Clause 2 - Control of borrowing
Local Government Bill

Mr Derek Conway (Old Bexley and Sidcup, Conservative)

I remind the Committee that with this we are considering 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 and Weybridge, Conservative)

If the Government have imposed an aggregate limit on local authorities' borrowing to send signals to the market that they are addressing whatever macro-economic crises are occurring, it is important that any breaches of borrowing limits are dealt with in a transparent way. There should be an openness about the reasons for the breaches. It would be dangerous for the Government to be put in the position of issuing directions in the form of letters whizzing out from Whitehall, right, left and centre to the favoured corners of the land. There is a good macro-economic spin reason for ensuring that any arrangements are transparent.

Given the lingering suspicion about the way in which the Government distribute their largesse among local authorities, it is also important for the Opposition to see clearly the objective bases on which exceptions are established. I see no real objection to consulting Parliament about the matter. There is no reason why an order in the form of a statutory instrument should lead to inordinate delays. If it takes a Department as long to write a letter giving a direction as it often takes to write a parliamentary written answer, the delegated legislation procedure would probably be quicker.

The Minister's arguments are not persuasive. There is no obvious reason why such a significant and potentially discriminatory use of power should not be exercised by an order that is subject to parliamentary scrutiny, given that it would be a rare occurrence and that arrangements should be transparent if the limits are to have their effect for macro-economic reasons.

In the course of the Minister's remarks, he mentioned a situation in which an authority might have contractual commitments that it was in danger of breaching as a result of the imposition of Government limits. Alarm bells should be ringing in the background about that, because therein might lie a loophole in the mechanism proposed by the Government. If the measure is necessary, it must be robust. I would be worried if the Minister was suggesting that, if a local authority has entered into forward commitments—however irresponsibly—an exception could apply.

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

I hoped that I had made the distinction clear. Any imposition of a national limit, as the hon. Gentleman recognises, would be in the wider economic interests of the country. In such a situation, it is perfectly possible that the new limit, which could be below the individual local authority's own prudential limit, could cut across existing contractual relations. Such relations may have been entered into responsibly and entirely properly because the authority was satisfied that it would have the ability to repay the loan from revenues that it would receive—it may be well within its prudential limit.

In such circumstances, if the authority could make a good, strong case, it would seem churlish and unwise not to be able to make an exception. I hope that the hon. Gentleman will acknowledge that such an exception would be made only in good faith, and not to bail out an authority that had acted irresponsibly.

Mr Philip Hammond (Runnymede and Weybridge, Conservative)

In the Minister's example, he would be able, when setting the initial limit on the authority for national economic reasons, to take into account any of the authority's forward commitments. It is therefore not clear to me why he needs the power to make an exception when everything should have been taken into account in setting the limit in the first place.

Mr Edward Davey (Kingston and Surbiton, Liberal Democrat)

Will the hon. Gentleman speculate on whether clause 6 will be overridden by clause 2(2)? Clause 6 provides protection for lenders, who can take their local authority to court. If the Government do not exercise their power under clause 2(2), would the national economic limit imposed by the Government still be overridden by the protection offered to lenders by clause 6?

Mr Philip Hammond (Runnymede and Weybridge, Conservative)

If I understand correctly, the intention behind clause 6 is to ensure that a lender does not have to inquire into the vires of the local authority in making the borrowing in question. The clause has nothing to do with commercial contractual relationships outside borrowing relationships, so I do not think that it applies in the case that the hon. Gentleman raises.

We have made a perfectly reasonable proposition. We are not suggesting, as the Liberal Democrats have done—although I understand why they have done it—that the power in clause 2(2) should be removed, but that if the power is to remain, it should be exercised by order subject to parliamentary scrutiny. That would be a sensible way for the Government to exercise the power. If the macro-economic considerations of

clause 4(1) are to have their proper and desired effect, the process will have to be transparent.

Although I do not intend to press the amendment to a Division, I would like to have a separate vote on amendment No. 5. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 5, in

clause 2, page 1, line 16, leave out 'direction' and insert 'order'.—[Mr. Hammond.]

Question put, That the amendment be made:—

The Committee divided: Ayes 9, Noes 13.

Mr Andrew Turner (Isle of Wight, Conservative)

I would like to explore an issue that I wanted to discuss in some detail when we were considering one of the amendments, but your predecessor quite rightly ruled the subject to be wide of the amendment, Mr. Conway. However, it is certainly not wide of the clause, as I am sure you will agree. The issue is the aggregation of borrowing limits.

