Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I beg to move amendment No. 27, in

clause 3, page 2, line 8, leave out from 'provision' to 'requiring' in line 21.

Mr Derek Conway (Old Bexley & Sidcup, Conservative)

With this it will be convenient to discuss amendment No. 55, in

clause 3, page 2, line 18, leave out from beginning to end of line 20.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

The amendment would effectively remove subsections (2) and (3). That would remove the Secretary of State's power to provide by regulations the way in which a local authority performs its duty under subsection (1) and would remove all sorts of mechanistic controls in subsection (3) on how a local authority executes the duty imposed on it by subsection (1).

We have already seen the draft regulations and, as expected, they specify that the CIPFA code shall be had regard to under subsection (4). The rest of the provisions are unnecessarily prescriptive and meddlesome and relate to things in which the Government should not be involved. Provided that the CIPFA code is properly drafted—I have no reason to suppose that it will not be—it will be sufficient that local authorities shall direct themselves with regard to the guidance in discharging their duty under the relevant subsection. It seems to us that nothing else is necessary.

The clause would substantively be reduced to subsections (1) and (4). That is adequate for the purpose and anything further would be indicative of the Government's institutional reluctance to let go. That is perhaps not surprising. Anyone who has ever dealt with a Government or any large organisation will not be surprised that there is an institutional instinct against letting go any power that might one day, perhaps in some obscure and arcane circumstance, be mildly useful or convenient.

If the Government are going to be true to their word in trying to make local authorities freer, they must start with a clean sheet. Similarly, the Minister

must justify every line of a Bill that imposes a restriction on the freedom of local authorities to act. Some restrictions are necessary, but these are not. The Bill was put out for pre-legislative scrutiny, although that process was not very lengthy. Indeed, some people have said that the Chairmen of some Select Committees are not getting any nearer to their knighthoods for saying that too loudly. The Select Committee gave a clear steer to the Government by saying that if they are to deliver anything like the aspirations that were set out in the White Paper, they need to be more hands-off. They must go through the Bill with a fine-toothed comb and remove those things that are unnecessarily prescriptive and meddlesome and are simply the residue of the institutional instinct to keep their hands on everything.

I hope that the Minister will be sympathetic to amendment No. 27. Characteristically, while he is smiling broadly, he is also shaking his head vigorously.

The Liberal Democrat amendment No. 55 has the same general thrust, but it would leave out only subsection (3)(c). It is, therefore, a subset of amendment No. 27 and I hope that the hon. Member for Kingston and Surbiton will agree with its broad thrust. We cannot disagree with the thrust of amendment No. 55 because it is contained within our amendment.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

The hon. Gentleman is correct. We will support his amendment. Although I am not trying to play a game of whose amendment was best, amendment No. 54, which we have already debated, would have gone even further than amendment No. 27. Amendment No. 55 is intended to give the Government another option to try to reduce the impact of regulation and it refers to the Government's keeping to themselves the power to make regulations. I am keen to speak to the hon. Gentleman's amendment, because it is good and because I think that he is challenging the Minister.

The Minister and his colleagues recently published a paper called ''Freedoms and Flexibilities for Local Government'', in which they set out the new ideas that local authorities will have the regulatory burden removed and that they will not have to write so many strategies or reports for the Office of the Deputy Prime Minister and other Departments in Whitehall. The Bill goes in exactly the opposite direction, as it is littered with new powers for Ministers to make regulations.

The Minister must think again. If his actions are to be consistent with that recently published paper, he ought to restrict the amount of extra regulatory powers that he takes for himself. He may say in his defence that at the moment the regulations that he has given to the Committee are minimal and he is right about that.

I was pleasantly surprised when I read the regulations to see that they referred to having regard to the code produced by CIPFA and, to that extent, we cannot criticise the Minister. He has kept it as short as he possibly could. However, if he reads subsections (2) and (3), I think that he will readily agree that he is giving himself power—perhaps it is a reserve power,

nevertheless it is a power—to make detailed regulations. I cannot see the need for that.

The purpose of going down the route of a code was that it gives more flexibility. It allows the finance officers of local authorities to engage with CIPFA in an attempt to understand whether they are abiding by the code, because of the many nuances and subtleties in a capital regime. That is the best approach. All those powers need not be kept in the Bill, even on a reserve basis. Although the evidence before us is that the Minister is not intending to use the powers, it is up to us to look to what might lie ahead and to say no, we do not want those types of regulatory burden to be imposed on local authorities.

