude of the Committee to the Minister for letting us have sight of the draft regulations. I do not wish to sound churlish, but they were not delivered early enough to have a huge influence on the drafting of amendments that would be unstarred for today. We received them only on Thursday evening. However, it is good that we have the draft regulations, as they set out that the Government's intention, at least initially, is to use the CIPFA guidance.

The clause is not perfect because the Government have the option of doing something else in the future, but I do not believe that the hon. Gentleman's solution would work. It would not allow for parliamentary scrutiny. It would not be workable in imposing a duty on a third body. While I sympathise with his intentions, we must all swallow hard, accept the draft regulation and the Government's good intentions on this occasion.

Mr John Pugh (Southport, Liberal Democrat)

I welcome the general thrust of the Minister's endeavours. As a former council leader, I was much persuaded a long time ago that the prudential regime was infinitely better than anything that we had then. Year after year, one had to explain to the electorate that one could not publish ventures because capital permissions given by the Government did not authorise or legitimise that.

I remind the Minister that we had such an appalling regime in the past largely because of the Thatcher Government and the need to restrain the behaviour of Derek Hatton in Liverpool—and the similar behaviour of others elsewhere. That resulted in a series of limitations being imposed on all local authorities that behave in a financially prudent matter. My fear is that the Minister might currently be obsessed with the conduct of Hackney borough, and that in order to stop the Hackneys of this world he might put more limits on perfectly well-behaved local authorities. I caution him not to do that.

As I understand the drift of the legislation, the Minister is explicitly giving local authorities the power to borrow—he is putting that into law—but he is qualifying that by introducing a sequence of reserve powers in exchange for the current series of formal restraints and permissions. Therefore, on one level, the

Minister can represent this as providing more freedom and autonomy. But I wish to ask a question: under the proposed regime, what can a local authority do in defiance of the Government that it could not do under the previous regime? If that question is asked, it becomes far more difficult for the Government to represent what they are doing as a move in the direction of freedom. To draw an analogy, teenagers have general autonomy and freedom and become young adults when they can do what their parents do not want them to do, rather than when they can do what their parents approve of anyway.

The Minister must recognise that our general line of attack on the Bill would be to suggest that he needs genuinely to curb his own powers, so that in a sense he will be reliant upon a third-party judgment as to whether an authority has behaved prudently. That is what this amendment would incorporate into the Bill.

I agree that the Minister has a legitimate defence to that; he could say that he does not want to allow local authorities under any circumstances—

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

Can the hon. Gentleman explain how these two amendments provide for a third-party judgment as to whether an authority has behaved prudently? I do not see that they do that.

Mr John Pugh (Southport, Liberal Democrat)

One has to see the amendments that we have moved in the round, but our general attitude is that prudence should be defined externally, rather than by the Minister's whim of the moment. The CIPFA code has not emerged from nowhere; it was intensely negotiated with the local authorities and a variety of different financial institutions—it is not an off-the-peg code that was devised on an ad hoc basis. Therefore, as we go through the Bill, the Minister should carefully consider not what he will allow local authorities to do that he would approve of, but what he is prepared to allow local authorities to do that is prudent but which he might not approve of.

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

As has been established, the overall aim of part 1 of the Bill is to give local authorities greater freedom to borrow, but that freedom must be balanced by proper safeguards. One of them is that authorities must set themselves an affordable borrowing limit, in accordance with clause 3. In addition, clause 4 empowers the Secretary of State as a last resort—I emphasise that—to set limits to prevent borrowing from becoming unsustainable at the local or national level. Clause 2(1) will ensure that when authorities borrow they may not breach the clause 3 or clause 4 limits.

Amendment No. 52 would make clause 2(1) narrower in an unacceptable way. It would remove the reference in clause 2(1)(a) to the clause 3 limit, and it would replace it with a direct reference to the CIPFA code. The hon. Member for Kingston and Surbiton approved of our intention to make regulations that require authorities to have regard to the CIPFA code when setting the prudential limit under clause 3, but the legislation as it is currently drafted gives us the option of specifying a code of our own. Alternatively, we could rely on regulations rather than a code, or employ some combination of the two approaches. We are embarking on a new and innovative system, and

for the moment we need to keep our options open. Without that flexibility, the safeguards in clause 2 are considerably weakened.

Secondly, the amendment would change clause 2(1)(b) so that it refers only to regulations setting a national limit under clause 4. That would, in effect, remove the power in clause 4(2), for the Secretary of State to impose a limit by direction on an individual authority. However, that power is a vital safeguard for local taxpayers against imprudent borrowing by one or possibly more authorities. It must be preserved.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

Will the Minister give way?

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

I will give way in a moment, but it is important that I respond to the Liberal Democrats, who seem to be living in never-never land or nirvana where no local authority ever acts imprudently. The hon. Gentleman mentioned Liverpool city council and I do not wholly disagree with his remarks about the imprudent conduct of some members of that council in the past. However, I would also put to him the conduct of certain people in Hackney, where his own party was in charge. Unsustainable spending was allowed, leaving the council in debt. We have had to work extremely hard—together with the new Labour mayor of Hackney, who has done a marvellous job in turning the authority round—to deal with that inheritance. Most people would say that preventing such a situation occurring in the first place would have been better than having to act later to sort out the mess, as we have had to do. Incidentally, dealing with that authority's problems has cost an additional £25 million, which will be the subject of a special grant report in the near future.

I accept that such things do not happen in the overwhelming majority of local authorities. However, it would seem highly imprudent—prudence is the word that we have been using a lot this morning—not to have that long-stop power to intervene to prevent an authority from behaving irresponsibly, incurring debts that it cannot service.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I do not necessarily disagree with the thrust of the Minister's argument but he has a difficulty. He mentions clause 4(2) and the need to have a power to impose a limit on an individual irresponsible authority. However, under pressure from the Select Committee, he has inserted into clause 4(1) the words ''for national economic reasons''. Whatever reasons the Minister may adduce for needing to deal with an individual local authority, they will never be national economic reasons.

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

I agree with the hon. Gentleman. I may not have made it clear that we have two specific purposes for the reserve powers. One of those purposes is to deal with a situation of national economic need—where it is essential, in the national interest, to restrain overall borrowing levels. I do not expect that to occur in the foreseeable future, while the country's finances are being managed as well as they are by the Chancellor. If the hon. Gentleman believes that the Chancellor is not prudent, does he support the views of his party's shadow Chancellor, who appears to be

suggesting a 20 per cent. cut in public expenditure? If the hon. Gentleman accepts the current levels of public expenditure, he may wish to talk to other members of his party to ensure that its intentions are clearer.

As I said, we have two separate purposes. One is a national safeguard, to be used only in circumstances where the national interest requires it. The hon. Gentleman spoke rather churlishly about our being pressurised by the Select Committee to agree to a change to the Bill. We willingly made that change to clarify the intent. I would have thought that the hon. Gentleman would welcome that entirely sensible and flexible response.