The Minister explained this morning that one reason why the Mayor of London has power to set the prudential borrowing limits for five local authorities is that he has executive power over them. However, another reason is the aggregation of borrowing that might be imposed on the ratepayers of London if those five local authorities operated independently. I explored to some extent the operation of such a rule in relation to North Tyneside, and the Minister quite reasonably explained that the council and the mayor work together there and set the prudential borrowing limit together. However, there are overlapping jurisdictions in North Tyneside, as there are in many local government areas. There is a police authority and a fire and civil defence authority that overlap the borders of North Tyneside council.

In my area, there is one all-purpose authority—or rather, it is practically all-purpose, because there is the ill-named Hampshire police authority, which operates in both Hampshire and the Isle of Wight, and it overlaps the borders of my council. All single-purpose authorities are local authorities for the purposes of the Bill. On the mainland, in Hampshire, outside the unitary authorities of Southampton and Portsmouth,

there are district councils, too. Each of those will set prudential borrowing limits independently. However, the only controls over that borrowing are, first, how much the Secretary of State considers that the authority can afford, and secondly, what income stream the local council sets for that authority.

In the Minister's response about London, he said that the Mayor's borrowing powers—or his wish and desire to borrow—would be restricted by the income stream set by the assembly; he did not say that the income stream to be set by the assembly would be driven by the obligations of the Mayor. At least in the case of London, one body borrows and another provides the income stream. In most local authorities, one body will set the prudential borrowing limit, decide whether to borrow and set the income stream on which that borrowing will depend.

It is important to ask about the direction of the influence. Is the setting of the income stream driven by the desire to borrow, or is the ability to borrow driven by an estimation of the income stream that may be available to fund that borrowing? I guess that, as is generally the case in the world, there is no tidy black and white answer, and that the influence works both ways. However, I am sure that the Minister will admit that borrowing depends on the ability of the local authority to predict an income stream that is sufficient to maintain that borrowing prudentially. I suspect that that is what is meant in clause 3 by the words,

''ensuring that the authority does not borrow more than it can afford.''

The authority can afford what its income stream will support.

If there are overlapping jurisdictions, the judgment about what can be afforded may depend on the level of the income stream that is set by other authorities. For example, the Hampshire police authority might want to borrow a hell of a lot of money to improve all the police stations and the control system throughout the Isle of Wight, and it might raise the precept accordingly to ensure that its borrowing can be met without taking account—it does not need to take account—of the income stream that the Isle of Wight council, and all the town and parish councils, might be setting for their purposes. Those purposes may be to permit those bodies to borrow as they are permitted by law.

Whether an authority can afford to borrow is one question, but whether the ratepayers can afford it is an entirely different, and I suspect a more important question with which the Bill does not wholly deal. How does the Minister propose that two, three or four authorities operating in the same area shall individually set their own prudential borrowing powers, when they would not know how much another authority may be setting, which one takes priority and what income streams might be set? The Bill does not even attempt to deal with that.

It is admirable that we are asking local authorities to set prudential borrowing limits and we all agree, more or less, that it would be excellent if the

Government did not interfere unduly with the setting of those borrowing limits. It is, however, incumbent on us to explain, as the hon. Member for Kingston and Surbiton (Mr. Davey) came close to doing in his nirvana of councils being able to go bankrupt, that the responsibility for meeting the costs of the borrowing, which may have been prudential in the eyes of one party but highly imprudent in the eyes of another, will rest with the council tax payers for many years to come. We need to trumpet that loudly, so that the council tax payers are in no doubt that they are making a choice. One of the intentions behind the Bill is that council tax payers and electors should be clearer about the choices that they are making when they vote in local elections. We should ensure that that excellent intention is carried through.

Earlier on, we talked about the hon. Gentleman having to borrow money to replace the furniture in this Room that, in his enthusiasm for clause 1, he had destroyed. You may not be aware of that, Mr. Conway, but it was an important part of our consideration of clause 1.

Mr Derek Conway (Old Bexley and Sidcup, Conservative)

I am glad that I was not involved.

Mr Andrew Turner (Isle of Wight, Conservative)

That would be fine for the hon. Gentleman, because he cannot walk away from his debts. However, councillors can, and all too frequently do, walk away from the decisions that they have taken on behalf of their electors. They could easily do that and not seek re-election. Sometimes, the electors are given the opportunity to elect them and choose not to. I do not entirely blame the councillors for that. I blame those councillors who set Hackney, for example, on an appalling track and decided not to seek re-election. I would be concerned about councillors who set high prudential borrowing requirements because that seemed, in their political judgment, to be the right thing to do. I do not decry their judgment, but it may differ from that of other councillors. However, I am concerned that having made such a decision and having found that the level of council tax is pushed ever higher, councillors might decide not to seek re-election and walk away from the responsibility, leaving it to other councillors, whether from the same or different parties.

