Mr Derek Conway (Old Bexley & Sidcup, Conservative)

I remind the Committee that with this we are discussing the following amendments:

No. 28, in

clause 4, page 2, line 26, at end add

'and the allocation of a share in such aggregate limits to individual local authorities.'.

No. 7, in

clause 4, page 2, leave out from beginning of line 27 to end of line 2 on page 3 and insert—

'(2) No regulations may be made under this section unless—

(a) the Secretary of State has consulted such representatives of local government as appear to him to be appropriate;

(b) he has laid before each House of Parliament a report explaining the reasons why he considers it necessary that the regulations be made; and

(c) the report has been approved by resolutions of each House of Parliament.

(3) Sections 117(1) and (2) do not apply to regulations made under this section.'

No. 49, in

clause 4, page 2, line 27, leave out subsection (2).

No. 29, in

clause 4, page 2, line 28, leave out from 'authority' to end of line 29 and insert

'where he considers that the local authority has not, in setting a borrowing limit under section 3(1), had proper regard to the requirements of section 3(2).'.

No. 31, in

clause 4, page 2, line 31, at end insert—

'( ) A limit set under subsection (1) or (2) may not, in respect of any local authority, be set at a level less than the level of that local authority's borrowing on the date that the draft regulation is laid.'.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

At this stage I shall not press the amendments. However, we will vote against the clause on stand part. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Mr Derek Conway (Old Bexley & Sidcup, Conservative)

With this it will be convenient to discuss new clause 2—Imposition of borrowing limits (No. 2)—

'—.(1) The Secretary of State may by regulations set limits in relation to the borrowing of money by local authorities.

(2) The Secretary of State may only make regulations under subsection (1) if the Code for Fiscal Stability, as provided for in section 155 of the Finance Act 1998, would otherwise be breached in any way.

(3) Before the Secretary of State may make regulations under subsection (1), the Treasury must prepare and lay before Parliament a document which shall be subject to approval by a resolution of the House of Commons explaining how the Code for Fiscal Stability would otherwise be breached if limits were not set in relation to the borrowing of money by local authorities.

(4) It shall be the duty of the Comptroller and Auditor General to examine the Treasury's document published under subsection (3) and report to the House of Commons his findings.'.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

New clause 2 represents a much better approach than the Government's approach because it sets a much clearer description of the circumstances in which macro-economic reasons would trigger the Government's right to interfere in the borrowing of local authorities. As clause 4 stands, we do not know what those reasons might be, because subsection (1) says only that regulations will set guidelines for capping local authorities' borrowing for ''national economic reasons''.

''National economic reasons'' is a broad and vague term. We have had Ministers' assurances in the explanatory notes and in debates that that would be a long-stop and reserve power that would rarely be used, but we still do not know what the national economic reasons are. There has been no description or attempt to set criteria in debates, the explanatory notes or elsewhere, which seems odd. The term could cover many issues that are not necessarily relevant to borrowing. There may be economic reasons why the Government feel that they have to take some measures, but those economic reasons should be germane to the borrowing of local authorities.

That is why new clause 2 talks about the Government's own code for fiscal stability. It was provided for in the Finance Act 1998 and has been continually referred to in Budgets and pre-Budget reports. It sets out the objectives of fiscal policy and the rules by which those objectives will be met. In theory, they are binding on central Government, but, as Governments always do, they have given themselves an opt-out clause. However, the code is supposed to set the framework in which fiscal policy is to be delivered in the long term. For example, it requires the Treasury to make a long-term forecast of the fiscal position of UK plc and sets out whether the public finances are sustainable in different conditions. It has two rules that underpin the fiscal policy. There is the golden rule, which is that over the economic cycle the Government will borrow only to invest and not to fund current spending, and the sustainable investment rule, which relates to public sector net debt as a proportion of GDP.

My point is that the Government have an elaborate code and underpinning rules to direct their fiscal policy. A lot of analysis follows those rules, and it is logical that local authorities should fit into that framework. Their borrowing and fiscal actions must

be taken into account in the Government's determination of whether they are abiding by their rules and sticking to their code for fiscal stability.