The other purpose is to deal with individual authorities where there is no question of national economic stability being affected but where the behaviour of those authorities may result in a situation such as the one in the London borough of Hackney. It is right and prudent that the Government, in introducing these new arrangements, should have a safety net or a long-stop provision that will—as I have said to the Committee and the Select Committee—be used only in extreme cases. It is quite wrong for the Liberal Democrats to imply that the Government intend to use the power extensively. We have no such intention. The safeguard should be used only in the circumstances that I have described. It would be highly imprudent to have no such power at all. The hon. Member for Kingston and Surbiton asked why the Government could not simply depend on the existing powers in the 1992 Act. Those powers relate only to revenue budgets, not to borrowing, and while they may be useful, they could not be used to prevent an authority from incurring additional debt that it could not service. The provisions give us that ability.

Mr John Pugh (Southport, Liberal Democrat)

As I understand it, the chief finance officer of most local authorities has the right to report to the entire council if the budget is running awry. Does that not provide sufficient control? If that control does not do the job, why was it introduced in the first place?

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

The hon. Gentleman's own language reveals that while the chief finance officer may have a duty to report, that is not the same thing as the authority acting on that report and curbing its borrowing. The hon. Gentleman might do some research into the conduct of Hackney council. I do not make a party political point, because Hackney council was governed by the Liberal Democrats, by Labour and, briefly, by the Conservatives. Indeed, in respect of a number of authorities that have been in difficulties recently—I am thinking of Walsall metropolitan borough council—there has been a pattern of all parties having had a period in charge; that I willingly accept. However, if the hon. Gentleman does a little research into the background during that period of time he will know that decisions were being taken on the basis of inadequate financial appraisals and without a proper understanding of the consequences for the local authority.

I think that most people in the London borough of Hackney would have welcomed Government intervention at an earlier stage to stop that authority getting into the difficulties from which it is now, I am

very pleased to say, recovering in a positive way. I pay tribute to the chief executive, the staff, the mayor and the councillors of the London borough of Hackney for their determination to turn their authority around. It would, however, have been better if it had not got into that mess in the first place.

The hon. Member for Southport asked me what a local authority could do in defiance of Government that it could not do under the previous regime. The answer is that it could certainly borrow up to the prudential limit. Local authorities are currently unable to do that; they are constrained by the level set by the Government on the approval for borrowing. An authority will be able to borrow up to the new prudential limit, irrespective of the wishes of the Government. That will not be a matter for the Government to consider, except in the extreme circumstances of national economic need. That is a significant difference.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

Inevitably, we are dancing backwards and forwards around this part of the Bill. The Minister has referred to the provisions of clause 4(2), which refers to the power to set limits in relation to particular authorities. Will the Minister confirm that he is only talking about a situation in which the authority has not had proper regard to the CIPFA code in setting its own prudential borrowing limit? Will he therefore accept our amendment No. 29 when we reach the relevant clause?

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

No, I shall not, because there could be other circumstances. I shall cross that bridge when we come to it.

We should look briefly at amendment No. 54, to which I have not given the same attention and on which I find myself in agreement with the hon. Member for Runnymede and Weybridge. Amendment No. 54 would remove the Secretary of State's power to specify in regulations how authorities are to set their affordable borrowing limits. That amendment would impose a duty on CIPFA, or another body chosen by the Secretary of State, to prepare a prudential code to be followed by authorities. I am sure that the Committee appreciates that CIPFA and other accounting institutes are independent of the Government. It would be unacceptable, as the hon. Member for Runnymede and Weybridge rightly mentioned, to try to compel those bodies to produce codes without making any provision for payment. We could not countenance a proposal to give statutory effect to a code produced in such a way by an independent body. I hope that the hon. Member for Kingston and Surbiton will accept that while the amendment is well intentioned it is not the right way forward. The clause already provides for the effect that he intends and it gives a desirable degree of flexibility at a stage in which we are, as I have stressed, entering into new territory.

The emphasis that I placed on the need for the reserve powers does not mean that we expect to use them often. We hope that the national limit will never be needed. Indeed, provided that the Conservative party does not return to Government, it may not be

needed. However, we need to be prudent and guard against possible nightmare scenarios. The imposition of a local limit would be an exceptional matter. We would expect to use it only in cases of the sort that I have described, such as those involving an authority with a record of poor financial management. We would use the measure sparingly, but we have a duty to ensure that we can, in the last resort, protect local taxpayers from imprudent borrowing if the need arises.

Obviously, we would consider the circumstances carefully before acting, and would try to resolve matters by discussion rather than by invoking the formal power, but it would be a high-risk strategy to assume that there could never be circumstances in which such powers were necessary. I hope that the hon. Gentleman will accept that and withdraw the amendment.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

The Minister does not quite understand the thrust of the amendments, perhaps because he feels that they are directed at him and his colleagues. The amendments would take the Secretary of State out of the equation. Whitehall interferes far too often in local government, and particularly in local government finance. Contrary to the criticisms made by the hon. Member for Runnymede and Weybridge, we have constructed the amendments so that they provide the flexibility for independent professional outside bodies to set up the code for borrowing. There is flexibility in amendment No. 54, as the Minister implied. Under that amendment, the Secretary of State could choose which accountancy body would draw up the code. CIPFA is the obvious choice, as the Minister readily accepts, but the amendment provides flexibility. If CIPFA decided not to draw up a code, the Secretary of State could choose another accountancy body.

I am reminded of the Government Resources and Accounts Bill Standing Committee, on which I had the privilege to serve. That Committee debated how we should draw up accounting definitions and a new set of resource accounting budgets for the Government. The then Conservative Front-Bench spokesman, the right hon. Member for West Dorset (Mr. Letwin), and I agreed that the Government relied on themselves far too often to set the definitions, and that bodies outside Government, Whitehall and the Treasury should be involved in drawing up the definitions. If the Government keep that power to themselves, they will be judge and jury in their own case.

We are discussing a slightly different issue, because under this Bill, the Government are judge and jury in respect of local authorities, not themselves. Nevertheless, the same argument applies, namely that there is a role for independent bodies. As the Conservatives and I said in Standing Committee on the Government Resources and Accounts Bill, there should be provision for such bodies in the Bill, and we should give them a statutory role. There may need to be some flexibility in case we have to change the body because it has ceased to exist.

As the hon. Member for Runnymede and Weybridge said, the body would be independent and so might fold. We would then need to appoint another body. However, as we discussed at length in

Committee on the Government Resources and Accounts Bill, such bodies exist in the accountancy world. There is, for example, the Accounting Standards Board and the Financial Reporting Council, which the Government set up with the accountancy profession. Those bodies are used to doing the sorts of jobs that we are suggesting that they could do under amendments Nos. 52 and 54. The amendment provides flexibility, and I believe that there is a precedent to the provision that the Conservatives supported.

The Minister says that the Government need the extra powers to control authorities such as Hackney. As I have said, I disagree with him because I believe that the Local Government Finance Act 1992 provides those powers. The Minister said that the 1992 Act deals only with revenue, but all borrowing has a revenue consequence. There is real worry about the Government attitude and the fact that they are divorcing capital from revenue. The reason why the Conservatives focused on revenue powers when they brought forward the 1992 Act was to include the capital consequences in the revenue calculation. There is a close inter-relationship between borrowing and the revenue control mechanism in the 1992 Act. I think that that provides the Government with the powers that they need, which they should not go beyond.