Mr John Pugh (Southport, Liberal Democrat)

Regarding financial impropriety, I do not think that a councillor's liability in legal terms would disappear if they had been advised by the finance officer to behave properly and not to act in such a way. They might be able to get out of the political flak, but if they do not seek re-election their responsibilities persist in legal terms, even in such a scenario.

Mr Andrew Turner (Isle of Wight, Conservative)

The hon. Gentleman is right, but I am talking about financial imprudence, not financial impropriety, which may be a matter of judgment between councillors from different parties. For example, my local authority, which is Liberal Democrat-led, was advised by the chief executive that they were in grave danger of making a loss when they ran a pop concert in the middle of last year. The councillors decided that they were going to make a profit and, lo and behold, they made a loss of £380,000, which worked out at £8 per household on

the council tax. It is possible for councils to act legally and stupidly at the same time.

Mr Patrick Hall (Bedford, Labour)

That is what elections are for.

Mr Andrew Turner (Isle of Wight, Conservative)

It is indeed what elections are for, and they are fine for dealing with councils that act stupidly in setting the revenue stream. However, councillors may place an obligation on future councillors, who may be of a different party—a party that is more sensible than the Liberal Democrats, such as the Labour party or my party. If councillors set high borrowing levels—and do so within the law but in a manner that the hon. Gentleman and I may consider imprudent—they will require future councillors to have a high income stream to meet those debts. In other words, a burden will be placed on future generations.

I do not say that that is wrong, but I do say that it is stupid. We ought to make it clear to electors—and hon. Members may be sure that I will do so in future local government elections—that if they elect a high-spending, high-borrowing council this year, they will face a high council tax bill not only this year and for four years to come but perhaps for a generation to come.

Mr Philip Hammond (Runnymede and Weybridge, Conservative)

This may be a good moment for a time check. So far, we have spent about 140 minutes on the first two clauses. We are rather behind our schedule: the programme resolution allows us only 12 minutes for each clause. I suspect that we will still require a few minutes to finish clause 2. However, I do not think that anybody would argue that this morning's debates have not been important. [Interruption.] Perhaps not all hon. Members were here for those debates. I accept that we have explored areas of general importance to this first part of the Bill, but I am concerned about the time that it has taken.

Let us take stock of where we are. Clause 1 puts into primary legislation a specific power to borrow for local authorities. Clause 2 then puts restrictions on that power. First, and quite properly, it refers to the self-imposed restrictions that councils will face as a result of the determinations that they make under clause 3. Secondly, and much more controversially, it refers to the externally imposed limits that councils will face as a result of Government action—Secretary of State action—under clause 4. Several hon. Members have questioned the extent to which the Government's much-vaunted granting of freedoms to local authorities is genuine. Already we see that what is granted in clause 1 is clawed back in clauses 2, 3 and 4. Perhaps more importantly, several hon. Members have stressed that, ultimately, the ability to borrow and to set a prudential borrowing limit depends on the stream of revenue funding that is available to a local authority. That remains very much in the iron grip of the Minister of State. I think that we are supposed to pretend that it is in the grip of the Deputy Prime Minister but we have all seen the firm way in which the Minister of State manages these affairs.

We have overarching concerns about this part of the Bill, but we have a specific concern about clause 2(2) and the Secretary of State's ability to exempt any

authority from any limit that is imposed on it under clause 4. We have been told that that will not involve any parliamentary scrutiny: it will simply be a determination made by the Minister, issued in the form of a letter. That causes us concern. We have seen bias in funding and we must now be concerned about bias in exceptions to borrowing restrictions.

The prohibition on borrowing in foreign currency may not seem controversial—local authorities have always been prevented from doing that. However, that is not a good enough reason for the inclusion of that prohibition in the Bill. I would like to think that the Government have reviewed afresh every restriction faced by local authorities.

Perhaps there are good reasons for such a prohibition, but many borrowers whose revenue streams are derived in sterling may consider foreign currency borrowings with suitable hedging tools in place to protect them from currency exposure. What evaluation has the Minister's Department undertaken of any benefits that might have accrued to local authorities from removing the prohibition? I do not suggest that many local authorities would wish to borrow in foreign currencies or that it would be appropriate. However, Conservative Members' starting position is that we should not restrict the powers available to local authorities unless it is essential.