New clause 2 would not use such broad, unspecified ''national economic reasons'' that do not relate to local authority borrowing, but instead take the Government's framework for fiscal policy and include local authorities' fiscal actions within it. I do not think that it is a particularly outrageous request from the Opposition for the Government to keep to their code for fiscal stability.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

We are the Opposition.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

The hon. Gentleman says that, but many people in the United Kingdom do not think that the Conservatives are a good Opposition and are instead looking to the Liberal Democrats to provide the opposition. I am grateful to him for giving me the chance to put that on the record.

The Government should accept new clause 2. It might mean that they have to treat local government with a little more respect. The Government's attitude to local authorities is that the Government should be able to set regulations when they decide that it is right, but they should treat local government with more respect and apply the same codes and rules to local government as they do to themselves. I therefore urge the Minister to reconsider.

Mr Andrew Turner (Isle of Wight, Conservative)

I am interested in the hon. Gentleman's argument that the rules and codes that apply to the Government should also apply to local government. Will he accept that the money supply, for example, is within the control of the Government, so they should have some responsibility in respect of limiting local authority borrowing and expenditure?

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

That is an interesting point, although we are in danger of going down the route of the debate that took place in the early 1980s between monetarists and neo-Keynesians about the real effects and causalities in respect of the money supply. I thought that that argument had been put to bed, and that most people did not believe that fiscal policy had a very big impact on the money supply but believed that monetary policy had by far the most significant effect. The hon. Gentleman may want to have a debate on macro-economic theory, but local authority borrowing and Government borrowing are a very small aspect of the overall money supply.

I was trying to say that the fiscal framework that is embedded in the code for stability takes all those issues into account. If the Government as a whole, local and central, stick by the code for fiscal stability, the theory is that there will not be the damaging side effects to which I think the hon. Gentleman alluded, so his point is covered whatever economic ideology he currently subscribes to.

I hope that the Minister will regard new clause 2 as helpful, because it specifically relates the Government's own policy to a point in the Bill at which it should be directed.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

Yes, we are the Opposition and consistently so, unlike the Liberal Democrats, who

want to play at being an Opposition to the Government in England while at the same time propping up the Labour party in its minority Administrations in Scotland and Wales.

It is interesting to hear the hon. Gentleman dismiss so readily and easily the relevance of Government borrowing as a component of the money supply. That may be a warning that, if the Liberal Democrats were ever to get their hands anywhere near power, that component of the money supply would quickly run out of control.

I will comment on the Liberal Democrats' new clause 2, but I shall begin with clause 4 in general. This clause rumbles the Government. The original clause 4, which was in the draft Bill that went before the Select Committee on Transport, Local Government and the Regions, was an umbrella capital control power and perhaps more prescriptive than the existing situation. The much-quoted Mr. Travers told the Select Committee that

''the . . . 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.''

The clause has two essential components. These are the ability of the Secretary of State by regulations to set limits for ''national economic reasons''—that rather curious term is undefined—and the power in subsection (2) to set by direction, without scrutiny, limits on the borrowing of individual authorities. In other words, the Government have retained power to get in at the front end to micro-manage and tell each authority what it can and cannot do. By virtue of having that reserve power to limit any authority's borrowing, the Government can in practice give authorities a clear steer about what they do and do not regard as acceptable in respect of their borrowing.

The Committee will remember that the Government resisted an amendment that would have limited their power under subsection (2) to cases in which the authority had not had sufficient regard to the specified codes of conduct and practice in setting its own borrowing limits. The Government have therefore made it clear that they want an unfettered discretionary power in dealing with individual local authorities to curb their activity and set limits for them.

The only legitimate area in which the Government should be concerned is the aggregate level of borrowing, because of the impact that that has on the overall fiscal and monetary macro-economic position.