My next point is more philosophical and relates to an underlying difference between the Government and Liberal Democrats: our position on local democracy. Other countries that really devolve power allow the equivalent of local authorities to go bust.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

Will the Minister—the hon. Gentleman—give way?

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

I am grateful for the hon. Gentleman's support. He has been positive to me this morning so I shall give way.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

The hon. Gentleman is going about wrecking the parliamentary system about as effectively as the Government, which is why I was confused.

Does the hon. Gentleman suggest that the mess into which Hackney has got itself should be dealt with at the expense of Hackney council tax payers? Would he therefore not support any special grant allocations from the Government to bail out Hackney?

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

We will look at the grant measures when they come before the House and we will listen to arguments on them. There might be special circumstances of which I am not aware. The council might have got into complicated arrangements with Whitehall, so I shall not prejudge the matter.

Other countries, such as the United States, Canada and many continental European countries, have no bail-out arrangements. Those federal or national Governments will not underwrite the debt of local authorities, whether they are American states or city governments in France. That forces authorities' to concentrate their minds on operating a prudential regime. The lack of a bail out forces the equivalent of council tax payers to think carefully when they go to the ballot box. That is rich local democracy and real

devolution. The reason why this place is not used to that is because we have a political culture of sorting everything out in Parliament and Downing street. While we have that culture and pass laws and financial frameworks that back it up, we will not get the true rebirth and renaissance of local democracy that some of us want.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

What the hon. Gentleman is saying is interesting, but is it Liberal Democrat policy that local authority borrowing should always be on a stand-alone basis and that it should be clear that central Government will not bail out local authorities that cannot repay their debt? That would lead to significant changes to the local authority debt market and many Liberal Democrat-controlled authorities would find that the cost of their debt would rocket because of their financial practices.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

We would certainly like to move toward that position but it would require major changes to local authority finance and the tax regime. For example, it would require council tax to be replaced with local income tax and the genuine devolution of financial powers. That could not be done overnight. I would be keen to have a long and wide-ranging debate with the hon. Gentleman about that.

Mr Andrew Turner (Isle of Wight, Conservative)

Will the hon. Gentleman give way?

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

In a moment.

The hon. Member for Runnymede and Weybridge and I might have that debate throughout our proceedings. My colleagues and I could outline the long-term reform that would produce real devolution of financial powers to local authorities, which would enable the changes to the borrowing regime that I have talked about to be implemented safely and prudently.

I see from your body language that I am in danger of teasing your patience, Mr. Griffiths.

Mr Win Griffiths (Bridgend, Labour)

You are.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

I hope that the hon. Member for Isle of Wight will not tease your patience, Mr. Griffiths, when I give way to him.

Mr Andrew Turner (Isle of Wight, Conservative)

I hope that the hon. Gentleman enjoyed his visit to my constituency on Friday. May I advise him that Ryde is spelled with a ''y''?

Will the hon. Gentleman explain why it is necessary to change the local tax system in order to introduce the beneficent regime about which he spoke so warmly?

Mr Win Griffiths (Bridgend, Labour)

Order. That is interesting, but I rule that beyond the scope of the amendment. Will the hon. Member for Kingston and Surbiton draw to a conclusion?

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

Thank you, Mr. Griffiths. The hon. Gentleman made a good point about spelling, which shows that one should not phone one's office from the train and dictate without checking spellings. I confirm that I enjoyed my trip to Ryde. I learned that Paul McCartney meant the song ''Ticket to Ride'' to be ''Ticket to Ryde'', but that John Lennon misunderstood him in the telephone conversation. I emphasise that I do not claim to be anything like John Lennon.

I turn now to another approach to the boring regime. We could learn much from other countries. In evidence to the Select Committee, which backs up my argument about the Government's approach, an expert, Tony Travers from the London School of Economics and Political Science, said:

''There is no doubt that although the Government has set in the Bill a framework within which it would be possible to operate, its so-called prudential rules system, the same legislation would indeed allow the Government to operate a very different capital control system, one similar to or even more controlled than the present one.''

It is those fears voiced by that excellent academic to the Select Committee that lie behind our amendments.

We are worried that the Government have left the Secretary of State with huge powers that he could use. We know the Minister's approach, and we are in no doubt about his genial manner and his belief that the system will be a light touch. I, for one, would not expect him to misuse the powers. The problem is, however, that the powers will be on the statute books for use by future Ministers. The Committee must worry not about the current holder of the office, for whom we all have much respect, but future Ministers.

I heard much noise of support from Labour Members for my comments when debating the programming motion when I referred to the way in which previous Conservative Governments had misused control powers in respect of local government. Labour Members should be worried about what is before them today. Their Government, who I am sure they trust, are putting into law powers that future Secretaries of State, who may not belong to their party, could misuse. Those powers are more extensive than those that the previous Conservative Government gave to themselves. Indeed, Tony Travers implied that in his remarks.

This has been a useful debate. Some arguments may be reiterated in different forms as we proceed. Given that we shall continue to have such debates, I shall not push the amendment to a Division. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

I beg to move amendment No. 11, in

clause 2, page 1, line 13, after 'by', insert 'or for'.

Mr Win Griffiths (Bridgend, Labour)

With this it will be convenient to discuss Government amendments Nos. 12 to 24.

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

In the Committee that dealt with the Regional Assemblies (Preparations) Bill, I said that it was a source of satisfaction to me that I had not moved a Government amendment. My record this morning is not so good, as I have had to move a Government amendment so early in our proceedings. When I have explained why, I hope that members of the Committee will understand the wisdom of making such a changes to the Bill.

The amendments ensure that clause 3, on the affordable borrowing limit, works in the way that has always been intended. The clause is crucial to the new prudential borrowing system. It requires each

local authority to determine and keep under review how much it can afford to borrow. That decision has significant implications and sets the limit to the amount that the authority can borrow. Because the decision-making process is so vital, clause 3(3) gives the Secretary of State wide-ranging power to make regulations about the way in which it is undertaken.

One way in which to use such regulations is to require authorities to have regard to codes of practice when assessing the affordability of their borrowing. The Committee will already be aware that we intend to specify the CIPFA code for that purpose. The code will therefore lay down sensible ground rules for the affordability decision, but that safeguard can work effectively only if the decision has been taken at the right level in the authority. We have argued from the outset that only the full council should have the right to set and vary the affordable borrowing limit. That is the rule that we intend to require and I hope that that is broadly agreed by the Committee. We have been considering whether such a requirement could be left to the CIPFA code or could be brought in by regulations under the clause 3(3) power. There is some doubt about whether that would be within the regulatory power, but in any event the matter is so important that we believe that there is a strong case for stating the duty in the Bill. That is why we tabled the amendments. The objective is achieved mainly by the first part of amendment No. 21.

