Mr John Pugh (Southport, Liberal Democrat)

I shall not move amendment No. 80, Mr. Conway. No, sorry, I shall move it.

I beg to move amendment No. 80, in

clause 26, page 11, line 16, leave out 'controlled'.

Mr Derek Conway (Old Bexley & Sidcup, Conservative)

With this it will be convenient to discuss the following amendments: No. 81, in

clause 26, page 11, line 16, leave out from 'reserve' to end of line 19 and insert

'the chief finance officer shall notify the District Auditor of the balance of that reserve at the end of the financial year under consideration, and if the District Auditor considers that this balance of the reserve is not appropriate, he shall notify the Council of his opinion and publish that notification.'.

No. 82, in

clause 26, page 11, line 20, leave out subsection (3).

Mr John Pugh (Southport, Liberal Democrat)

I am opposed to the powers in subsections (2) and (3), which are given not to the Secretary of State, but to ''the appropriate person''. I question the need for those powers. It has long been the practice of local authorities to act carefully as regards their reserves. That is in the culture. Measures emphasise the need to do so, and district auditors continually remind local authorities of that duty. District auditors and treasurers have a right forcefully to remind councillors of the state of their reserves. That is how things stand. The issue of worrying about reserves is sufficiently at the forefront for local authorities. It is not a matter that they take up from time to time; it is a matter that anyone running a local authority concentrates on.

The new power that is given to the ''appropriate'' power represents an unwarranted interference in a local authority's activities. It is unclear what the intent is for the power. It runs, to some extent, against the democratic mandate, a point that I can illustrate from personal experience.

I had a role in setting the budget of my local authority from 1993 to 2001. It was cash-strapped, and it had an appalling rate support grant, which, I am glad to say, the Minister has done something about recently. It had heavy social service commitments, and there were continual demands from central Government to passport education, which we religiously and dutifully did. In most years, the district auditor commented on the level of reserves. In most years, the schools got all they wanted and their funds and balances remained appreciable. However, we were in no year able to set balances at the level that we wanted. We were able to set budgets that were not reckless and which were approved by the treasurer. We used other devices, such as slowing down the rate of spend on capitalisation, but we persistently had low balances, with a ratio of 5:1 between schools' balances and the local authority balances.

During that time, the electorate, confronted with what I thought was a tolerable council tax increase, rewarded those who set those budgets. Year after year, I am happy to say, the Liberal Democrat presence on the council grew. In 2001, the advice of the district auditor and treasurer were dutifully taken by my

successor who increased the balances. That went against the wishes of the local electorate because the increase in council tax was appreciable, and he promptly lost his seat.

There is a tension between democratic accountability and financial regulation, and local people can choose which way they wish to go on that. I am reluctant to give the power of setting the council's budget to the borough treasurer who will be happier the greater the balances are.

I wonder what the purpose is behind the Whitehall regulation that we are now imposing. It seems opaque. In my view, we have reserves for unexpected contingencies. There other ways in which local authorities can deal with those—slowing down the rate of spend, increasing capitalisation or even making cuts—but there are circumstances in which reserves may legitimately be reduced. The Government's reserves will reduce if we start a war in Iraq, that being the sort of occasion on which reserves are substantially reduced.

The Bill seems to say, however, not that reserves should be varied rationally and prudently—I would agree with that—but that they should be parked as dead money throughout the budget year. I am not entirely clear what will happen once a local authority has set its reserve at its budget session in March. Will it have to keep to that level all year? May it use that money at all? Is the reserve simply to be a vast morass of unutilised money right across the country? It strikes me that clause 26 is needless and meddlesome interference. Local authorities do not want it. So far as I know, CIPFA has not demanded it. It takes freedom away rather than giving it. It adds a new restriction, which the Minister has not denied, to a Bill that is supposed to be about localisation.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

I have seen CIPFA briefings that state that it is very much against this power.