The clause also raises more questions than it answers, because we have seen from the structure of subsection (1) that the Secretary of State, by regulations, would set borrowing limits for each authority. I therefore assume that an exhaustive list would be published of all authorities in the country, with a borrowing limit set for each. The purpose of that would not be the individual borrowing limits of each authority, but the macro-economic impact of the aggregate limit on borrowing by the local authority sector. However, the Minister has told us nothing

about how he would set the individual authority limits in such a situation.

How can Parliament be reassured that those limits will be set in an equitable way? Will the approach be based on a mechanical formula, with top-slicing of the self-imposed borrowing limits set under clause 3 by each authority, so that each authority would be limited to, for example, 75 or 80 per cent. of its borrowing limit?

I suspect, however, that the Minister will insist on retaining the micro-management power that will enable him to go down the list ticking off the good, the bad and the indifferent, and to set the limits according to ministerial whim. Let us hope that the limits are set on the Minister's birthday, when he might be in a good mood and might be expected to be generous to prudent authorities, rather than on one of his blacker days, when he might be tempted to display bias, the accusation of which must by now be so familiar to him that it is water off a duck's back.

Clause 4 introduces the curious notion of headroom and transfers between authorities, which we have not yet had the opportunity to debate. Having set debt caps on individual authorities, for the purpose of creating a limit on sectoral borrowing, the Government would then allow authorities to swap headroom, which, in effect, would create an internal market in borrowing capacity. Will the Minister comment on that?

I assume that it is envisaged that local authorities, for a limited period of time, would be able to sell their unused borrowing capacity to other authorities. That may sound slightly strange, but I know that that sort of thing has happened before. I was talking to a local authority a week or so ago, which had made a very nice turn in the 1980s and early 1990s by lending to Liverpool city council, when no other lender was willing to do so. Will the Minister explain how this internal market in debt capacity will work?

During a macro-economic crisis, in which the objective is to control total sectoral borrowing, is it sensible to envisage a system that imposes limits on individual local authorities, but then immediately opens up the opportunity for those authorities on whom the limit bites to acquire borrowing capacity from another authority—a prudent authority that has very low borrowing in relation to their ministerially set borrowing limit? There will be a tendency for the maximum borrowing limit set under the mechanism to become, through that transfer of headroom, a minimum borrowing level. Borrowing will tend to increase to the maximum permitted. That is perverse, because in a crisis where borrowing needs to be limited the objective would be to limit an individual authority's borrowing as the Minister directs—he has some discretion—and certainly not to encourage other authorities effectively to borrow or to allow borrowing against their unused capacity. I would be grateful if the Minister could clarify that point.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

I have been closely following the hon. Gentleman's argument. I agree with him that the clause is fairly odious. Its one redeeming aspect is the ability to share unused borrowing capacity. It is the

only flexibility in the system, so I am surprised the hon. Gentleman speaks against it.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

That depends how one views the use of the power under subsection (1). The Minister has told us that it would be used only in extremis in a national macro-economic emergency. In those circumstances it is curious to impose limits that almost certainly would not bite. There is a local authority sector debt. The Government seek to curb the growth of local authority borrowing—temporarily, I hope—for some external reason. If authorities on which the limit bites are able simply to acquire debt capacity from other authorities, the limit will not bite and the macro-economic objective will not have been achieved.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

I may be misunderstanding the clause, but I thought that the limit set in subsection (1) was for the total of all local authorities' debt; and, therefore, if there was room within that limit that is where the arbitrage would take place.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

We do not have a draft regulation because there is no suggestion that there will be any regulations under subsection (1). The Government rejected an amendment that sought to specify an aggregate limit and an allocation of that aggregate to individual local authorities. My understanding is that each local authority will be given a limit, but perhaps the Minister will correct me. If one sat down and did the arithmetic, that would produce an aggregate limit for local authority sector borrowing. But, given the ability to trade headroom, it is not clear that that would achieve the objective effectively, efficiently and quickly in the circumstances where it is right to use subsection (1)—that is, a serious monetary crisis. I look forward to the Minister's comments.

The general thrust of new clause 2 is similar to amendment No. 7, which requires the Government to define the national economic reasons. The Minister's courage clearly deserted him when he went to write ''crisis'' into the Bill. We have talked about a national economic crisis, but the Bill uses the word ''reasons'' instead.