There is a separate and specific issue relating to the Greater London Authority, which is a body comprising the Mayor and the Assembly, and which has four separate functional bodies—Transport for London, the Metropolitan Police Authority, the London Fire and Emergency Planning Authority and the London Development Agency—all of which are themselves defined as local authorities. Aficionados of London government—I know that the hon. Member for Kingston and Surbiton is one such, as he served with me on the Committee that considered the Bill that created the GLA—will know that those functional bodies are local authorities. That explains the need—given that the GLA and functional bodies' borrowing limits are to be set by the Mayor—for the regrettably large number of amendments referring to the limits set by or for the local authority. I say that because I understand the suspicions held in some quarters, particularly among Liberal Democrat Members, that the Government might not be beneficent and that the reference to limits set for the local authority might imply some Government control freakery. That is not the case. I hope that the hon. Gentleman will acknowledge that we are recognising that although it is right that the Mayor should set the limit, because it will be set for the local authorities, as defined—the four functional bodies—the Bill therefore needs to say, ''set by or for them''. I apologise for my lengthy explanation of the rather obscure issue, but it is important that the matter should be understood.

Of course, before setting the limit, the Mayor must consult the London Assembly and, in the case of the limit for a functional body, that body itself. Amendment No. 12 and the definitions in amendment No. 22 achieve that effect. The second

part of amendment No. 21 is required to make it clear that the Mayor's normal wide powers of delegation are curtailed in that context. The other amendments are consequential, as I explained. I hope that the Committee will understand the need for the amendments and will agree that they should be incorporated in the Bill.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

The Minister not only preened himself during the passage of the Regional Assemblies (Preparations) Bill on not having had to table any Government amendments, but accused me of having forgotten about London when talking about England. I can say ''touché'' to him this morning on two counts, because he obviously forgot about London when he was drafting this Bill. I accept that the amendments are largely technical, but I have certain knee-jerk concerns at the thought of the Mayor deciding on borrowing limits. It is the same concern that I would have if Cadbury's suggested that my kids should run their chocolate factory, and I hope that the Minister is satisfied that the Mayor setting the prudential borrowing limits is not a contradiction in terms.

Maybe I am incredibly thick, but without having looked at the Greater London Authority Act 1999, it is not entirely clear to me what the second part of amendment No. 21 is intended to do. Can the Minister clarify that for my benefit? Could he also clarify, in relation to amendment No. 22, the status of the functional bodies when they are borrowing? From what he said, I take it that they will have separate borrowing limits. Does that mean that they are borrowing on their own security, or against the revenue streams and assets of the Greater London Authority as a whole? Whichever is the case, is it entirely satisfactory that the Mayor alone sets the limits without any involvement by the Greater London Authority? Why is the provision for London analogous to that provided in the draft regulations for other authorities rather than the assembly being the body that determines the prudential borrowing limit?

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

The hon. Gentleman did not have the pleasure of sitting with the hon. Member for Kingston and Surbiton, myself and other hon. Members for some three months in consideration of the Greater London Authority Bill. Had he done so, he may have been less chary about the time allocated for this Bill, and he would know that the problem that I described was created because the four functional bodies are defined separately as local authorities. They are separate bodies but they fall within the Greater London Authority family.

Within that structure, a large measure of delegation is available to the Mayor to delegate his authority to those functional bodies. The hon. Gentleman asked about the second part of amendment No. 21. It simply restricts the Mayor's delegation powers in respect of setting the borrowing limit, which we believe should be set by the full council in the case of a normal local authority and by the Mayor in London's case. The Mayor is the executive in London and he must consult with the assembly and the functional bodies before reaching a decision. The hon. Gentleman's concerns

about consultation are covered, but it is important that the Mayor should have overall responsibility. I have no hesitation in affirming that principle and make no comment on the character of the present incumbent of the post. It is right for the Mayor to be responsible for setting the overall limit.

Mr Andrew Turner (Isle of Wight, Conservative)

Will the Minister give way?

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 and wish him third time lucky in this intervention.

Mr Andrew Turner (Isle of Wight, Conservative)

Will the Minister explain to those of us who were not privileged to sit on the Standing Committee that considered the Greater London Assembly Bill why the Mayor is the appropriate body to determine the borrowing limits in London but not in Hartlepool or North Tyneside?

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

As the hon. Gentleman will be aware, the constitution in respect of London is different from that of other authorities where a referendum has been taken and a mayoral constitution has been established. The mayor will play a key executive role in those places that have elected mayors. The position is different in London because the Mayor has been created to head the family that I described, which is comprised of bodies that are also defined as local authorities.

The amendments deal with London's unique position. They ensure that the Mayor cannot delegate the responsibility for setting the overall limit to the functional bodies—which are defined as local authorities and would otherwise have a power to set their own borrowing limits. The amendments also ensure that there is appropriate consultation with the GLA, which has a relationship not dissimilar to that of councils to mayors in the other areas to which the hon. Gentleman referred. I hope that that explains why the provisions are necessary. They are somewhat arcane and unique to the circumstances of London.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

I hope that I can give my version of explanation to the hon. Member for Runnymede and Weybridge and suggest why the Minister may have forgotten about London prior to today's amendments. When we debated the Greater London Authority Bill, there was a huge debate about what form of authority it was. We challenged the Government who were approaching the Bill as though it was a usual local authority. However, the Minister insisted that it was different from a local authority, in that it was a city government. When we debated the Regional Assemblies (Preparations) Bill, the Minister almost suggested that the GLA was similar to a regional government, but withdrew his remarks just in time before they were put on the record. That is why the Minister forgot about London. The structure is odd; it is neither a local authority nor a regional assembly, but some new-fangled creation that probably will not repeated elsewhere in the United Kingdom. That was one of the reasons why we did not like the Government's approach to the GLA.

We do not have a problem with the amendments in principle. We tabled literally hundreds of amendments to the Greater London Authority Bill, but we do not need to table amendments to this Bill. Unlike the Bill, the amendments would give more powers to the GLA.

That is welcome. Under the Greater London Authority Act 1999, the mayor was circumscribed in what he or she would be able to do.

I quibble with the Minister, however, about the role of the Greater London Assembly on setting affordable borrowing limits. As some Conservative Members have implied, the assembly should have a role beyond that of consultation and be part of the decision-making process. That takes the Minister and I back to many debates when we argued endlessly that the assembly should be more involved and that all the power within the GLA should not rest on the Mayor. In case members of the Committee are not familiar with the 1999 Act, the assembly has power only in respect of one vote a year on the budget. It can veto the Mayor's budget if it can achieve a two-thirds majority among its members. It has a limited power within the finances of the GLA. We objected to that at the time and, while I shall not vote against the amendments, they would be improved if the assembly were more involved in such decisions.

The hon. Member for Runnymede and Weybridge was concerned that the Minister was giving more powers to the current incumbent. Perhaps the explanation is that the powers will not be given to the Mayor of London until April 2004. The Minister may be hoping that events directly after that time will solve the Government's problems with the current incumbent. I certainly hope that they will and that a colleague of mine will be elected, but that has yet to be decided. Unlike the hon. Gentleman, I consider that it is right to give the Mayor and the GLA more powers in that regard.

Mr Andrew Turner (Isle of Wight, Conservative)

I am grateful to have the opportunity to press the Minister with some of my thoughts. He may not feel pressed by my thoughts, but much more explanation needs to emerge if I am to accept the amendments and their consequences elsewhere for London. The right hon. Gentleman assumes that the Mayor must set the prudential borrowing limits for each of the four bodies—the GLA and the three functional bodies.