I shall speak briefly in favour of amendment No. 55, which is a little bait for the Government, if they do not accept the argument put forward by the hon. Member for Runnymede and Weybridge on amendment No. 27, which we support. Surely the Minister supports the deletion of subsection (3)(c). That measure is otiose; it goes over the top in what it would allow the Government to do and to set up in regulation. Even if we agree that the Government need a few reserve powers in regulation, which I do not, subsection (3)(c) is completely over the top. If the Minister is not prepared to accept amendment No. 27, I hope that he will at least consider amendment No. 55.

Mr John Pugh (Southport, Liberal Democrat)

I seek clarification from the Minister about the clause. I have to go at 3.45 pm, so I will not be here to hear his clarification. However, I shall read his answers with assiduous care in Hansard.

I accept that the Bill will place local authorities under a duty to produce a borrowing limit of some kind and to state it; I am not clear whether it is a ratio or a cash limit that they need to state, none the less they will have to state a limit and keep to it. If they wish to vary it, the regulations prescribe that they should hold a council meeting. Is there not a danger that the Bill may build in bureaucratic inflexibility by producing more council meetings than are necessary? At the moment, there are not many of them and members have little to do under the new cabinet system, but we do not want them to do unnecessary work. We want them to be prudent and we want all members of the council to be aware of the risk, but it seems to me that limits can be exceeded for a variety of reasons.

If the Government mismanage wholesale the country's economy, interest rates may have to go up dramatically, which might put a council on or over the limit. Under normal circumstances, the director of finance would suggest re-phasing of the capital programme and looking at slippage and so forth at the cabinet meeting or the policy resources meeting. He would not consider it necessary to hold a full-scale council meeting to make ordinary adjustments. I am concerned not so much about that scenario but about others that I am not sure are catered for.

The Minister has sensibly reserved himself the power to disapply some of the regulations, but I am not certain whether disapplication would work in

some of the following scenarios that I shall sketch out. I am referring to councils that wish to run major schemes, such as Manchester with the Commonwealth games and Sheffield with the student games. Clearly, they must put their exposure on such issues to their local electors and to the full council, but there are circumstances during the progress of contracts for such schemes in which their capital exposure will go up temporarily and they will be a relatively good business proposition for the council. The public good may be secured thereby, but temporarily the councils will edge over the limit if they are already close to it.

Of more immediate concern is how councils are expected to react to failed schemes in which the contractor goes bust and for a short time they are contractually exposed, perhaps to a considerable extent. I shall cite an example from my own experience. The contractor Christian and Nielsen went bust while conducting a major refurbishment of Southport pier, which is now happily complete. During that period, the council was financially exposed and had to cover for capital funds that were not provided through the contractor performing in the way that was expected. The cost of the job went up substantially when the contractor left the site.

Under those circumstances, what is a local authority to do? I do not think that my local authority would have gone over its prudential limit if it increased its capital limits, but a hypothetical authority might do so in such circumstances. What should it do? Should it de-commit to a major scheme, abandon other schemes or simply walk away from the job and see what happens?

In the case of Southport pier, the council required settlement on a bond, but that bond was only sorted out two or three years after the contractor went bust. In a sense, the council behaved prudently in accepting extra capital expenditure, and it performed a noticeably good public service. Under the old scheme, they would have had to ask the Minister for special capital approval. I am not certain whether current arrangements allow for that, so I should like the Minister to comment on the question.

How would the Minister react if a local authority approaching its prudential limits were faced with a proposition whereby the capital financing of a scheme would be considerably lessened by an up-front capital commitment from the local authority? I am familiar with such schemes, under which the contractor attempts to minimise his risks. Eventually, the capital risks of the local authority and the contractor may be diminished, and the cost of the project may come down. Would that be out of order, or would an authority have to make an application to the Minister in respect of such a scheme?

The key questions are how the idea of prudence will be interpreted, and whether, with the best will in the world, there might be circumstances in which, although a prudential limit is set, the public good may be served by varying it, albeit temporarily.

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

It will not surprise the hon. Members for Runnymede and Weybridge and for

Kingston and Surbiton that I do not intend to accept their amendments. The hon. Member for Runnymede and Weybridge commented on the fact that I shook my head while smiling. I hope he does not think that, like Iago, I intend to

''smile, and smile, and be a villain''.

On the contrary, I intend to try to put in place an appropriate framework that ensures the necessary freeing-up of local government. As I shall explain to the hon. Member for Southport, that framework will give local government more responsibility and the ability to determine the outcome of problems such as the one that he identified, rather than make them dependent on ministerial decisions, as was the case in the past.

Mr Paul Goodman (Wycombe, Conservative)

The Minister will find that he quoted Hamlet, not Iago.

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

I am absolutely mortified. The hon. Gentleman is quite right. Having spent too much time in this place, I have become less familiar than I should be with the great works of our literary heritage. I can only apologise unreservedly for the mistake.