Mr John Pugh (Southport, Liberal Democrat)

Exactly so. The clause seems to be something dreamt up by a ministerial mind for which there is no basis in the realities of finance.

If the Minister wishes to set a rule about the minimum reserves, why is there no rule on maximum reserves. What would we do about a particularly anal public authority that collected public money and did absolutely nothing with it. If that is licit, it is nonsense. The Minister seems, however, not to be bothered about that, worrying instead about minimum reserves. If he wants to create a power as heavy-handed as this one, he needs to demonstrate that there is a real problem. Yet there is no such problem high on the agenda in the local authority world.

Mr Robert Syms (Poole, Conservative)

I agree with the hon. Member for Southport. Local authorities spend a lot of time considering what reserves would be appropriate. I agree, too, with his point about whether it is good or bad to have large or small reserves. What local authorities really need are reserves that are adequate to cover an emergency. Piling up money, which means raising too much from the electorate or not spending

sufficiently, is not an efficient and effective way of conducting local government.

Those judgments are best made by local authorities, which have experience of their own financial controls and can look at how they have conducted their affairs over several years. It is not necessary for central Government to set a minimum reserve figure. If that happens, people will start to budget above the minimum, so that they do not fall below it. Inevitably, then, they will start to pile up more money in the reserves than is necessary.

There would be a slight benefit if the Government set minimum reserves: we may get some warning of the impositions that the Government intend to place on local authorities in any given year. In recent years, there have been major impositions on local authority pension funds which have put pressure on the authorities, and major tax changes, including increases in national insurance contributions. The Government may give local authorities some indication of how they intend to hit them, and their balances, in ways that their treasurers may not have foreseen.

We have professional people in local government who are paid good salaries to use their judgment to make recommendations to the authorities. They do not need to be second-guessed by people in Whitehall. When local authority treasurers make the wrong judgment, they have the embarrassment of explaining to council members why reserves have fallen too low, and that is a discipline in itself. It is not easy to make those judgments, and we can see in many local authorities the vagaries of social services budgets, such as children being placed in care outside their local authority area and bills that exceed the budget, which cause problems. However, given the history of local authorities and the robustness of their management methods, local treasurers, and not the man in Whitehall, are best placed to make these decisions.

Mr Andrew Turner (Isle of Wight, Conservative)

I have some sympathy for the amendment, but I also have some sympathy—not a lot, but some—for what the Government are trying to achieve in the clause. I have fairly direct experience of four local authorities, but I do not have the experience of living in the area of a well-run, or should I say a Conservative-controlled, authority. [Hon. Members: ''Ah!''] I was going to say a well-run Conservative authority, but of course that would have been tautological because all Conservative authorities are well run.

Before I got this job I worked for Southwark council, which was run by new Labour and was highly effective in some respects. I now have the privilege of representing an island that has elected a Liberal Democrat-led council. I shall a few words about that later. I served as a member of Oxford city council, which was a broadly old Labour authority, and I have experience of Hackney, which at that time was a loony Labour authority.

In the amendment, the hon. Member for Southport has assumed that all authorities are broadly as competent as a Conservative-controlled authority. It happens that when he was responsible for setting the

budget in Southport, although we only have his word for this, it was a well-run Liberal Democrat authority.

Mr John Pugh (Southport, Liberal Democrat)

A good percentage of those budgets, although by no means all of them, were made in collaboration with the Conservatives, and some in collaboration with Labour, so at least some of them must have been right.

Mr Andrew Turner (Isle of Wight, Conservative)

I thank the hon. Gentleman, and I apologise once again for confusing Stockport with Southport. Of course, Sefton, of perhaps Crosby, is his authority. The fact is, however, that, influenced by the Conservatives, that was a well-run authority.

Not all authorities are as well run as Conservative-controlled authorities. I have to say that Oxford city council was a reasonably well-run authority and, as I said, Southwark was a reasonably well-run authority when I had the privilege of working for it. However, other authorities work in a capricious and barmy way. The problem with the clause and the amendment moved by the hon. Member for Southport is that they do not recognise the difference between authorities.