I am not convinced that the code for fiscal stability has the relevance here on its own that the Liberal Democrats have written into new clause 2. I prefer the structure of amendment No. 7. I do not disagree with the hon. Gentleman's purposes, but the problem is that the test in subsections (2) and (3) of new clause 2 is that the code for fiscal stability would be breached if limits were not set in relation to the borrowing of money by local authorities. So many variables in terms of Government borrowing and fiscal activity would contribute to a breach of the code for fiscal stability that it would be a difficult test to satisfy that local authority borrowing had to be controlled in order not to do so. I suspect that it would never bite. Perhaps that is what the hon. Gentleman intends, and if so he will join us in voting against clause 4.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

The hon. Gentleman suggests that it is the intention of new clause 2 to prevent any limit

biting on local authorities, even in the circumstances described, but it is not. The intention is to ensure that local authority borrowing is treated in the same way as other borrowing.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

The hon. Gentleman clarifies the intention of the new clause, but the fact that it is being considered in a clause stand part debate suggests that parliamentary counsel views it as a wrecking proposal.

We are happy to reassert that we will vote against the clause and I hope that the hon. Gentleman will join us. Amendment No. 7 and new clause 2 attempt to highlight and reduce the odiousness of the clause, but it would be best to vote against it as it clearly signals the Government's determination to clutch at a reserve power, which is not compatible with genuine decentralisation; it is nothing to do with granting freedom and flexibility. As the hon. Member for Southport (Dr. Pugh) said at our last sitting, the test, which I shall apply throughout the Committee stage, is whether the Government propose to allow local authorities to do what the Government do not want them to do, rather than only what the Government want them to do. Do they propose to give local authorities partial freedom to do what the Government want them to do and to retain a reserve power to prevent them doing what the Government do not want them to do?

Mr Christopher Leslie (Parliamentary Secretary, Cabinet Office; Shipley, Labour)

That is clear.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

The hon. Gentleman is absolutely right. It is clear that it is the Government's intention to allow the local authorities freedom as long as they are doing what the Government want. When they think about doing what the Government do not want them to do, the reserve power is there to put them back on the Government-defined track. That is Government at their worst; dishonest about the purpose of the provision at the outset and shifty when rumbled. I hope that the Government will review the clause or, even better, at a later stage take into account at least the underlying intention of the amendments and properly scrutinise the regulations, for which there is no provision under subsections (1) and (2). If they do not do so, and unless the Minister makes a significant concession when he winds up the debate, I shall urge my hon. Friends to vote against the clause.

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

I shall do my utmost to retain my usual good humour, despite the monstrous travesties and hyperbole of the hon. Member for Runnymede and Weybridge, who sought to transform a modest safety net provision into a terrible, odious construct, which the Liberal Democrats find equally objectionable. I shall deal with both points of view.

New clause 2 is designed to replace clause 4(1), which would enable the Secretary of State to limit local authority borrowing if it was likely to exceed the nationally sustainable level. There are similarities between the new clause and amendment No. 7, which has been withdrawn, and links with the recommendation in paragraph 14 of the report on the draft Bill by the Transport, Local Government and the Regions Committee.

There should not be a statutory requirement for parliamentary approval before setting a national limit. If, in the unlikely hypothetical circumstances of a major financial crisis—we do not envisage such a crisis, especially while the economy continues to be as prudently managed as it is at present—it would not be appropriate for the Government to delay before taking the necessary corrective action. In any case, any action that the Government took in pursuance of their powers under clause 4(1) would be implementing policies on public expenditure that had already received parliamentary scrutiny. Nor do we believe that it is practical to specify in the Bill detailed methods for assessing national economic interests as new clause 2 proposes. We put in the reference to national economic interests in response to concerns voiced in the Select Committee to demonstrate our good will and that we will seek to use this measure only in those extreme circumstances.