Amendment No. 27 would narrow the Secretary of State's power under clause 3 to make regulations about the setting of the prudential limit. The amendment would allow the regulations only to specify a code of practice. Although we envisage that the regulations will, for the moment, serve only to name the CIPFA code—we all agree that that is the right way to proceed—we need to keep in reserve the power to impose some procedural requirements through regulations. I should say to the hon. Member for Runnymede and Weybridge that the provision is not a matter of excessive meddling, as I believe he described our proposals. The provisions under subsection (3) mainly relate to procedural arrangements—such as when, how and for how long an authority should make a determination—the monitoring of amounts determined under that subsection, and provision for the factors to which regard should be paid in making a determination.

On reflection, hon. Members will recognise that those are sensible, practical issues that may need to be covered in future. There may be a question mark over the length of time in which a prudential limit will apply, or questions may arise from an inquiry into what went wrong when a local authority got into difficulty. Findings from such an inquiry may lead us to the view that earlier warning signs may have helped to obviate the problem and that guidance for authorities would therefore be useful in the future. Only a curious Government would deny themselves the scope to issue regulations to cover those points.

We do not intend to exercise the powers in a heavy-handed way or to impose unnecessary burdens on local government. The Bill is an exercise in freeing-up local government. However, in doing something innovative, we want to ensure that it is a success and that we have the powers available to adjust the tiller as necessary as the process develops.

Mr David Curry (Skipton & Ripon, Conservative)

In order to be consistent with Government policy, would the powers be a competence retained by the Secretary of State that he

could disapply in the case of local authorities qualifying for the ''excellent'' epithet in the comprehensive performance assessment?

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

The right hon. Gentleman makes an interesting suggestion. As he will know, as a result of that performance assessment, we have introduced a new framework—an innovations forum at which those authorities judged excellent by the Audit Commission will be invited to join the ODPM and other Departments to explore ways of carrying forward the Government's agenda of extending freedoms and flexibilities. The points made by the right hon. Gentleman should not be ruled off that agenda.

We see the forum as a creative arena that will find ways in which local government can make better use of freedoms. We read with interest the advice offered by the right hon. Gentleman to his local authority and others in the pages of municipal publications. I am looking forward to reading the next one, for which he has given me a trailer.

Mr David Curry (Skipton & Ripon, Conservative)

It is the last one and I will bring a cutting to the next sitting.

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

I can only apologise for having missed it. I look forward to seeing the cutting. The right hon. Gentleman makes a fair point, and we will bear it in mind.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

My right hon. Friend the Member for Skipton and Ripon (Mr. Curry) and the hon. Member for Southport both talked about the Minister disapplying regulations, but my reading of the clause is that the power to disapply relates only to limits made under clause 4(1) and that there is no general power to disapply. Therefore, however interesting the Minister finds my right hon. Friend's suggestion, he would not be able to go down that route even if he wanted to. Will the Minister clarify that point?

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

The hon. Gentleman is quite right to say that the disapplication under clause 2(2) applies in respect of the national limit set under clause 4(1). However, the right hon. Member for Skipton and Ripon asked whether some of the procedural regulations made under clause 3(3) might not apply to local authorities judged to be excellent. I simply said that that could be usefully discussed by the innovations forum.

The provisions are not intended to be detailed because we see them as a back-stop, although the power is necessary to enable us to guide the introduction of the new system. The point that the right hon. Gentleman made is, in principle, a valid one and we would not want to stand in its way.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

Will the Minister confirm that, if amendment No. 27 were accepted or if the Minister made no regulations under subsections (2) and (3)—as appears to be the case—would it be open to a third party to apply to the court to determine that a local authority had not discharged its duty under subsection (1)? Could a councillor or council tax payer in that authority's area do that? Is regulation by the Secretary of State and the retention of reserved regulatory powers the only way in which we can be sure that local authorities will do what they are required to do by

statute? Can we not rely on the same methodology that we use to ensure that every other party in the country does what it is required to do by statute?

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

I hear what the hon. Gentleman says, but I am not sure that I would want to depend on the vagaries of judicial review to determine whether an authority had complied with the requirement to set a prudential limit in an appropriate way. I say that only because going to the High Court to challenge a local authority is a cumbersome process. For example, several authorities might take decisions on their prudential limits at a time when it was difficult to take account of all relevant factors, as shown by other authorities' experiences, when setting the prudential limit. In that situation, it would be better for the Government to use its regulatory framework to set a series of timetables under the provision in subsection (3)(a)(i), which deals with when an authority should make a determination, than to depend on the vagaries of whether a council tax payer or local business felt able to pursue a judicial review through the High Court.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

Just for the Committee's clarification, given that the Minister says that he does not intend to use regulatory powers to deal with several of the measures, will he describe how he expects CIPFA to develop its code? CIPFA will publish the final version later this year, but presumably it can be renewed and revised when experience suggests that that should be done. Surely that is the way to tackle the problems? Rather than assume that regulation must be used to change the framework, we should look to revising the code.