The Government, with the help of the Audit Commission, have erected a new structure called comprehensive performance assessment, which checks out authorities, scores and marks them, checks how well they have achieved their performance indicators and sets targets. The assessment concluded that 13 authorities were poor. I judge that the London borough of Hackney was a poor authority when I was interested in its performance. Twenty-two authorities were assessed as weak and 39 were assessed as fair, and the Isle of Wight authority is one of those.

It is absurd for Ministers or Liberal Democrat spokesmen to assume that all authorities are the same and require the same treatment. I wish that the clause made reference to the quality of local authorities' performance and contained an abjuration by the Minister of powers that would apply to authorities that are doing reasonably well.

As my hon. Friend the Member for Poole said, members of many authorities take care with their reserves. They pay close attention and budget sensibly over a four-year cycle. However, it is also true that several local authorities are wholly incompetent, and others cover the range in between. A most spectacular example is authorities that spend the four-year cycle running up their reserves in years one, two and three while setting absurdly high council tax increases. Mysteriously, in the year before the local elections, such authorities set a tiny council tax increase and their reserves plummet—my authority in the Isle of Wight did that in 2000–01.

I would not say that that is typical of Liberal Democrat authorities and, indeed, the hon. Member for Southport demonstrated that, but it is not unknown. The clause tries to deal with that but it is not satisfactory because it is an all-purpose blunderbuss that could be applied to any authority. I would prefer the provisions to be narrowed down and focused on authorities that are widely recognised as

bad performers yet have chosen not to take the opportunity to improve.

None of that denies the responsibility of local politicians and national politicians who act locally to draw the public's attention to the failure of their local authorities. That is the strongest argument in favour of the amendment. If we do not tell people that their authorities are performing badly and draw evidence of that to their attention, they are less likely to take the necessary action.

I shall not say that I welcome the CPA because it has been clouded by responses that local authority officers have given, and judgment has been clouded by assurances given by local authority officers that all is for the best in the best of all possible worlds. That is the kind of world in which the hon. Gentleman appears to live. We need to invigorate local democracy by giving people understandable information that the CPA and we local and national politicians have to hand in order to allow them to make a necessary response.

Mr Mark Todd (South Derbyshire, Labour)

The principle of the clause relies on the estimation ability of a local authority. In my experience, there is a substantial error margin when predicting the balance at the end of a financial year. There are many variables. One figure is eventually arrived at which is a factor of several pluses and minuses. Relatively small variances in the number of those figures can produce a substantial variance in the final balance figure. It is not surprising therefore to find that that occurs on a regular basis. In my experience, treasurers' tolerance or knowledge of the variables involved varies significantly, and therefore their guidance on the figure that they recommend as appropriate is not always as watertight as one would wish.

The second issue is that the measure places considerable power in the hands of one individual officer in an authority and there is the possibility of a breakdown of relationship either within the management group of an authority or between that officer and the elected members, in which that would become an unfortunate focus of action. Perhaps the Government will reflect on those points. I will not support the amendment, but I think that a little more thought should be given to exactly how the provision will work.

Mr Geoffrey Clifton-Brown (Cotswold, Conservative)

I am pleased that the confusion in the Liberal Democrat ranks was eventually sorted out and that they decided to move the group of amendments, because we have had a useful and important debate.

The setting of reserves is an important subject. In most authorities, the relationship between the chief officers and the elected councillors is good, so despite the mischief that the Minister was trying to cause in respect of my Gloucestershire councillors, we are referring to a comparatively small number of badly run councils, where the councillors on the whole do not accept the advice of people who are highly experienced, such as the chief accounting officer.

My hon. Friend the Member for Isle of Wight used the interesting phrase ''invigorate democracy'', which

is exactly what we are talking about. Democracy involves greater freedoms for elected representatives, but that allows greater freedom for elected representatives to get it wrong. We must all accept that there will be occasions when elected representatives will get it wrong. The problem arises when they get it so badly wrong that the authority cannot deliver its statutory level of services. The higher authority, the Secretary of State, and the district auditor have a role to ensure the continuance of the services.