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

There are four functional bodies.

Mr Andrew Turner (Isle of Wight, Conservative)

I am sorry. It is thought that the Mayor is best placed to set the prudential borrowing limits because he is aggregating a debt, which would be imposed on council tax payers and other revenue sources that contribute to the running of the five functional bodies. At the beginning of the debate, I wondered why it is appropriate for the Mayor of London to take such action, not the mayor of North Tyneside, for example. However, I concluded—perhaps the Minister will correct me if I am wrong—that it is because there are five bodies in London, whereas there is only one body in North Tyneside, so the local authority, not the mayor, is given the opportunity to set the prudential borrowing limit for North Tyneside.

The Minister is not intervening, so I assume that I am right so far. Other local authorities in North Tyneside set their own prudential borrowing limit. For

example, there is a fire and civil defence authority, a police authority and, I assume, a passenger transport authority, each of which can set separate prudential borrowing limits for itself. The burden will lie on not only the ratepayers of North Tyneside, but the ratepayers of the whole Tyne and Wear conurbation. That opens up the question whether the Bill is correct in referring to a local authority borrowing more than it can afford. Would it not be better to refer to a local authority borrowing more than the ratepayers can afford?

Mr Win Griffiths (Bridgend, Labour)

Order. I am just about to stretch myself here, but the amendments relate solely to the powers of the Mayor and the bodies in London. While the hon. Gentleman is raising a significant issue concerning the rest of the country, it is not in order to raise such matters now. They could be raised when discussing amendments to other parts of the Bill.

Mr Andrew Turner (Isle of Wight, Conservative)

I accept your ruling, Mr. Griffiths. I am concerned about why the Minister has chosen the Mayor to be the proper authority to set the prudential borrowing limits for the five bodies in London, when he has not chosen to do so elsewhere. You are right about the other parts of my argument. They may creep outside the ambit of the amendments, in which case I am happy to sit down and let the Minister reply.

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

May I first say in response to the hon. Member for Kingston and Surbiton that, while I am delighted to know that he will support the amendments, I must disappoint him by saying that they will not substantially increase the power of the Greater London Authority. They define the responsibility between the Mayor and the four functional bodies, and require the Mayor to set the overall limit. There will be no additional freedom, because the freedom that is being extended by the Bill applies to all local authorities, which will have the ability to set a prudential limit and to operate borrowing on that basis. The GLA will be treated the same as any other authority in that respect.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

I may have not fully explained myself. When we debated the 1999 Act, the Government were unwilling to give such a borrowing power to the GLA and the Mayor. That was my point. Now, they are giving them the same power as they are giving to local authorities. It is a new power and one that I welcome.

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

I am happy that the hon. Gentleman and I agree that the amendment is a desirable step forward. We are extending freedom to local government and I am delighted that Liberal Democrat Members welcome that, albeit with reservations.

The hon. Member for Isle of Wight (Mr. Turner) is showing an interesting geographic spread in his concerns from about the most southerly point in the United Kingdom to a debate about one of the more northerly metropolitan conurbations. With respect to your judgment, Mr. Griffiths, I shall not go into detail about the specific arrangements in Tyneside, but I must say that there are two fundamental differences between the Mayor and the assembly constitution in London, and the mayoral constitutions in other parts

of England that were introduced under separate, later legislation.

In London, the Mayor is defined as the executive. That is an important distinction. It is a unique constitutional arrangement and not replicated elsewhere. The Mayor, alone, has executive responsibility. He has to consult the assembly, and the hon. Member for Kingston and Surbiton highlighted the assembly's important role in relation to the budget. If he recognises the important role of the assembly in relation to the budget, the hon. Gentleman must be aware that that control over revenue is critical. He made the point in an earlier debate that, without the means to service a loan there, is no point in borrowing, so the two are inextricably linked, and I hope that he recognises that the assembly's control over the revenue budget is an important discipline that the Mayor will have to have regard to when using his powers to set the borrowing level.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

I am grateful to the Minister for clarifying that point. I agree with him, and I hope that current assembly members of all parties will prevent the Mayor from imposing a very high council tax levy on the council tax payers of London.

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

I agree with the hon. Gentleman, and I expressed a similar view on all previous occasions when the Mayor proposed what appeared to be an unreasonably large precept. I hope that the assembly will act prudently this year by ensuring that the council tax payers in London are not saddled with an unreasonable demand from the Greater London Authority.

I return to the distinctions between the London Mayor and mayors elsewhere. One of them is the distinct role that gives the Mayor executive responsibility. In constitutions elsewhere, the council is a pre-existing corporate body to which the mayoral function is added; that is different from the London position, where the Mayor has a unique executive responsibility. The second difference is the one that was rightly highlighted: the Mayor in London is working with a set of existing bodies that are part of the Greater London Authority family. They have accounting lines to the Mayor, who rightly should set their overall expenditure budgets within the Greater London Authority budget, and their borrowing limit. That is why the unique functions apply in London. I crave your indulgence, Mr. Griffiths; I will not stay on this issue any longer than it takes to make the point. Elsewhere, separate police authorities and fire authorities—they can come in a number of different forms, which I do not intend to get into a discussion about, least of all this morning—are not part of the family in the same way that the Greater London Authority functional bodies are part of the GLA family. There are differences, which is why it is appropriate to have these separate provisions for London. I hope that the Committee will agree that that is the case.

Mr. Hammond rose—

Mr Win Griffiths (Bridgend, Labour)

Mr. Hammond.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I was hoping to intervene on the Minister, but he is quicker off his feet than I remembered him to be, and I did not get up in time.

Given what the Minister has just said about that family, can he answer my specific question about whether these functional bodies will borrow on their own account—on the security of their own assets and revenue streams—or whether the borrowing is, in effect, secured against the Greater London Authority's total revenue streams in all capacities?

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

The hon. Gentleman raises a technical question about the Greater London Authority, which is complex, and I will not go into the details. The key point is that the Mayor has overall responsibility for the budget, including the financing and repayment of debt of all the functional bodies, even though four of them are defined as separate local authorities within the Greater London Authority family.

Amendment agreed to.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I beg to move amendment No. 26, in

clause 2, page 1, line 14, at end insert

'except where such borrowing is for the purpose of refinancing existing borrowing and the local authority states that repayment of an amount of existing borrowing sufficient to eliminate any such breach is to be made within fourteen days of the date of the borrowing in question.'.

Mr Win Griffiths (Bridgend, Labour)

With this it will be convenient to discuss the following amendments:

No. 53, in

clause 2, page 1, line 15, leave out subsection (2).

No. 5, in

clause 2, page 1, line 16, leave out 'direction' and insert 'order'.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

Amendment No. 53 was tabled by Liberal Democrat Members, but we can deal with it in this group.

Amendment No. 26 addresses a concern that I touched on in my questions to the Minister on clause 1. We are now putting into the Bill a clear authority for local authorities to borrow for the purpose of managing their treasury operations. The Minister and the explanatory notes specifically referred to the desirability of local authorities being able to borrow in order to retire debt, and the Minister used the analogy of what many home owners have been doing over the past few years as interest rates have settled at a lower level—they have retired more expensive debt by borrowing in the markets at current market rates.