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. We see the code as the first port of call; that is consistent with our approach. If CIPFA wishes to continue to perform the function—I have no reason to believe that it will not—and if the Government are happy with its work, as we have been so far, that could be the right way forward.

A review of the code could be held in two years time, although that is hypothetical and we have no plans to do that. The timetable for that might mean that the revised code would not be issued for several months. It might be useful for the Government to use the regulatory powers if an issue that requires a response surfaces. I do not say that that will happen, but we have useful powers that will allow the tiller to be adjusted as the new regime comes into effect to ensure that it works smoothly and without problems.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

Surely if a particular issue comes up, a full revision of the whole code is not required. CIPFA could consider the issue and make a supplementary addition to the code, which would avoid the need for regulation.

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

The code will be issued under regulation, so a revision to the code would require the same procedure. I am not sure that the hon. Gentleman's proposal has more benefit than a Government regulation. We think that the

framework is the right way to introduce the new system smoothly and with safeguards.

Mr David Curry (Skipton & Ripon, Conservative)

May I suggest that the right hon. Gentleman changes his metaphor? He is clearly not a sailor, because what one does to a tiller determines the direction in which one goes. He might prefer to trim his sails a little.

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

As a former Conservative Minister, the right hon. Gentleman will know a lot about the trimming that is required. I have always understood that both sails and tiller are used to ensure that a ship remains on a proper and sensible course and is not diverted by squalls or short-term pressures from unexpected sources.

In the same way as a former Prime Minister of the right hon. Gentleman's party criticised Baroness Thatcher by likening her economic policy to playing golf with a single golf club, I hope that he will accept that we should not depend on a single provision in introducing this new arrangement, but that a number of tools should be available to us to enable us to ensure its smooth implementation.

Mr. Turner rose—

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

I appear to have provoked the entire Opposition. I give way to the hon. Gentleman.

Mr Andrew Turner (Isle of Wight, Conservative)

Will the right hon. Gentleman accept that that criticism was directed at my noble Friend Lord Lawson rather than my noble Friend Baroness Thatcher? The Minister is wrong about sailing, wrong about Shakespeare, wrong about golf, and wrong about Baroness Thatcher.

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

I do not intend to be drawn into a discussion of how far Lord Lawson's economic policies were determined by the then Prime Minister, now Baroness Thatcher, but I think that I am right in saying that it was Sir Edward Heath who observed that the two of them were guilty of playing golf with only one club.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I am sorry to bring the Committee back from the high seas and the golf course to the matter in hand, but the Minister said—I was going to say a moment ago, but it is now a while since he said it—that as the CIPFA code was introduced by regulation, it would be appropriate for any amendment to that code to be introduced by regulation. Surely, that is incorrect, because regulation 2 states that a local authority should have regard to any current prudential code for capital finance that CIPFA might issue. I understand that to mean that if CIPFA revises its code, in the absence of a regulation de-specifying it, that code will automatically be incorporated.

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

The hon. Gentleman may well be right. I will look further into the matter and give him a detailed response. However, my point was that if we wanted a change in the arrangements, that could be effected in a number of ways, and we believe that having regulatory powers to enable that to happen is the right way to go about things. That is why we are introducing under the clause regulations that do not simply allow us to use the CIPFA code. His

amendment would bind us to using that code as the only way to make changes.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

With respect, the Minister is wrong. The amendment would leave in place subsection (4), which gives the Secretary of State the power to specify one or more codes of practice. Therefore, the amendment would not simply leave everything dependent on the CIPFA code, but it would remove the regulatory powers under subsections (2) and (3).

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

I accept that it is possible to have another code of practice as well as the CIPFA code, but there would not be the regulatory powers that are currently made available in clause 3 and that we believe are appropriate to enable adjustments to the tiller or sails—or whatever nautical metaphor the hon. Gentleman and his right hon. and hon. Friends might wish to employ—to ensure that the ship stays on course.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I am not even sure that the Minister is right about that because subsection (4) states:

''Regulations under subsection (2) may include provision requiring a local authority to have regard to one or more specified codes of practice, whether issued by the Secretary of State or another.''

Would that not deal with those issues, if it were felt to be necessary to deal with them?

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

I am becoming slightly confused by the hon. Gentleman's argument. On the one hand, it appears that he is arguing that it is undesirable for Government to have regulation-making powers, but he is now arguing that it is appropriate to have a range of different means of effecting change.