Mr Desmond Swayne (New Forest West, Conservative)

Does my hon. Friend agree that the determination of the level of the reserves can in certain circumstances have a profound effect on what the local authority is able to carry out? While it may be perfectly sensible to have a certain level of reserves in mind that are appropriate for some local authorities, they might be wholly inappropriate in different circumstances in other local authorities.

Mr Geoffrey Clifton-Brown (Cotswold, Conservative)

My hon. Friend is right. That is why it is wrong to have too much central direction, for example in the percentage level of the budget that every authority would be required to have in their reserves. Some form of formulaic calculation such as that would be totally wrong, because each local authority is different. As the hon. Member for Southport has made clear, there are a number of ways of dealing with contingencies, other than the reserves—although the reserves play an important part in the local authority being able to meet its budgeted commitments. It has been an interesting debate. Although I think that the hon. Member for Southport moved the amendment with a great deal of common sense, I hope that he will not press it to a Division.

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

It has been an interesting debate. When the hon. Member for Southport spoke to the amendments, I noted initially that he was a little unsure whether he was supposed to do so, and that he did so almost as though he were speaking against the provision of the clause, not the proposals under the amendment, which would set up a new relationship—in our view, not an appropriate relationship—between the district auditor and the local authority. I stress at the outset that our objective is to reinforce the process of local democracy, where local authorities should democratically determine their finances and arrangements in a responsible, thorough and prudent way. That is our objective. I wholly agree with the views expressed by the hon. Member for Isle of Wight about the importance of encouraging local authorities to exercise their powers effectively and prudently, and to encourage a thriving local democracy.

We must recognise, however, that things occasionally go wrong and it is naïve to assume that intervention will never be needed. The hon. Gentleman referred to a period working in Hackney; I wholly agree with him that the council was very badly run indeed for a long time under different administrations—one was Labour, there was also a Liberal Democrat council, and a period when the Conservatives were in charge. I make no party point;

the council was poorly run and got into serious financial difficulties, which could have been avoided had the provisions in the clause existed at the time and had there been a possibility of requiring action at an earlier stage to prevent some of the problems that the authority faced. I will return to the matter in a moment.

I stress that this is a fallback proposal—a reserve power—not something that would be required in the normal course of events. We expect local authorities to operate properly and prudently, based on the advice of their chief finance officer, and to set their reserves appropriately to match the authority's needs.

I agree with my hon. Friend the Member for South Derbyshire that what we are discussing is not an exact science; there is no formulaic way to approach it. It requires judgment and there must be a margin for error and for changing circumstances. We want to encourage authorities to be prudent and to manage themselves well.

Mr Geoffrey Clifton-Brown (Cotswold, Conservative)

Will the Minister accept my philosophical argument that democratically elected councillors should have the power to get things wrong? At what point in the equation would the Minister expect the provisions to be used?

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

As I have already said, I do not expect them to be commonly used. They are a fallback measure; ideally we hope that they will never be used because the provisions in the clause 25 will help to ensure a framework for prudent financial management and appropriate reserves, giving a cushion for comfort in the event of unforeseen circumstances. Therefore there will be no need for intervention. The provisions are a fallback against the circumstances in which an authority does not act prudently, disregards the advice of its chief finance officer and is heading for serious financial difficulty. Only in such circumstances do we envisage any need for intervention.

On the hon. Gentleman's philosophical point, yes, indeed, councillors must be able to make mistakes, but there comes a point where the degree of the mistake has such a widespread impact on the delivery of services in an area—I will explain it in a moment when I refer to Hackney—that the authority has to go cap in hand to another body for financial support because of its mismanagement, and then the wider issue arises, that had action been taken at an earlier stage the problem could have been averted. No reasonable person would oppose the principle that a long stop to guard against those circumstances is a sensible provision in the overall framework.