The onus of proof lies with the Minister. He must show, beyond reasonable doubt or at least on the balance of probabilities, that the power to borrow in foreign currencies would be wholly a bad thing. If the Government are setting their face against foreign currencies and all that they stand for, is that a portent of decisions yet to come? Perhaps we have detected a shaft of light illuminating future intentions through a chink in the Government's armour. I await the Minister's comments with bated breath.

Mr Edward Davey (Kingston and Surbiton, Liberal Democrat)

I welcome you to the Chair, Mr. Conway. I will not explain my earlier alleged vandalism, but I confessed to the policeman and he will rectify matters.

Although we have debated this subject exhaustively, there is one aspect that I wish to draw to the Committee's attention. It is pertinent to future debates and answers an earlier question by the hon. Member for Isle of Wight (Mr. Turner).

In a letter to you, Mr. Conway and your co-Chairman, Mr. Griffiths, dated 15 January, the Minister kindly set out the background to some of the clauses that we are debating. In the commentary, it states that there will be an opportunity for account to be taken in the code that the Chartered Institute of Public Finance and Accountancy will produce of any views expressed by the Committee and of any changes in the draft legislation. The commentary states that we are invited to comment on the code. The Government want CIPFA to take account of our discussions. We can still influence the way in which the code is developed by CIPFA and its implications for councils throughout the country.

The hon. Member for Isle of Wight may be pleased to know that in the draft code, which is work in progress, paragraph 27, on page 14 states:

''Affordability is ultimately determined by judgement about acceptable Council Tax levels and, in the case of the Housing Revenue Account, acceptable rent levels.''

Paragraph 29 lists the different matters that should be considered in respect of affordability.

I agree with some of the hon. Gentleman's comments. When it examines the code and final drafts before publication, CIPFA may wish to consider his point about council tax levels and precepts, which, taken together, might affect affordability. I do not wish to say much more than that because—we hope—the House will influence the important code in the debates that follow. We want the code, CIPFA's role and that of other accounting bodies put into the Bill. If we want control of borrowing to happen in the true prudential way, the Committee must influence CIPFA to change its current draft of its code.

Mr Robert Syms (Poole, Conservative)

We are debating capital finance, which inevitably has a strong relationship with the revenue budgets. I have scanned through some of the documents and want to know where the private finance initiative falls into the equation. We do not count it as capital, but it is a long-term liability. I am interested in how that is accounted for in the financial indicators that must be produced by local authorities. It will have a big impact on the capital and revenue.

If local authorities felt that the Government, at some point, would intervene to control their local borrowing, they might think that it would be better to go along with the PFI and reduce their borrowing, but have higher revenue costs as a consequence. I want the Minister to put on the record the Government's view of the long-term liabilities of PFI that local authorities have and how that would relate to the financial indicators that we are expected to show, so that we decide whether money can be afforded.

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

I welcome you to the Committee, Mr. Conway. It started off in an extraordinary fashion this morning in your absence, with an act of vandalism by the hon. Member for Kingston and Surbiton. He told the Committee that he has reported the matter to the police. I sincerely hope that he will be able to attend future sittings and will not be detained.

We have been making good progress, and I am glad that we are now considering the completion of clause 2. I wish first to deal with the provisions of the clause and then the specific issues raised by the hon. Members for Isle of Wight, for Runnymede and Weybridge (Mr. Hammond), for Kingston and Surbiton and for Poole (Mr. Syms). The Bill scraps credit approvals entirely. It is a major deregulatory measure and allows local authorities to borrow without the Government's consent, provided that they can afford to service the debt. That does not mean that borrowing can ever be unlimited.

The theme of the Bill is prudent borrowing. Clause 3, which we shall discuss soon, requires each authority to work out for itself what it can afford to

borrow. Having done that, the authority is bound by clause 2(1)(a) not to borrow more than that affordable amount. It is true that clause 2, in conjunction with clause 3, results in control, but that is not control by the Government. The constraint arises from the simple, common-sense rule that authorities should not borrow more than they have decided that they can afford. That represents a genuine new freedom for local authorities.