The point that I have been making is that the current provision in clause 3 provides an appropriate framework that enables the Government to introduce—

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

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 the hon. Gentleman must bear with me while I respond to a previous intervention.

Clause 3 allows the Government, through the regulatory regime, both to introduce the CIPFA code—and other codes that might be promulgated in the future—and to make the adjustments to which I have referred under the provisions of subsection (3). We honestly believe that that is the sensible way forward. There is no great gain in substituting one set of regulation-making powers for another. It may appear to the hon. Gentleman that the amendment would remove a regulation-making provision from the Bill, but in fact it would simply transfer it to another place. I hope that he accepts that to set up the scheme properly and sensibly we must be able to make adjustments in the light of circumstances and experience. We must ensure that the scheme and the regime can cope with unforeseen problems. The framework in clause 3 allows us to do that, and there is no great merit in removing specific powers only to rely on interpretations of other powers in the clause.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

We are getting to an interesting point. Is not there a distinction between codes and regulation? The codes, whether the CIPFA code or a code issued

by another body or the Secretary of State, give local authorities guidance so that they can determine an affordable or prudential borrowing limit, having taken into account all the considerations. That is distinctly different from the regulatory approach, which says, ''You must do this or that''. For that reason, some of us prefer the prudential route, which the Minister promotes, to retaining the regulatory powers that the Government seek to hold in reserve.

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

I believe that the hon. Gentleman has misinterpreted what I said and the provisions in the legislation. It is appropriate that certain provisions are in the Bill—for example, the requirement that the whole council should set a prudential limit—but to ensure the smooth operation of the system, procedural requirements should be specified by regulation. However, that is different from considering all the factors that need to be taken into account through the code, which we believe will be the right way of achieving that end.

The purpose of clause 3 is to allow an orderly introduction of the scheme so that authorities can make decisions in an appropriate way, taking full account of the code or codes that may be introduced under the provision, and considering any additional requirements to do with, for example, timing of decisions.

I understand the hon. Gentleman's Liberal-Democrat predisposition to believe that the Government have control-freak instincts and want to control everything. However, he acknowledged only a few moments ago that he was pleasantly surprised by how non-prescriptive the draft regulations were and that they introduced the new arrangement in the best possible way. That is how we are trying to proceed. We have no wish to impose unnecessary regulations, but we do require the power to act if that is necessary to ensure that there is no ambiguity, confusion or potential for serious problems in the operation of the new system. The purpose of the measure is to provide a sensible back-stop, as we have done elsewhere in the Bill, to ensure that we can take the necessary corrective action if, for any reason, the new system appears to be on the wrong track.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

The Minister suggests that I misunderstood the clause. He says that subsections (2) and (3) are about process, whereas the code simply gives details about how the limit will be assessed. I would have expected the code to deal with process as well. There is no misunderstanding; it is just that the Liberal Democrats and, I believe, the Conservatives do not feel that the reserve regulatory powers are necessary. We want to get rid of them.

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

I can only repeat to the hon. Gentleman that the provisions are a necessary safeguard. He conceded that they were not heavy-handed and I hope that he will accept that they will free up local government in a way that ensures that corrective action can be taken if need be.

I do not want to go over ground that I have gone over already, but we were talking earlier about whether the prudential limit should be set by the whole council. Clearly, that could not be determined

by a code. We had thought that it could be done through regulations but, on reflection, we decided that it had to be done in the Bill. Borderline issues will arise, which is why the retention of the powers is necessary.

I want to respond to points raised by the hon. Member for Southport (Dr. Pugh) although, as he told us, he has had to leave. He spoke about the possibility of authorities getting into difficulty with major capital schemes, suggesting that they could be exposed to risks because of the nature of the schemes or because contractors went bankrupt. He gave the example of Southport pier—which, I am glad to say, is in a rather happier state than Brighton pier. That might have something to do with the performance of the contractor, but it is in any event a cause of relief to the good people of Southport.

In his absence, I say to the hon. Gentleman that the whole purpose of the new provisions is to ensure that local authorities take responsibility for their decisions. He described a council seeking a supplementary credit approval from the Government if it got into difficulty, but it is exactly because we want to get away from the unsatisfactory current provision that we are introducing the new prudential regime. In advance of major capital schemes, authorities will have to consider what reserves they have and how they would cope with cost overruns or contractors' bankruptcies. Rather than assume that all is for the best in the best of all possible worlds—which is a tendency of the Liberal Democrats—and then, when things go wrong, run to the Government saying, ''Please bail us out'', local authorities should act prudently and anticipate difficulties by making appropriate provisions.