Hon. Members will understand that one cannot anticipate the circumstances that may apply. Could anyone have imagined, other than in a Jeffrey Archer novel, the run of events that occurred at the time of this country's ejection from the exchange rate mechanism during the imprudent management of our affairs by Lord Lamont? Such circumstances could not have been anticipated—[Hon. Members: ''They were.'']—other than by someone with an extraordinary imagination. The total mismanagement of the economy and the extraordinary incompetence of senior members of the Government at that time are difficult to apprehend in today's more tranquil, rational and calm environment. But that happened. Therefore we should not anticipate that everything will continue for ever in the calm, measured, prudent form to which we are now accustomed thanks to the Government's good management of the economy.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I am delighted that the Minister has spelled out to the Committee the folly of linking a currency inextricably to another currency that has a different set of underlying economic determinants. I hope that he will be casting his vote accordingly if and when the Prime Minister ever dares consult public opinion on making a yet more irrevocable link.

The Minister talked about the use of subsection (1) only in extremis; in serious national economic circumstances—a crisis.

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

Yes.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

But the Bill does not say ''crisis'', as I mentioned earlier. It says ''national economic reasons''. Does the Minister have any advice, perhaps from counsel, that ''reasons'' means extreme or crisis reasons? The words that he has put into subsection (1) do not constrain the Government in any way.

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

If the hon. Gentleman feels that they do not constrain the Government he is not terribly experienced in the ways of the House. Anyone looking at the operation of these powers will question whether the national economic interest is such that it is necessary. That is a clear constraint because the Government have said that they will use these powers only for that purpose. I am not going to get

into textual analysis over whether ''national interests'' should be substituted with ''national crisis''; I feel that ''national interests'' is a better expression. I have already indicated that those are the circumstances where these exceptional powers might be used. I will turn to the code for fiscal responsibility in a moment.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

Before the Minister was tempted into a debate on the European question, he said that one could not always envisage the circumstances, so he wanted to leave himself maximum flexibility. However, the code for fiscal stability allows for such flexibility. Paragraph 11 states:

''The Government may depart from its fiscal policy objectives and operating rules temporarily''.

The flexibility in the code for fiscal stability is why we put it into new clause 2. The only difference between our approaches is that the Minister always wants to distinguish between local government and central Government borrowing. He believes that central Government borrowing should always take precedence and no consideration should be given to local authority borrowing, which can be treated willy-nilly by Whitehall. We are trying to change that; that is why new clause 2 is proposed.

Mr Derek Conway (Old Bexley & Sidcup, Conservative)

Before the Minister replies, I ask hon. Members to keep their interventions brief rather than making long speeches. The Committee system allows everyone to have their turn. It is quite warm in here, so if anyone wishes to remove their jacket that would be in order.

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

Thank you, Mr. Conway. I am delighted to hear the tributes of the hon. Member for Kingston and Surbiton to the code for fiscal responsibility and to the Chancellor's prudent management of the economy. We are delighted to agree with him on that. However, it lead me to suspect that Liberal Democrats are beginning to dream, in the memorable words of one of their former leaders, of going back to their constituencies to prepare for power, or perhaps it was the first shot in the hon. Gentleman's campaign for the deputy leadership of his party. I should not have such unworthy thoughts.

We are delighted that the hon. Gentleman welcomes the code for fiscal responsibility, but it would not be particularly helpful in this context. It lays down broad financial principles rather than dealing with the conditions that might apply in the extreme circumstances that I have described. I am also surprised that the new clause did not include any reference to the Audit Commission, which we would want to involve in consultations on any possible national limit, as it is the appropriate audit authority for local government. I hope that he will agree that the new clause is not useful.

As Members know, clause 4 gives the Government reserve powers to impose borrowing limits on authorities, which would override the affordable borrowing limits set by authorities under clause 3 in limited and exceptional circumstances. The first power is detailed in clause 4(1), which enables the Secretary of State to set borrowing limits for all authorities, but it can be exercised only for national economic reasons. As I said already, we inserted that in response to the

concerns expressed by the then Transport, Local Government and the Regions Committee. The clause reflects the policy of the White Paper ''Strong Local Leadership—Quality Public Services'' and the Welsh Assembly Government policy statement ''Freedom and Responsibility'', which is that the power should be used only if necessary to maintain public expenditure at nationally sustainable levels.