The Bill must strike a balance between such freedom and safeguards for national and local taxpayers. That is why clause 4 contains a reserve power for the Government to intervene and set limits on borrowing. The limits can be imposed for all authorities, if that is necessary in the national economic interest. As I said earlier, we do not anticipate that that will occur in the foreseeable future while the economy is being prudently managed by the Chancellor. However, in the event of there being a misfortune in the long and distant future, it would be helpful for the Government to make such powers available. A limit can also be set for an individual authority to prevent it from borrowing imprudently. Again, we do not foresee such powers being used widely, but only as a last resort. They are a necessary safeguard against irresponsible and imprudent activity by one or more local authorities, which could result in an unfortunate consequence for their council tax payers.

Mr Philip Hammond (Runnymede and Weybridge, Conservative)

The Minister referred to the possibility of imposing limits on an individual authority that is proposing to borrow imprudently. Can he confirm that ''imprudently'' should be defined by reference to the CIPFA code, and not in some other arbitrary way that the Secretary of State may determine?

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

As the hon. Gentleman knows, we attach considerable importance to developing the code. We have worked closely with CIPFA and have the highest regard for it, and we are confident that the code will set out the proper considerations that should be taken by local authorities setting borrowing limits.

Of course, it is always possible that there will be circumstances that have not been anticipated. In the 1980s and early 1990s, when the hon. Gentleman's party was in power, the Government made a series of measures to control local authority expenditure. They were considerable acts of centralisation, but the Government justified the measures because local authorities were developing a series of creative accountancy devices to get around capital controls. He should recognise that the Government must have some flexibility to cope with unforeseen circumstances.

Although we certainly expect the CIPFA code to be at the core of the provision, we do not, as we have already argued, believe that it should be the only way in which control can be exercised. That is why the Bill provides for regulations to be made by the Government. I have given an idea of how we intend to keep an overview and a discipline, when that is necessary, but we expect to use the powers in very exceptional circumstances only.

If we were to set limits under clause 4, authorities would have a duty to comply with those limits under clause 2(1)(b). Clause 2(2) enables the Secretary of State to disapply a national borrowing limit, if one is in place, for an authority in the sort of circumstances that I outlined earlier. I emphasise that we envisage the power being used only in the most exceptional circumstances. The provision is a flexible response, welcomed by the Local Government Association, that will make possible the rectification of a situation that would otherwise be extremely difficult for an authority to manage. It is precisely because the power would need to be exercised quickly that we believe that that should be done by direction rather than by the more complex process of making an order.

I shall digress briefly and discuss the role of the Secretary of State—and, indeed, the term ''Secretary of State''. The hon. Member for Runnymede and Weybridge made play about that; however, the issue goes wider than he anticipated. Part 1 applies to both England and Wales, with a few minor exceptions that I shall mention in due course. References to the Secretary of State in part 1 also serve as references to the National Assembly for Wales, and I shall be using the expression in exactly that sense in my remarks on part 1. I hope that that helps to clarify the issue.

Mr Philip Hammond (Runnymede and Weybridge, Conservative)

As a matter of interest, and to tax the depths of the Minister's study of the background to the Bill, why is the term ''appropriate person'' used in other parts of the Bill to deal with the England versus Wales issue if, in part 1, ''Secretary of State'' is used?

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

I congratulate the hon. Gentleman on his extremely sharp perception of the different language used in part 1 and the other parts. I asked the same question a little while ago, and I can tell him that the difference reflects the use of two separate parliamentary counsels in drafting the Bill. I raised the question of whether consistency was desirable, and I am assured that although it might be desirable, it is not absolutely essential, so we can proceed with those different terms. It is only right that I should make that clear to the Committee.

Clause 2(3) provides that authorities may not borrow in currencies other than sterling without Treasury consent. The Bill allows authorities considerable freedom as to the manner in which they borrow and the sources from which they obtain loans. As for very many years, authorities will be able to borrow from the Government through the Public Works Loan Board. They will also be free to borrow from private sector banks and financial institutions. In addition, authorities will be able to raise finance in the money markets by issuing bonds and other instruments. We are perfectly happy for local authorities to borrow from foreign institutions, many of which have well-established branches in the UK.

We expect authorities to base their choice of lender solely on best value grounds, but there is normally no reason for authorities to borrow other than in sterling, and to do so may be imprudent. That is simply because borrowing in foreign currencies would expose authorities to exchange rate risks.

Mr Philip Hammond (Runnymede and Weybridge, Conservative)

Might.

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

Yes, I am not saying that it will, but that it might. If there was an adverse movement in the value of a foreign currency against the pound, an authority could find itself owing far more than it had borrowed: that is not a justified risk, given the considerable opportunities for borrowing that are already available to local authorities.