I am sure that the Committee will have a useful debate about reserves, but I have no doubt that we will be accused of being unreasonable and heavy-handed by requiring authorities to make appropriate provisions for reserves. That will be another example of the distinction between those who believe in prudence and those who live in a never-never land—or the Liberal Democrats' Valhalla, as I have described it in previous sittings—where it is assumed that everything will go right and that someone else will do the bailing out when things go wrong. That is not sensible. I hope that hon. Members will acknowledge that the amendments are neither necessary nor desirable and will not press them to a Division. If they do, I hope that the Committee will reject them.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

My hon. Friends are having a heated debate about the relative merits of the terms ''nirvana'' and ''Valhalla'' in describing the Liberal Democrats' paradise.

The Minister is not having a terribly good day. It is only a month since I had to report him to the Minister for School Standards over his grammar. I would say that golf and sailing are clearly extra-curricular activities and do not fall within the right hon. Gentleman's remit, and I shall have to consider sending another letter to the Minister for School Standards about right hon. Gentleman's Shakespeare.

Standards are slipping on the Government Front Bench, Mr. Conway. Something must be done. [Laughter.]

The Minister referred to Liberal Democrats having a conspiracy theory about the Government's desire to maintain maximum control and maximum regulatory capability. He has certainly told us about the power in the Bill to make regulations, but he has published draft regulations that do not use that power, which suggests to us that the power is unnecessary and should be removed. I do not accuse him personally of having a passion for a maximum number of regulatory powers. I know how difficult it is for a Government to deregulate: it is easy to say, but difficult to do. The main reason why it is difficult is that behind the Minister stands a vast army—a vast structure—that is partial to regulatory power. What administrator, what bureaucrat, what part of the Government machine would not rather have more regulatory power? The measure by which we must judge the Government is their courage in taking on the machine and in fighting that battle within. We are seeing some of that inevitable tension in respect of the Bill and the process that led to it.

The Government set out a bold political statement when they said that they want to free up local authorities; then, they published the White Paper. The draft Bill, however, does everything but free up local authorities. Every bit of freedom that it grants, it snatches back three or fourfold in subsequent paragraphs. After a trouncing by the Labour-dominated Select Committee, the Government conceded ground in a few areas, but it is clear that for every inch that they concede to local authorities, they are snatching a yard.

I do not feel that the Government have addressed the issues on which we are focusing in amendment No. 27 and I urge my hon. Friends and other right-thinking Committee members to support us as we press it to a Division.

Question put, That the amendment be made:—

The Committee divided: Ayes 10, Noes 12.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

Where have we got to on clause 3? We have prudential limits being self-determined by local authorities, which is good. In subsections (2) and (3) we have the Secretary of State's powers to do that for them, which is bad. In subsection (4) we have a reference to the codes of practice and the ability to use third party codes of practice, which seems sensible. We would obviously have preferred amendment No. 27 to have been accepted, but we welcome the use of the CIPFA code of practice, which is a step in the right direction.

I want to raise two specific points with the Minister on subsection (1). The hon. Member for Southport touched on the first point and I confess that it had not occurred to me, until he mentioned it—that it is possible to interpret subsection (1) as meaning not that a specific sum of money should be specified but that another limit on borrowing, for example—a multiple of anticipated revenue—should be used. I take it that it is the Minister's intention that borrowing limits must expressed as a specific sum, but if that is not the case, perhaps he would advise the Committee. If it is, perhaps he would confirm that he has received a proper opinion that the wording of the Bill will in fact require that the limit determined under subsection (1) is always determined as a fixed sum.

My second question, which my hon. Friend the Member for Isle of Wight touched on during an intervention, is whether the word ''afford'' is the right one in subsection (1), which states:

''A local authority shall determine and keep under review how much money it can afford to borrow.''

Affordability is, of course, one of the criteria to which a local authority should have regard. No authority should borrow more than it can afford to borrow. However, it may not always be sensible to borrow all the money that one can afford to borrow. To use an analogy with personal finances, we have all seen people who borrow the maximum amount of money they can afford to borrow and regret it later. My hon. Friend the Member for Isle of Wight was probably on the right track when he used the word ''prudent'' because we are really discussing a prudential limit, being the amount of money that it is prudent to borrow. That may not be the same as the amount that the authority could afford to borrow. An authority can afford to borrow as much debt as it can service from its revenue streams, but it might not be prudent to do so.

This is an important matter and I shall be interested to hear what the Minister has to say about the way in which the concept of affordability is to be interpreted in relation to subsection (1).

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

I want to comment briefly on what we have just heard from the hon. Member for Runnymede and Weybridge and to confirm our view that clause (3) is unnecessary. Had we amended clause 2 properly, we would have kept to the CIPFA prudential code and we would not then have all these unnecessary elements in clause 3.