We hope that we will not need to set a national limit at the beginning of the system, but a sudden surge of borrowing could be prompted by the new prudential regime, which could create circumstances in which it could be felt necessary to do so. If we ever needed a national limit it would have to be imposed by regulations, on which we would fully consult local government. We will not draft regulations on a national limit unless and until they are required, but we are already discussing with local government representatives the possible general structure of such regulations, in case they are ever needed.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

The Minister just said that the creation of the prudential regime could lead to a surge of borrowing, which would require the imposition of limits. That suggests that he is looking at local authority borrowing in isolation and contemplating the use of the provision to impose limits because of aggregate local authority borrowing, rather than looking at the total macro-economic picture. Will he confirm that that is not true, and that limits would be imposed only if local authority borrowing were creating a problem as a component of the wider picture?

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

That is obviously implicit, because otherwise we would not have included the reference to the national economic interest. The hon. Gentleman is a thoughtful commentator on economic affairs, although at times he is a little obsessive on European issues—I did not rise to his challenge on that one—and I am sure that he will recognise that if local authorities, which account for a quarter of total public expenditure, were all borrowing large amounts simultaneously, they could have a disproportionate impact on overall national economic circumstances. I felt that it was right to mention that situation—but as I said, we do not envisage the circumstances meriting the imposition of a national limit at the beginning of the new system. I have said that we will consult local government, and we are already having preliminary discussions with local authorities to consider the type and general structure of regulations in case they are ever needed.

Clause 4(2) contains a second reserve power, which would enable the Secretary of State to set a limit on the borrowing of an individual authority. That could be used only for the purpose of ensuring that an authority does not borrow more than it can afford. Again, the power is a backstop that will be available only for extreme circumstances in which individual authorities are managing their affairs in such an imprudent way that, in the interests of their council tax payers and residents, Government intervention is necessary. There

have been a few highly publicised examples of irresponsible behaviour by one or two local authorities, which give the whole of local government a bad name, but I hope that we have established the fact that the Government want to work constructively with local authorities as a whole to ensure that those cases are dealt with expeditiously and do not recur.

In response to concerns expressed by local government, we have reflected in the Bill the policy in the White Paper and the policy statement. As I have said, the limit would be imposed by direction—in other words, a letter from the Secretary of State to the authority involved. That offers flexibility, enabling the limit to be tailored to the particular case, varied or removed quickly if circumstances change.

Clause 4(3) provides that any limits imposed by the Government, nationally or locally, can be different for different types of borrowing. We could therefore allow borrowing for certain purposes to be subject to less stringent constraints, or exempted from the limit entirely.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

How does the Minister square that with the suggestion that limits under clause 4(1) are imposed only for macro-economic purposes, with regard to the aggregate level of local authority borrowing?

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

I am sure that the hon. Gentleman can envisage circumstances in which certain types of borrowing to promote national infrastructure, which is essential for economic development and prosperity, were regarded as overridingly important, and exemptions might be made as a result. Again, there is a degree of flexibility, which the hon. Member for Kingston and Surbiton rightly highlighted as important.

Flexibility is also important in relation to subsections (4) to (6). These deal with headroom, whereby authorities will be allowed the freedom to transfer borrowing capacity between themselves. Interestingly, the hon. Member for Runnymede and Weybridge asked whether there might be trading in headroom. We do not know whether there is any now. He may be aware that there is already a system whereby authorities can pass across unused borrowing limits within the current borrowing approval system. I do not know whether there is active trading. I think that it is mainly a question of voluntary agreements between local authorities whereby one exchanges this year's headroom in return for a transfer in the opposition direction in the coming year.

Such arrangements should continue to be available, because within the overall national limit, it would be perfectly reasonable for authorities to shift individual borrowing decisions provided that they did not breach the overall limit. That is where the headroom allows flexibility.

