Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I beg to move amendment No. 2, in

clause 9, page 4, line 20, leave out subsection (3).

Mr Win Griffiths (Bridgend, Labour)

With this it will be convenient to discuss amendment

No. 37, in

clause 9, page 4, line 25, after 'provision' insert

'in relation to a local authority which is not debt-free at the time of the receipt'.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I shall endeavour to be brief so that we can make some progress. Amendment No. 2 would leave out subsection (3), which is the usual nonsense that I have noticed creeping into Bills. First, it makes substantive provisions and then it gives the Secretary of State God-like powers to determine that something that is black will be treated as if it were white, and something that is white will be treated as if it were black.

I noticed such a provision in the Employment Bill last year, and here I see it again with almost exactly the same structure. Paragraph (a) says that black is white, if the Secretary of State says so, and paragraph (b) says that, on the other hand, white is black, if the Secretary of State says so. Clearly, that is not an acceptable way to proceed, and although Ministers, after some time in office, no doubt start to perceive themselves as having God-like characteristics, reversing definitions is a step too far.

I suspect that we have no argument with the use of those powers in draft regulations 9 and 10, but that does not detract from the fact that the Secretary of State will have sweeping powers to define something as being something that it patently and palpably is not.

I have a more substantive concern about draft regulation 8, which concerns the treatment of repaid loans and grants. That regulation depends on the assumption, which is clearly fallacious, that all loans and grants are made from borrowed money. On the loans and grants that are to be repaid to an authority, the notes on the regulation say:

''If it could be used for revenue purposes, the authority would, in effect, be paying its running costs with borrowed money, contrary to the 'golden rule'.

With a tortuous argument, one could just about propose that interpretation where the original loan or grant had been made from borrowed money, but where that is not so, there is simply no case for what the Government propose in draft regulation 8.

I would be grateful if the Under-Secretary could specifically make a case in equity for requiring a local authority that originally made a loan or grant out of its own resources, without borrowing, to treat the repayment as if it were a capital receipt. I invite him to consider how the argument in support of draft regulation 8 is framed in the explanatory notes, which implicitly assume that all such expenditure will originally have been financed by borrowing.

Amendment No. 37 is an alternative—proposing, at the very least, to make a change if the Under-Secretary is not prepared to delete subsection (3). It would simply make the subsection inapplicable to debt-free authorities. There is a cogent argument that when an authority is debt-free, it is unnecessary and burdensome for the Secretary of State to have wide powers to treat a receipt as a capital receipt, with all the consequences arising from clauses 10 and 11—joys yet to come. It seems entirely reasonable that debt-free authorities should be excluded from the hazard of the

Secretary of State using these sweeping powers to define things as something that they are not, and to include their receipts from the repayment of loans and grants as capital receipts.

Mrs Valerie Davey (Bristol West, Labour)

I rise very briefly because I know that my hon. Friend the Member for Guildford (Sue Doughty) wants to say a little more about the amendments.

The Liberal Democrats support the two amendments, although it was remiss of me to forget to sign up to them. What the hon. Member for Runnymede and Weybridge has said is exactly right. Subsection (3) seeks to do something rather odd and is one more example of the Government's taking unnecessary regulatory powers to themselves, and amendment No. 37 would free debt-free authorities from some of the controls and powers that the Government seek. I shall not speak at length on amendment No. 37 because in many ways it looks forward to the debates that we shall have on clause 11.

Ms Sue Doughty (Guildford, Liberal Democrat)

On Second Reading, I was concerned that the Minister almost implied that there was something wrong with debt-free authorities; that they were not prudent or sensible, that they did not seem to be using their money in the wisest way, and that the Government knew best. In reality, different types of councils, whether Barking and Dagenham or Stevenage, or my own councils of Guildford and Waverley, each had reasons why they chose to become debt-free. One was that they had no other way of managing their housing finance.

The Government seem to think that spending power should be redistributed from richer authorities to poorer authorities, yet the need for housing can be as great in a richer authority as in a poorer authority because of the economic nature of the area. Housing in Surrey is hugely expensive, and people pay up to six and a half times their salary to buy a modest house, compared with three and a half in other parts of the country. Such people will not be able to buy their own homes and the cost of rented housing is commensurately higher too.

Waverley council submitted a memorandum to the Select Committee. It had to consider the need for affordable housing because its finances could not meet that need. The council's housing need register had more than 1,300 families and single people. Council housing associations had 580 households that needed to transfer to another home because of overcrowding or other reasons, and 400 households were homeless or at risk.

Some Labour Members may be surprised that Surrey has homeless people. As in other parts of the country, people become homeless not because they are feckless but because of the cost of living. In 2002, the average house price was about £220,000, and it is now £270,000. Public sector earnings among the lower paid have not gone up to meet those costs and never will. Therefore, in order to use its money in the best possible way, the council decided to focus on becoming debt-free and not to spend on areas

outside housing in order to obtain the necessary leverage.