The hon. Member for Runnymede and Weybridge referred to affordability and how it would be measured. I am not sure that I agree with him because if we define ''prudent'' we have to return to the numbers. The numbers will be central to assessing prudence or affordability and the draft code on which CIPFA is working refers primarily to numerical issues.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I am grateful to the hon. Gentleman because I should have given that example. It seems to me that—the Minister will tell me if his interpretation differs—using the term ''affordability'', if the cost of borrowing goes down, the amount of borrowing that can be afforded on a given revenue stream goes up. I hardly imagine it is the Minister's intention that if the cost of borrowing to local authorities were to fall from 4 per cent. to 3 per cent. they would have an immediate 33 or 25 per cent. or some other percentage increase in debt capacity.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

As I read the draft code, it takes account of those issues. The hon. Gentleman suggests that the code paints a static picture and that a council may look at its step position, tax base, expenditure and so on and say that it can afford things that year, but it will not look at the dynamics and the ranges it needs to keep within. My understanding of the code enables such analyses to be made, which is why I support the drafts before us. Most prudent people when looking at their mortgages and borrowing look at those aspects of affordability, taking a realistic and prudent view of

what will happen to interest rates, but perhaps the hon. Gentleman does not.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

With respect to the hon. Gentleman, we have seen precisely the opposite in people's personal borrowing. As interest rates have fallen, households have massively increased their borrowing to reflect the fact that borrowing is more affordable. The consequences are still to come home to roost, and may give rise to the kind of macroeconomic exigency about which the Minister speculates in the powers he is taking under clause 4(1).

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

Mr. Conway, you will certainly rule me out of order if I am tempted to analyse the macroeconomic situation and how the low inflation climate has affected borrowing in the personal sector. I suggest that the hon. Gentleman reads the draft code and looks at some of the indicators that CIPFA suggests local authorities should consider. I do not think that such problems will arise. It is possible that in trying to follow the provisions local authorities may get it wrong; governments, local authorities and individuals can all get it wrong. The hon. Gentleman should know from looking at the Conservative record on managing public finances how badly governments can get it wrong—we saw debt double under the last Conservative Government.

I accept that mistakes can be made about what is prudent and affordable. The question is what sort of framework one puts in place. I believe that the code is the right one and to the extent that clause 3 refers to the code and ensures it will be part of the framework, I support it.

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

We had two interesting speeches from the Conservative and Liberal Democrat Opposition. If I heard correctly the view of the hon. Member for Runnymede and Weybridge, the balance sheet was to divide clause 3 as a sandwich into subsection (1), then the middle, which is subsections (2) and (3), and last, subsection (4). His verdict was: (1) good; (2) and (3) bad; and (4) good. Overall he gave a positive view, although he disliked the middle of the sandwich.

I am not getting into a mathematical assessment because the hon. Gentleman might discover that the number of words in the middle section is greater than that in the two outer sections and come to a different view.

Mr Paul Marsden (Shrewsbury & Atcham, Liberal Democrat)

A simple question: where is the beef?

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

The hon. Gentleman anticipated my answer. As usual, the beef is to be found in the middle of the sandwich. As we established earlier, although Opposition Members do not like it, we believe that there should be a little beef in the middle just in case it is necessary. We think that the sandwich is very good in any case, based on the two outer parts.

Before I deal with the contribution from the hon. Member for Kingston and Surbiton, I shall pick up a couple of specific questions asked by the hon. Member for Runnymede and Weybridge. First, he asked

whether the borrowing limit must be determined as a sum of money. The answer is that the Bill's wording implies that, but the local authority should, in reaching its decision, take account of wider factors, such as the various ratios and indicators set out in the draft code.

Secondly, the question was asked whether the local authority was under any obligation to borrow the full amount. The inference was that once a borrowing limit had been set, an authority should borrow that amount. Of course, we do not take that view. The borrowing limit is the limit. We expect the authority to consider wider implications, not only how much it wants to borrow and the major capital schemes that it wants to pursue, but, crucially, what the risks are, what measure of reserve is necessary to take account of unforeseen circumstances and how much latitude there should be for the factors that the hon. Member for Kingston and Surbiton raised, such as potential changes in the economic scenario.

Just as any prudent home owner, when taking a decision on borrowing, would think not only about current mortgage rates, but about how they might change in future, so we expect an authority to form a view on the wider implications and not just to apply the borrowing limit mechanistically in the confident assumption that it will be able to service the debt in all circumstances. The borrowing limit is there to be interpreted by the local authority, and the interpretation should take account of other, potential circumstances.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

The Minister is muddling two issues. Clearly, in entering into any borrowing, a prudent local authority will have regard to a range of circumstances. However, that is different from setting a borrowing limit, which may be far above anything that the authority contemplates borrowing. My question is whether affordability—in other words, its ability to service the debt—is the only criterion that it should use in setting the borrowing limit. It seems to me that it is not, but clause 3(1) specifically says that an authority shall

''determine and keep under review how much money it can afford to borrow.''