There is not any wider political implication in that provision, and if the UK were to join the euro—after a referendum—all legislative references to sterling, including this one, would have to be replaced by references to the euro. I hope that that does not cause apoplexy among Opposition Members. The issue of Europe has already come up, and we have only reached the second clause. The Liberal Democrat party, as well as Government Members, will probably soon be running a book on how long it takes in any Committee before the issue of Europe comes up, but on this occasion I will merely note when it has come up and move on.

Mr Philip Hammond (Runnymede and Weybridge, Conservative)

The Minister might like to know that my party's book is on when the Government will have the courage of their convictions and call the referendum that they keep delaying.

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

As the hon. Gentleman knows, we will call it when the economic tests have been considered and the circumstances are right for our country to seek to join the euro.

Once the Bill is enacted, the only effective borrowing power available to local authorities will be that in clause 1. However, clause 2(4) is a technical safeguard to ensure that the controls in the Bill apply to borrowing under any other powers that may still exist. I have now covered all the provisions, so I will address the specific points raised by hon. Members.

The hon. Member for Isle of Wight started his contribution by referring to the ill-named Hampshire police authority. I think that I understand the purpose of his argument: he is unhappy because, although that authority covers the Isle of Wight, that is not acknowledged in its name. However, his local authority made representations to me only a few days ago: it was seeking to be joined to Hampshire for the purposes of the area cost adjustment. I acknowledge that a Liberal Democrat councillor made those representations, but the hon. Gentleman rightly and properly accompanied his local authority and supported—I think—its case. It is important to recognise that sometimes it is wise to work together with wider entities.

The hon. Gentleman referred to decisions by other authorities potentially impacting through a precept. Where a precept applies, an authority will be aware of that before it sets its council tax: that is how it should organise its affairs, so that its own budget cannot be put into a parlous position by the decisions of others. The key point about the prudential limit is that it needs to be exercised by whoever sets the budget for the authority. The only exception to that is the Greater London Authority—we have discussed the specific circumstances of that authority.

Mr Andrew Turner (Isle of Wight, Conservative)

I appreciate the Minister's answer, but I am sure that he will accept that the precepted authority is not influenced merely through the precept. It is also influenced through the prudential borrowing limit set by the precepting authority, and the consequences for that in any given year, and what may be prudent for a single-tier, all-purpose authority may be imprudent for an authority that is part of a number of authorities that levy a council tax from the same set of ratepayers.

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

I do not entirely follow the hon. Gentleman's argument, because the one impact that a separate authority can make on the individual local authority is through the precept. If it sets its borrowing limit, and that is not adequately covered, that is a problem for that authority. It comes to be a problem for the relevant local authority only when the precept is presented, and that is presented before the budget. That is an opportunity for the authority to consider that before it sets its own budget. That is why I said that I do not understand why it can be put in a position in which it cannot meet its budget because of another authority's action.

Mr Andrew Turner (Isle of Wight, Conservative)

May I try to give an illustration? It is one thing if a single-tier authority decides that it can afford to borrow £100 million and the consequence on the precept is £5 million or £10 million a year. However, if the authority, which is single-tier for most purposes, has another authority for which it might be prudent to set a £100 million borrowing limit and if both authorities set such equally prudent borrowing limits for the individual authorities, the impact on council tax payers would be £10 million a year plus their share of that from the larger authority. That clearly has a different impact on affordability for the council tax payer. Does that not also affect the prudence of setting the borrowing limits?

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

Let us assume that we are talking about a police authority, as the hon. Gentleman raised that matter. The police authority sets its budget and must set its prudential borrowing limit as part of the process. There are precepts on the local authority, and the precept is the one interface between the two that the authority must consider. Any other consequences of borrowing decisions made by the police authority are entirely a matter for the police authority, not the local authority. Local people might rightly take a dim view of a police authority that budgeted imprudently and subsequently had to present a larger precept than might appear sensible. The main local authority's interface with the other body will be the precept—there will be no other mechanism. That is why the prudential limit will not necessarily impact on such a case.

The hon. Member for Poole raised the issue of the private finance initiative. It will be addressed in the prudential codes and will be the subject of a substantial debate that we will reach shortly. I urge him to be patient, because we will set out definitional matters that will apply to PFI in detail.

I hope that I have dealt with all the issues raised and that the Committee will agree that the clause should stand part of the Bill.

Question put and agreed to.

Clause 2, as amended, ordered to stand part of the Bill.