Amendment No. 26 would exclude from the limits on borrowing by local authorities short-term exceeding of limits if the purpose of the operation was to borrow new money in order to retire existing debt. For example, if a local authority had £10 million of outstanding debt on unfavourable terms that it intended to retire by repaying that debt, it would first have to raise £10 million of new debt. It might be possible to do that transaction back to back, but that would limit a local authority's range of options for raising finances. If the authority wished to issue new debt, it might have to raise new debt and pocket the money, as it were, before it could repay the old debt.

Such a consideration is readily in the grasp of anyone who has struggled with the management of ordinary household and personal debts.

It is important that a local authority that is close to the prudential limit should not be prevented from going to the market to raise new debt if the explicit purpose of that is to retire existing debt in a short time, which would mean that the overall borrowing level would fall back below the prudential limit. A mere short-term treasury operation should not take an authority's overall borrowing limits over the prudential limit that the authority had set itself.

The amendment's terminology might not be perfect, but I would be grateful if the Minister would respond to its substance. Will he reassure me that operations will not be inhibited by setting overall prudential limits that might prevent authorities from raising additional debt in order to retire debt? We suggested 14 days as the period allowed between new borrowing and the retirement of existing debt. The Minister might say that that period is far too long, but the principle is the issue.

The Liberal Democrat amendment No. 53 would delete subsection (2) and I have sympathy with the sentiment behind it. It is probably a probing amendment that is intended to encourage the Government to talk about circumstances in which subsection (2) would be used—the Minister has already talked about those circumstances.

Our approach is slightly different. Amendment No. 5 would replace the Secretary of State's ability to specify a local authority's borrowing limit by direction with the power to do that by order. Of course, an order under the Bill would be a statutory instrument that would be subject to parliamentary scrutiny. I understand that if the Government expected to specify many individual local authority limits, the process would be cumbersome and impractical. However, the Minister told us that he expects that to be a reserve power that would be used extremely rarely, and only if something went very badly wrong with a local authority. It is therefore reasonable to expect parliamentary scrutiny of a significant claw-back of the much-trumpeted freedoms that the Government claim to give local authorities in the Bill. Although I sympathise with the sentiment of the hon. Member for Kingston and Surbiton in wanting simply to strike out subsection (2), given the Government's clear intention to have the reserve powers, it is more realistic to ask them to exercise the powers by order, which will not be onerous if the procedure is exceptional and likely to be very seldom used.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

We certainly support amendments Nos. 26 and 5. They do not go nearly as far as we would like them to, but the hon. Gentleman may be right to suggest that they may tempt the Government to accept a minor improvement. I do not want to pooh-pooh the hon. Gentleman's amendments, because they raise important points. Amendment No. 26 could be very important if there were a crisis. It could ensure that limits imposed by Whitehall would

not be required. The Bill already contains some powers in clause 5 that relate to the circumstances that the hon. Gentleman probably has in mind. His ideas may fit more neatly into clause 5.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

Clause 5 deals with borrowing for cash flow support. In amendment No. 26, I am talking specifically about borrowing for debt refinancing.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

I accept that clause 5 is about temporary borrowing. I thought that the hon. Gentleman was worried about situations in which temporary measures might be needed to improve a council's debt position. I do not want to get into a theological debate about it; the hon. Gentleman's point is well made. Indeed, his point backs up what the Government have set out in clause 1(b)—the idea that local authorities should consider borrowing to improve their treasury operations.

The hon. Gentleman also has a valid point in amendment No. 5. If the Government are to use these powers only on very rare occasions, it is sensible that this House should be able to scrutinise their use.

I come now to our amendment No. 53, which seeks to strike out clause 2(2). As the hon. Member for Runnymede and Weybridge said, it is a probing amendment. We have suggested it because the Government are giving the Secretary of State powers to pick and choose between local authorities. This House should be concerned when the Government do that, especially when there are no clear criteria or objective tests for such decisions. The Secretary of State will be able to decide which local authorities he or she wishes to impose borrowing limits on. The charge of political favouritism will often be made.

The Minister may argue that the powers would give the Secretary of State a chance to intervene to help a local authority and to disapply limits that would otherwise be imposed. Perhaps we should welcome that. However, decisions should be subject to objective criteria rather than to the whim of the Secretary of State of the day. I want to probe the Minister on when he expects the powers in clause 2(2) to be used. Why do Ministers feel that they need those powers? When do they envisage using them? Can he give the Committee examples of when this pick-and-choose power would be necessary? If the Minister can reassure us on those questions, we will not press this amendment to a vote.

Mr Robert Syms (Poole, Conservative)

I want to pursue the point about Government interventions on particular local authorities. Conceivably, that could happen because the local authority has been imprudent over a long period and has got into difficulty, but on some occasions outside factors can hit a local authority very hard. A few years ago in Scotland, Western Isles council was hit by imprudent investments. Situations have also arisen in which banks have collapsed or building societies have got into trouble. Does the Minister consider the power purely as a power of limitation, or does he think that, in certain circumstances, the Government may be in a position to expand borrowing? To make that expansion affordable, it may have to be part of a package in

which, for a period, additional revenue is given to an authority.

I can imagine situations in which an authority faces a disaster of some type. In such cases, offering a helping hand to what has generally been a prudent authority over a period of time might be a better approach than purely saying, ''There are limits on borrowing. Sorry, you must deal with your problems yourself.''

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

Amendment No. 26 relates to clause 2(1)(b) and would allow an authority to breach any national limit that was imposed by the Secretary of State if an old loan was being replaced with a new loan. That would allow the authority to take out a new loan 14 days before repaying the existing loan. Authorities often refinance loans for good reasons, as the hon. Member for Runnymede and Weybridge mentioned, and I agree that it is important that that facility should continue to be available.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

The Minister has interpreted the amendment as I suspected that it might be interpreted on reading the amendment paper last night. The amendment was intended to flow on from the opening phrase of subsection (1)(a), not simply from the end of subsection (1)(b), so that it referred to the limits under clause 3, as well as those under clause 4. As I understand it, the correct way in which to insert such an amendment is to do so at the end of the relevant line, because it would then refer to preceding subsections.

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

I understand what the hon. Gentleman says and I think that the main thrust of the distinction between national, rather than individual, limits will be more relevant to the next two groups of amendments, to which I will come in a moment. The points that I will make would apply even if the wider usage were applicable, as he intended.

We object to the amendments because there is no reason why loans should overlap and because it would be imprudent if they did. The present system does not allow any duplication of debt, but under current arrangements local authorities still manage to refinance without any difficulty. Indeed, new and old loans will, in virtually all cases, have come from the Public Works Loan Board, and it requires only a simple book entry to ensure that one debt is extinguished as soon as the new one is created.