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

The hon. Gentleman is right to say that the affordability issue determines the borrowing limit, but I was trying to deal with the question whether that would automatically lead through to borrowing up to that limit. I was making the point, which I am pleased he agrees with, that it should not. An authority should work within the limit and assess not only affordability issues, but wider issues, such as those that I mentioned.

To put this in context, we should be aware that local authority borrowing is consistently falling, in just the same way as the Government have been successful in reducing the level of overall indebtedness of the country as a whole. We are working in a relatively benign framework, in which we have prudent management and falling debt levels. We can all take a great deal of satisfaction from that.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

Does the Minister expect local authority borrowing to carry on falling in future?

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

Here we have a wonderful paradox. The Conservative party accuses us of being the party of control and of determining what local authorities should do, but when we present local authorities with greater freedom and say, ''Over to you; it is now local government's decision,'' we are asked what we think they should do—

Mr Andrew Turner (Isle of Wight, Conservative)

What they will do.

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

Or what they will do. I shall resist that. The decisions will be taken by individual local authorities in different parts of the country in the light of local circumstances. That is the correct way forward, subject always to the national safeguard in clause 4. The Opposition parties do not like it, but it is the necessary corollary to the greater freedom that we offer.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

There was nothing very difficult in what I asked the Minister. My understanding—if I am wrong, he will correct me—is that the Government's policy objective is to encourage local authorities to borrow. That is part of the purpose of changing the regime. It strikes me as rather odd that the Minister was explaining that we did not need to worry and that everything was fine because local authority borrowing was falling, if the Government's objective is in fact an increase in borrowing levels.

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

The Government's objective is to ensure that local authorities can discharge their responsibilities and respond to the challenges of their areas and can invest, where appropriate and prudent, to improve the facilities and infrastructure of their communities. That is what we want. We want such decisions to be taken locally, although we believe that a national framework is needed, for the reasons that I have spelled out. That is why the clause 4 powers are included, but decisions taken under clauses 1, 2 and 3 should be reached by individual local authorities in the light of the prudential limit set and the guidance and regulations to which I have referred. That seems to us the right way forward, rather than the Government expressing a view on what the outcome should be.

Mr Andrew Turner (Isle of Wight, Conservative)

The Minister has now misrepresented twice, although I am sure inadvertently, what my hon. Friend the Member for Runnymede and Weybridge has said. He did not say ''shall'' and ''should'', but ''would''. The Minister has used the word ''should'', but I think that ''would'' would be more appropriate.

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

I made it clear in my earlier remarks that I expect that some authorities will increase their borrowing while others will reduce it. That is a perfectly natural part of the democratic and decision-making processes of individual authorities, which we want to encourage. I shall not give an overview of the whole position other than to say that we are keeping a prudent watch on it and have reserved powers that we could use if a sudden surge of borrowing took place that seriously endangered wider national macroeconomic stability. We do not anticipate that, but reserved powers are there, just in case.

Mr Paul Marsden (Shrewsbury & Atcham, Liberal Democrat)

Does the Minister not find it a little curious that the Conservatives now seem to be such dedicated followers of prudence? In the seven years

before 1997, central Government debt more than doubled from £2,412 per head to £5,638 per head.

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

The hon. Gentleman makes a very valid point. The Conservative party, during its later years in power, presided over an unfortunate mismanagement of the economy, which resulted in increased problems of debt and neglect of our infrastructure. Far too much of the national economy was allocated to dealing with the problems of failure rather than investing in future success. This Government have worked assiduously since 1997 to ensure that that is reversed. We have seen important reductions in overall debt, substantial investment in our infrastructure and improvements in social programmes to make the maximum use of all our citizens' talents. That is the way forward and the distinction between our parties.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

That is guff. I am sure that the Minister recognises that there are points in an economic cycle at which more borrowing is necessary. I hope that he recognises that, or he will be in trouble with some of his right hon. and hon. Friends.

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

I entirely agree that there are moments in the economic cycle at which it is important to increase borrowing. The hon. Gentleman will recognise that, at a time when the world economy is going through considerable difficulty and turbulence, the fact that the UK is in a strong position is in no small measure due to the prudence of my right hon. Friend the Chancellor's financial management and our increased investment, now coming through, which has the counter-cyclical effect of keeping our economy in a strong position. I am delighted to see that wisdom is at last reaching the Opposition Benches and look forward to discussing that further with the hon. Gentleman in due course.

Question put and agreed to.

Clause 3, as amended, ordered to stand part of the Bill.