Mr Andrew Turner (Isle of Wight, Conservative)

We certainly cannot blame the Government for not knowing the circumstances in which headroom may currently be traded. They cannot be expected to know everything. Indeed, it is better that they do not—but will the Minister help the Committee by telling us whether, where there is not a

reciprocal arrangement, the traded or transferred headroom might have a value that should have been taken account of by the transferring authority, and should therefore show up in some form of recompense to its ratepayers for the transferred value?

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

No; we are getting into the sort of detail that is best, and properly, left to local government. There should be flexibility so that if a local authority has, say, £3 million of spare borrowing capacity because it chooses not to borrow up to its set limit within the overall national limit, it can make that available to another authority. However, it should be left to local government to make such arrangements, without a national framework.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

The Minister says that he does not know whether trading in headroom goes on at the moment, but will he confirm that nothing in the Bill or the existing legislation prevents local authorities from obtaining monetary reward for releasing their headroom? Will he also explain how the transfer mechanism will work? Presumably, a local authority that transfers headroom will want to do so on a time-limited basis. Will the regulations provide for a specific structured form of releasing headroom for a period of time? If the borrowing authority defaults on returning the headroom—in other words, on reducing its debt on time—will the donor authority be penalised, or will it automatically be assumed to have reclaimed its headroom when it is contractually supposed to have done so?

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

The hon. Gentleman asks two separate questions. The first is whether there is anything in the legislation to prevent trading in headroom. To the best of my knowledge, there is not. This simply enables the flexibility in the existing system that allows transfers of borrowing approvals between authorities to continue under the new system. If trading currently takes place—and I have told the Committee that I am not aware of any—there is no reason why that should not be extended under the new system.

The second question is about the auditing arrangements for keeping track of the process. The individual authority and its auditors will be responsible for ensuring that there are robust systems in place. The hon. Gentleman is correct to say that there will be a time factor, because borrowing approvals for authorities under the current system are limited for individual years, and under the new system, the authorities will set their own prudential limits for future years. They will therefore want to be satisfied about their capacity for future borrowing.

There will be a proper framework, but it will be determined at a local level rather than being set by the Government. I hope that hon. Members will not encourage the Government to become involved in that process, because that looks like the sort of micro-management that hon. Members complain about. That is very far from our intention.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I understand the point that the Minister made, and to some extent sympathise with it, but he cannot avoid being cast in that role. Subsection (5) states:

''The Secretary of State may by regulations make provision about the exercise of the right''

under subsection (4).

Therefore, the mechanism for the transfer of headroom must be defined in the regulations. If authority A were to transfer some headroom for a period of one year to authority B, would it be assumed that at the expiry of that one-year period, authority A had recovered that headroom, regardless of whether authority B had kept its side of the bargain and reduced its borrowing?

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

The whole purpose of the transfer of headroom is for authority A to make available its spare capacity for the current year to authority B in exchange for some benefit in a future year, such as making available an alternative degree of headroom. That agreement would need to be defined between the two authorities and confirmed by their auditors.

The hon. Gentleman is correct to say that there are regulation-making powers, and we will, after consultation with local government, set out broad parameters. We do not, however, intend to get into micro-management of that activity. The Government would not, and should not, be involved in that, because the overall effect would not be to increase total local government borrowing. As I said earlier, the arrangements are not dissimilar to those that exist under the present system for transfer of credit approvals.

The provisions are not odious, but are necessary as a prudent back-stop for a new system that will hugely extend the freedom available to local authorities. Local authorities will be able to borrow within a prudential framework, rather than being subject to borrowing control. They will take the decisions, and will be able to reflect their needs and circumstances by borrowing to meet those needs. That is a major advance, which local government welcomes.

I am sorry that the Opposition fail to recognise that that considerable extension of freedom to local government must be accompanied by limited safeguards to guard against extreme circumstances in which the exercise of those freedoms could create difficulties, either in terms of national economic management or the performance of a few local authorities. Those are no more than prudent safeguards, and I hope that hon. Members will not vote against them. If they do, I hope that the Committee will nevertheless confirm that clause 4 should stand part of the Bill.