In the four years that it took Waverley council to achieve debt-free status, the borrowing forgone was about £4.2 million, yet the benefits of that will be lost if the Government proceed with the Bill. Therefore, we support the amendments. We need a recognition of why local authorities have had to go debt-free and we should trust well-run local government to understand its finances and to manage them appropriately.

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

We come now to the part of the Bill dealing with capital receipts. There are three clauses, the first two of which relate to definitions and the third of which is the substantive policy. Clause 9, the first definitional clause, starts by stating that a capital receipt is a sum received when an authority disposes of a capital asset. Clause 9(3) enables us to amend that basic definition by regulations to include or exclude specified items. Draft regulations 8 to 11 illustrate how that power would be used. The hon. Member for Runnymede and Weybridge said that he had no objection to the approaches adopted in regulations 9 and 10, but he objected to regulation 8, and asked me to give further explanation of it.

The explanatory memorandum on regulation 8 makes it perfectly clear that the making of these loans and grants will have counted as capital expenditure for the authority when they were made, so clearly this is capital. If then the authority receives—

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

Will the Minister give way?

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

I shall give way in a moment. I am trying to answer the point that the hon. Gentleman raised.

When the authority receives the repayment, possibly from a registered social landlord—one of the most likely circumstances—it is important that it should be treated as a capital receipt. That is both logical and natural. In many cases it will have also been the subject of borrowing, but it is not the fact that it was the subject of borrowing that is fundamental. The sum will have been treated as capital when the loan was originally made, so the receipt of the return is naturally and properly treated as capital. I am sorry if the hon. Gentleman does not agree with that, but perhaps he can now explain why not.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

Perhaps the Minister can explain why proper accounting practice will not cover the point that he raises. He seems to retreat into saying that this has to be defined as a capital asset because it was capital expenditure when the loan was made. I should have thought that that sat as an asset in normal accounting practice, and on disposal would be treated in the way that the Minister wants. Why is it necessary to have what I call the black and white power of the Secretary of State to define something differently from what it is?

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

On the contrary, the important thing is to ensure that there is clarity and that there is not scope for those who want to try to wriggle out of

the obligations to treat the receipt differently and to pretend that it is revenue and use it for such purpose. As we shall discuss in due course—I shall relish this debate—many debt-free authorities raise the banner and say that they want to use their capital receipts for housing purposes, but when one looks at their patterns of expenditure a number of them have not been doing that; they have been using them for other purposes. In practice, they have found attractive the possibility of subsidising other council services, or indeed the council tax, by shifting money away from housing to other purposes.

If one believes that there is a serious housing problem in many parts of the south-east—I agree wholeheartedly with the hon. Member for Guildford; her area is no exception.

Mrs Valerie Davey (Bristol West, Labour)

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 cannot answer all the points simultaneously. I am speaking about the issue raised by the hon. Lady and I shall give way in a moment. If one believes passionately, as she does, that housing is important and that the money should be concentrated on that, it is right that it should go there. If mechanisms to enable authorities to redefine capital receipts in the way that I have just indicated and apply them to other purposes are allowed, the principle that we need to maximise resources going into housing, which I certainly support, is undermined.

Mrs Valerie Davey (Bristol West, Labour)

I will not stray into the debate that we are likely to have because you would rule me out of order, Mr. Griffiths, but is not the answer to the Minister's point that, rather than going for this pooling regime, for which clause 9 sets the scene, the Government should restrict the use of housing receipts for housing investment? If that is his concern, that is the solution.

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

As the hon. Gentleman will discover when we get there, that is the effect of what we are doing. We are probably not quite as far apart as he thinks, but we shall come to that later. I shall not test your patience, Mr. Griffiths, by entering into that debate now.

I was saying that it was right that these sums should be treated as capital and that the Secretary of State should have the power in clause 9(3) to make regulations for these purposes.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I go back to the explanatory notes, from which the Minister quoted selectively. If he casts his eye over the last sentence on regulation 8, he will see that it says of the receipt from the repayment of a grant or a loan:

''If it could be used for revenue purposes, the authority would, in effect, be paying its running costs with borrowed money, contrary to the 'golden rule'.''

That would be the case only if the original capital expenditure on that grant or loan were made out of borrowed money. Does it not give the game away that the Department's thinking is focused on authorities that are in debt and that the circumstances of debt-free authorities are ignored?

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

Quite the contrary. The hon. Gentleman makes my case for me by highlighting a

passage—which I would have been perfectly happy to quote, but did not—that illustrates exactly the problem of the risk of leakage of capital from housing investment to other purposes. I made the point that the vast majority of such sums would be the product of borrowing initially, but it is not fundamental that they are the product of borrowing. It is fundamental, however, that the sum was capital when it was made available as a loan to another body, usually a registered social landlord, and it should be treated as capital when the debt is repaid.

Amendment No. 2 would remove the regulation-making power completely, whereas amendment No. 37 would limit the power by making it impossible for the definition of capital receipts to be used in relation to debt-free authorities. The amendments are clearly designed to make it impossible for the Secretary of State to fine-tune the system to take account of needs and changing circumstances.