There has already been some reference to clause 5 and I should add that that gives authorities valuable scope for temporary borrowing to solve genuine cash-flow problems. That relates to a different issue, but it shows that the Government are willing to put in place arrangements that enable authorities to manage their affairs without difficulty. We do not believe that the amendment is necessary. Existing arrangements do not give authorities any freedom to double up debt in the way that the amendment would allow, but they are still able to manage satisfactorily. There is no good reason to agree the amendment.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

Does the Minister agree that the Government have, under pressure from the Select Committee, removed from the draft Bill clause 2(4)—I think—which sought to restrict the classes of person with whom a local authority could enter into borrowing arrangements? The implication of that subsection was that local authority borrowing was to be made freer. Local authorities might, perhaps, want to issue bonds to the wider market and they might wish to use innovative financing mechanisms. It is quite conceivable that in such circumstances there would be a need to raise a new debt in order to retire existing debt and there might not be the ability to back-to-back that debt as had previously been the case.

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

Once again, we have this grudging acceptance of the fact that the Government have responded to proposals from a Select Committee. We have genuinely listened to views and we have amended the Bill accordingly, and rather than getting credit for it, we are once again being attacked for having done that.

I say to the hon. Gentleman that this is all part of the process of freeing up local government. I agree that we should give greater freedom and that we should not be restrictive, but we do not want to encourage imprudent practices. I can see no good reason why a local authority could not arrange for the kind of back-to-back arrangement that we have described, whether it is taking out its loans through the Public Works Loan Board or through other lenders. The amendment would send a bad signal, because it would facilitate the doubling up of debt.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I am not a financial expert and I am certainly not an expert in the raising of public sector debt. However, if the local authority wanted to offer a local savers bond, for example, to people living within its area, it is inconceivable that such an operation could be back-to-backed with the retirement of debt from the Public Works Loan Board. The money would have to be raised first, and would have to be in the bank before the existing debt could be retired. Does the Minister not want to allow local authorities to explore such innovative approaches?

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

I, like the hon. Gentleman, am not a great financial expert. To put it charitably, it is the partially sighted leading the partially sighted on this issue. However, I think that the provisions in clause 5 that give local authorities the scope for temporary borrowing in order to solve genuine cash-flow problems would cover the case that he describes.

Mr John Pugh (Southport, Liberal Democrat)

I share some of the Minister's reservations about amendment No. 26 in so far as I recognise that there is a distinction between prudent and imprudent financing. I was going to make that point, but then I read the amendment. It is tightly drawn, and says that the local authority must state

''that repayment of an amount of existing borrowing''

will be eliminated ''within fourteen days''. That would place only a small demand on the system. Were we back in an age when borough treasurers were encouraged to show an entrepreneurial spirit and get their local authority in trouble, I would have anxieties.

However, the amendment is tightly drawn. Is the Minister saying that the sort of manoeuvre mentioned in the amendment is allowed under the Bill, and if not, what is wrong with such a manoeuvre?

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

As we have established, the system does not allow the doubling up of debt in the way that has been described. Local authorities manage their affairs in a way that avoids that, and we want that to continue. If we believed that there was a problem that could not be handled by the provisions in clause 5, to which we have referred, we would certainly want to consider the amendment, because we do not want to make unreasonable difficulties for local government. However, we do not believe that there is a problem—the current arrangements work well without the facility that the amendment would provide. I accept that such a facility would be for 14 days only, but the cost of maintaining two debts that might run into millions, if not hundreds of millions, of pounds over that time could be significant, so it is prudent to try to manage without such a facility.

Mr John Pugh (Southport, Liberal Democrat)

There is a presumption that a local authority would not dream of using the provision unless it would make the authority a net saving. A local authority would be insane to refinance if it knew that that would cost it more.

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

I simply repeat that authorities are already faced with such issues and it is not a cause of difficulty. We have not had representations from people seeking changes. The prudential system will often allow for a cushion so that new debt can be taken out if, for example, the authority has an additional borrowing facility. As I say, clause 5 contains provisions for coping with short-term cash-flow difficulties. If the issue were a real problem, we would consider the amendment, but I do not believe that it is. I hope that the hon. Member for Runnymede and Weybridge will withdraw the amendment.

Amendments Nos. 53 and 5 deal with rather different circumstances. Amendment No. 53 would remove clause 2(2), under which the Secretary of State could allow an authority to breach the national borrowing limit. It is important to define that. To answer the issue raised by the hon. Member for Poole (Mr. Syms), the provision does not apply to authorities that may have acted imprudently. The facility applies only when a national limit is imposed for reasons of national interest, and an authority is placed by that in a difficult position, because the national limit prevents it from doing things that it is contractually committed to or that are in urgent need of doing. It must also make a sound case for the fact that, although it remains within its prudential limit, it needs the extra flexibility. To remove the Secretary of State's ability to make a change in such circumstances is not a welcome reform. I am surprised that the hon. Member for Kingston and Surbiton is suggesting that. The Local Government Association certainly would not share his view. It would want the facility, because it allows a response to individual circumstances when a local authority might be caught by the imposition of a

national limit that was set below its own prudential limit.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

I want an explanation of the circumstances in which the measure would apply and practical examples, so that future Ministers' actions can be considered against objective criteria. I am in favour of having the freedoms to get round Government limits, which I do not agree with in the first place, but I am not in favour of arbitrary action by a Secretary of State with no reference to objective criteria. Is the Minister prepared to give the Committee what I have requested?

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

Of course I will, but let me preface my remarks by saying that we do not intend to use the measure commonly. On the contrary, I have said that we expect to use the national limit only in very exceptional circumstances—only if the national interest requires it as an overriding priority.

Individual local authorities could be set a limit by the national limit that was below their own prudential limit. They could have undertaken contractual commitments that would require borrowing within their own prudential limit, but that would breach the national limit. It would clearly be appropriate for that authority to make representations to Government and for Government to be able to say that they would relax the national limit in that case, not because of the imprudence of the individual authority, but because there were very strong grounds for doing so in that individual circumstance.

It is only that flexibility that we allow. I thought that the hon. Gentleman would see the logic of it and welcome it, as local government as a whole does.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

If the Minister imposes national limits for reasons of macro-economic emergency when the Government have finally driven the economy and the fiscal situation into crisis, it cannot be right to start breaking them. They are highly onerous and should only ever be imposed in the first place if there is a real problem and a global macro-economic limit on local authority borrowing is required. If the Government then start to breach that in the case of individual authorities, with no compensating reduction for other authorities, the original purpose of the action will be undermined.

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

Given the prudent management of the economy, we envisage the power being needed only in very exceptional circumstances. As I said, it might be necessary only if, by some unforeseen misfortune at a future date, a Conservative Government are re-elected. In that situation, if a national limit was imposed because it was nationally prudent, there could be circumstances, such as those that I have outlined, in which an individual authority was placed in an impossible—

Mr Andrew Turner (Isle of Wight, Conservative)

Will the Minister give way?

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

I am trying to respond to the previous intervention. I hope that hon. Members understand that I do give way and respond to them, but I cannot respond to two interventions simultaneously. That capacity has not yet been devised, so I am concentrating on the intervention

from the hon. Member for Runnymede and Weybridge.