Mr Desmond Swayne (New Forest West, Conservative)

The clause is almost identical to the clause that appeared in the draft Bill, and it is that fact that has generated such strong representations to members of the Committee. I see from the agitated body language of many Government Members that they are as affected by those representations as we are. The answer proposed by my hon. Friend the Member for Runnymede and Weybridge is that we should vote against the clause. He is a wise man, but also a hard man in such respects.

I should like to offer the Minister an opportunity to try to draw the sting of the opposition that has been caused by the fact that the Bill contains that almost

unamended clause. The Minister described the ''prudent safeguards'' as being for extreme circumstances, and said that such provisions were unlikely to be used. Given the lack of anything in the Bill, would it not have been wise—indeed, he still has an opportunity to do this—to give the Committee an exposition of the extreme conditions in which the powers would be used.

The prudential tests that apply to borrowing will clearly not provide any great scope for increases in capital expenditure. Therefore the key to affordability for local authority capital investment will remain the level of Government funding for that. The Local Government Association pointed out that the debate takes place against the background of an expected paper from the Government on the future of Government support for local authority capital finance. I had not known that. Would it not be possible for the Minister to draw some of the sting of the opposition to the clause by sharing with the Committee some insight into the details of that expected Government paper on local authority capital finance?

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

Opposition Members' nice cop, nasty cop routine is a fascinating challenge to the normal stereotypes. I must tell the hon. Member for New Forest, West (Mr. Swayne) that I have already spelled out the extreme circumstances by describing the lamentable mismanagement of this country's economy by his noble Friend Lord Lamont a decade ago. I hope we will never return to that. As a prudent Government we have put these provisions in so that in the event of the country making a great mistake and ever again returning a Conservative Government there would at least be a safeguard.

Mr. Turner rose—

Mr. Hammond rose—

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

The ease with which one can get a rise out of the Opposition is extraordinary.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

The Minister may joke, but he has just said something very important. Is he ruling out the use of the power under section 4(1) for so long as his Government are in power?

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

No. I am saying that we do not at present envisage circumstances in which the power has to be used because the economy is being well and prudently managed. As a prudent Minister, I cannot possibly anticipate what is likely to happen in the foreseeable future if there were to be major upheavals in the world economy that affected this country. It is right that these powers should be there, but we do not envisage using them. We do not anticipate their need but we think it prudent to put them in the Bill.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

Does the Minister regard a halving of the value of shares quoted on the London stock exchange over three years as being a serious economic circumstance?

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

It is a serious economic circumstance, but because the national finances have

been so well managed by the Chancellor, we are in a stronger position than almost any other country in the world to weather an international storm. The hon. Gentleman is well enough versed in the movements of stock exchanges to know that what is happening in London is not unique. He will see similar trends in Tokyo, New York and Frankfurt. But the British economy is more strongly placed to cope with that than almost any other economy in the world. We do not see a need to use these powers in the foreseeable future, but it is wise that they should be there.

The hon. Member for New Forest, West referred to drawing the sting out of the opposition. It may reflect my benign view of the world at the start of my 59th year, but it feels like a very minor prick by an irritating gnat.

Mr. Turner rose—

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

I give way to another hon. Gentleman.

Mr Andrew Turner (Isle of Wight, Conservative)

I thought that the Minister was going to say another irritating gnat.

As the Minister is prepared to contemplate the possibility of a future Conservative Government, will he also contemplate whether his reassurances that the powers would be used only in circumstances that he might describe as a crisis would apply to a future Government? Is he legislating for his Government or for a future Government, who may have different views about the use of these powers?

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

I accept that, of course. I have already made it clear that we are legislating for the future, but in response to a question from the hon. Member for Runnymede and Weybridge I was happy to acknowledge that because of international factors such circumstances might arise in the lifetime of this Government. I am glad that I have given the hon. Member for Isle of Wight some comfort and that as a result of my remarks it is possible for him to contemplate a future Conservative Government. On that happy note, I urge the Committee to allow the clause to stand part of the Bill.

Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 15, Noes 8.