As I have pointed out, draft regulations 9 and 10 merely continue the existing rules, so I shall say no more about that as both matters are accepted as capital receipts under the current regime. Removing clause 9(3) would also deprive authorities of the flexibility offered by draft regulation 11, which exempts low-value sums from being treated as capital receipts. I cannot imagine that that flexibility is unwelcome to local government, so I hope that Members realise that pressing their amendment would mean trying to remove a useful additional flexibility that the regulations provide.

The provisions need to apply to all authorities, whether they are debt free or not. The hon. Member for Guildford suggested that I had implied on Second Reading that there was something wrong with debt-free authorities. I did not. I made the point that there was no justification for treating debt-free authorities on a different basis from other authorities. We believe in a proper and fair system that treats all authorities on a par and does not give particular advantages and benefits to authorities simply because they are in the position of being debt free, for whatever reason.

I also made the point that some authorities were debt free because they were fortunate enough to inherit a housing stock—in many cases in new towns built by a new town development corporation—and the Government probably paid the entire debt. Therefore, such authorities had a unique advantage compared to others. Certain authorities may have chosen to be debt free for particular reasons—some because they have not invested to meet needs in their areas that different authorities thought important.

All that I was trying to say was that it would be wrong to assume that there was something uniquely virtuous about debt-free authorities. We believe that they should be treated on a par with other authorities and that the system should be a fair one that treats all authorities alike. We do not accept the amendment, and I invite hon. Members to withdraw it. If they do not, I shall invite my hon. Friends to ensure that it is not accepted.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I am in some difficulty, because the Minister has not convinced me by any stretch of the

imagination, but he is right in one thing that he says. Subsection (3) has been used as the vehicle for three perfectly sensible draft regulations—9, 10 and 11—but I would have preferred them to have been enabled via a provision in the Bill that was not so wide ranging and counter-intuitive as subsection (3). The substantive issue behind regulation 8 and the broader issues that we have been debating will be debated again—and, I suspect, once more after that—as we deal with the next couple of clauses, so we shall have plenty of opportunity to show the Government our feelings on these matters.

Before we move to the next stage of the Bill, perhaps I may consider how we might address the Minister's perfectly proper requirement for regulations 9, 10 and 11 while also addressing our concerns about the broad powers in subsection (3). That is the best way to proceed. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I shall be brief, as I have only one issue to raise with the Minister. Subsection (4) would provide or create the possibility of a timing gap between when a receipt is deemed to have been received by the authority and its actual receipt by that authority. There cannot be a person in the Room who is not aware that when we reach clause 11 we shall be considering the great sequestration clause and the Government's attempt to take a large proportion of those receipts. They cannot take what has not been received, however, and my concern is that there is the potential under subsection (4) for a receipt to be deemed to have been received by an authority just because it has become payable to it, even though there may be a substantial timing difference. Thus, the Secretary of State may demand his pound of flesh.

What is worse, Members will see when they study clause 11 in detail that the question is not even one of a shoot-out between the Secretary of State and the local authority. The Secretary of State will simply be able to withhold other sums payable by him, matching the sums that he will be entitled to receive under the clause. How does the Minister propose to ensure that local authorities are not put in unreasonable difficulty?

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

I must disappoint the hon. Gentleman by reassuring him that we are discussing perfectly sensible and practical measures rather than what he has described during an extraordinary flight of fancy that produced an apocalyptic vision. He began by saying that Ministers were taking God-like powers, and he described a perfectly sensible provision for making regulations to fine-tune the treatment of capital receipts as a power to make white black. Now we are hearing about shoot-outs. That is all very interesting and dramatic, but it is rather a long way from reality.

I say to the hon. Gentleman in the nicest possible way that he has been going on for much of our proceedings about the importance of ensuring that

proper accounting practice is followed. Proper, modern accounting practice says that capital receipts should be treated as received when they fall due. That is the only reason for introducing the provision—to ensure compatibility with modern accounting procedures. I hope that he does not object to that and agrees that the clause should stand part of the Bill.

Mr Philip Hammond (Runnymede & Weybridge, Conservative)

I accept what the Minister says—that would be the proper way to treat a capital receipt in accounting terms when it fell to be received—but can he give us any comfort by saying that he is prepared to ensure that circumstances do not arise in which an amount payable to the Secretary of State by virtue of clause 11 could fall to be paid over or set off against an amount due from the Secretary of State to the local authority before that authority had received the cash in question?

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

We do not think that that will happen in practice, because in large transactions involving land and property the receipt normally comes in immediately. However, we shall take the hon. Gentleman's anxiety into account in framing the pooling regime. It is not our intention that an authority should be penalised by being required to make a payment to the Secretary of State before it is in a position to do so. With that reassurance, I hope that the hon. Gentleman will agree that the clause should stand part of the Bill.

Question put and agreed to.

Clause 9 ordered to stand part of the Bill.