There will be individual circumstances in which things might be difficult for an authority. We do not wish to say that there can be no possibility of disapplying the national limit for an individual authority if that would not have a significant impact on the overall national position. Removing that flexibility would be unwise. We believe that local government welcomes the additional flexibility. It does not welcome the power to impose a national limit, but I think that it understands why we are including it. As I have said, the power will be used only in extreme circumstances. Not having the power to make an adjustment for an individual authority would be harsh, unwise and an unduly restrictive position.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

The debate is proving helpful in elucidating when the Government think that they might use the power, but let me give a counter-example. Let us imagine that the Government set the national economic limit and it hits quite a large number of local authorities whose prudential limit was above that limit. As the Minister said, they may have contractual arrangements with private sector companies that require them to borrow up to or near their own prudential limit above the national economic limit. If the Government had a range of local authorities approaching it, how would they act? The Minister is asking the Committee to agree to a Bill that would give the Government powers that the Minister could pick and choose. I would not expect an Act of Parliament or the regulations to prescribe every single circumstance, but it is reasonable for the Committee to ask for clearer guidelines and explanations from the Minister as to how he would deal with such circumstances.

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

I must beg your indulgence, Mr. Griffiths, in moving ahead to clause 4. As the hon. Gentleman will see if he examines that clause closely, where a national limit is imposed there is capacity for the headroom available to some authorities to be transferred to other authorities. We would expect that flexibility to cover most eventualities.

However, in situations in which that was not sufficient, and in which there was, for example, a direct threat to service delivery in a particular authority, it is right that the additional flexibility to disapply the national limit in the case of one authority should be available. That shows our willingness to be sensitive and responsive to a range of different circumstances, and I am surprised that the hon. Gentleman does not welcome it as giving additional flexibility to the system.

Amendment No. 5 relates to a similar power.

Mr Andrew Turner (Isle of Wight, Conservative)

I share the concern of the hon. Member for Kingston and Surbiton about the subsection. I am particularly worried by the opportunity for unfettered discretion, because Ministers tend to exercise such discretion in ways that are sometimes difficult to describe objectively. Indeed, they set themselves such

limits precisely because it is difficult to describe objectively how they intend to exercise that discretion.

Does not clause 4(1) give the Minister the opportunity, should it be necessary, to write regulations that describe objectively the circumstances in which he would want to exercise the discretions that he has described? That would therefore make the subsection that we are discussing in clause 2 otiose.

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

No, because, as I am sure the hon. Gentleman understands, in those unlikely circumstances, the Secretary of State, in considering the use of the powers in clause 4(1), would be examining the overall national position. If that national position required the establishment of a national borrowing limit, and that limit flowed through to each individual authority, it is difficult to assume that in all circumstances the Secretary of State would be aware of all the pressures on all 400 local authorities in the country, and that that would not create difficulty for one individual authority.

Although I am flattered by the assumption that we will be so prescient and understanding of the circumstances of every local authority that we can, in framing our regulations under clause 4(1), take account of all those circumstances, in the real world it is possible that some circumstances will come to light subsequently. The power in clause 2(2) is a useful power to enable the Secretary of State to take compensating action.

As I have said all the way through, this is an extreme case. We are most unlikely ever to use the powers, and we are spending a considerable amount of time on something that will only be a long-stop to a long-stop. It is a circumstance that is most unlikely to occur in our lifetime, unless the electorate make a great mistake and re-elect a Conservative Government.

Mr Andrew Turner (Isle of Wight, Conservative)

I do not wish to detain the Committee, but the Minister referred to a national borrowing limit. Clause 4(1) refers to limits set for national reasons, and those limits would be different for each local authority, presumably according to objective criteria.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

No.

Mr Andrew Turner (Isle of Wight, Conservative)

My hon. Friend says ''No.'' Will the Minister clarify the matter?

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

The hon. Gentleman makes the obvious point that because the national limit has to translate into limits for each individual authority, the plural is used.

As I have suggested, in setting that, it would be difficult for the Secretary of State to anticipate every situation that will occur in each single local authority. Therefore, the added flexibility of clause 2(2) is welcome.

Amendment No. 5 also relates to the power in clause 2(2). We would exercise that power by using a direction—by sending a letter to the authority—which is what we do when we issue a supplementary credit approval under present rules. That would allow us to respond quickly to a case of real need and we could also attach any necessary conditions and tailor those to the precise circumstances of the case. The

amendment would require us to lay an order before Parliament, which is a much less flexible and more time-consuming process that could involve unacceptable delays.

Hon. Members will have received a briefing from the Local Government Association, dated yesterday, that is possibly a response to the amendment. The association hopes that the limits in clause 4 will never have to be used. However, it will support clause 2(2) as being a valuable safety valve should the power be used and an authority finds itself in circumstances in which a breach of its borrowing limit might occur for reasons outside its control. The LGA would be concerned if an order-making power were to delay the Secretary of State's decision to disapply an authority's borrowing limit. I hope that the hon. Member for Runnymede and Weybridge will recognise that we are acting in the best interests of local government with the support of the LGA and will not press the amendment.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

No, I cannot give the Minister any such assurance. On amendment No. 26, rather tellingly, the Minister said that he had received no representations on the need for such a provision. He clearly does not regard an amendment tabled by the official Opposition in the course of due parliamentary process as such a representation.

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

The hon. Gentleman conceded and I acknowledged that both of us are partially sighted in financial matters. I give greater weight to representations received from financial experts than amendments tabled by well-briefed and well-intended but not necessarily wholly expert hon. Members.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I would expect the Minister to recognise that some experts may have a vested interest in preserving the existing system. He said that the present system does not allow for ''doubling up''. It is curious that he uses that phrase, because no commercial organisation would think of going into the market to raise new cheap debt in order to retire a few days later expensive and burdensome debt as ''doubling up'' or of having some such onerous implication. They would regard it as a sensible operation to conduct and carry out.

The Minister said that local authorities manage under the present system and that he wants to see that continue. Does that mean that he wants to see what he originally provided for in his draft Bill—the ability to regulate with whom local authorities could conduct their borrowing business?

Does he want to see local authority borrowing effectively remain the exclusive preserve of the Public Works Loans Board, or does he want to encourage local authorities to use more innovative and diverse forms of finance? If the latter is the case, I suggest that a power akin to that proposed by amendment No. 26 may be necessary.

The Minister says that the Public Works Loans Board makes available a cushion—of unused facilities available at the time, for example. However, the most hard-pressed authorities may be the ones that are over-borrowed—within their prudential limits, but highly borrowed—and need to conduct such Treasury operations. Those authorities are not likely to have the headroom within existing prudential limits.

I readily admit that I am no financial expert, but if we want diversity in local authority debt instruments and the participation of the local community in financing local authority debt, we must reconsider the matter. I do not intend to press the amendment, but I will talk to experts on the subject and communicate with the Minister before Report stage.

Turning briefly to amendment No. 5, the Minister said that orders were less flexible than directions. They are: that is the price of democracy, I am afraid. I suggest that any process under subsection (2) must be transparent. If the financial markets are to be settled by the imposition of overall limits in a macroeconomic crisis, they need to know that the Government are not sliding out letter directions to local authorities right, left and centre.

It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Two o'clock.