The amendment tabled by the hon. Member for Southport would remove the power to set minimum reserves by regulation and substitute a duty on the auditor to notify the authority if proposed reserves were inappropriate. Amendments Nos. 80 and 82 are consequential amendments.

It is already part of the remit of local authority auditors to review the authority's financial standing and the level of reserves, which is an important part of financial standing. It is achieved by the code of audit practice, which is approved by resolution of each House of Parliament. Auditors also have a statutory

duty to consider making a public report if any matter needs to be brought to the notice of the public. That well-established framework is entirely adequate to ensure audit scrutiny and to comment on reserves. In practice, auditors make public reports on the levels of reserves but, unfortunately, experience has shown that authorities do not always heed the auditors' advice.

The need for a statutory framework on reserves to be strengthened has been demonstrated by the evidence of the Audit Commission in its surveys, which have been summarised in our response to the Select Committee report on the draft Bill. We highlight the fact that it found that 12 per cent. of authorities in England and Wales had inadequate reserves and the proportion was greater among the larger authorities. We believe that that is a worryingly high level. We have consistently made it clear that the clause 26 power would be used only if authorities were seen not to be remedying deficiencies in their reserves in accordance with the advice of their finance officers.

The evidence demonstrates that a power to set minimum reserves is necessary if authorities and the communities they serve are to be safeguarded from unreasonable financial risks with all the consequences of emergency in-year service cuts that may follow. Authorities should not get into the situation that arose in Hackney or Walsall where reserves were allowed to dwindle to a level where they were inadequate to cover overspending. In both cases the authorities found themselves having to make extremely difficult and damaging adjustments in order to remedy the defects of their budget—more so in Hackney, but Walsall nevertheless has had some very difficult decisions to take.

I pay tribute to the current political leadership in both of those areas, who are grappling with the problems and trying to resolve the inherited position. I suspect that they would have been greatly relieved if the powers that we are now putting in the Bill had been there in the past and had been used to prevent that difficult situation from arising in the first place. This year we have to make a grant of £25 million to keep Hackney council afloat, and £15 million of that is needed specifically to restore the council's reserves. That is an indication of the scale of the problem that can arise in an extreme case. That is why we believe there is need for these fall-back measures.

The hon. Member for Isle of Wight made some useful points about the need for extra freedoms for high performing authorities. That is very much part of our agenda. Those councils that are rated as excellent will receive a three-year period without further inspection, together with freedom from ring-fencing and the requirement to produce only one plan, as well as participation in the innovations forum that will explore additional freedoms. There is a commitment to recognise and reward authorities that are doing well. Our intervention programme is focused only on those that are in difficulty. There is a differentiation between the performances of authorities. I am glad that the hon. Gentleman has not had the misfortune to experience life under one of those Conservative councils where he might not have encountered the

good management that he has seen in some areas with which he has been associated. The case for the clause is strong. The amendments are not helpful and would compromise the current relationship between the auditor and the local authority. I hope the hon. Gentleman will withdraw his amendment.

Mr John Pugh (Southport, Liberal Democrat)

As things stand I will have to withdraw the amendment, but I should like to comment on what the Minister has said. I said some time ago that I thought that this was the Local Government (Hackney) Bill. It is. We are in danger of formulating bad rules for local government in much the same way as we are trying to eradicate bad rules for local government that were made in response to the regime of Derek Hatton in Liverpool. Hard cases make very bad law. I do not think that a case has been made for imposing a regime on local government that is different from that for central Government.

The Minister has deliberately underplayed the current scope for intervention and the current protections. The ultimate protection is publicity: when a council performs badly the electorate will become aware of that. The councillors will be voted out and people who aspire to do better will be voted in. The hon. Member for Oldham, East and Saddleworth (Mr. Woolas) is not in his place at the moment. His local party members are currently running around Oldham with a lot of details about the performance of Oldham councillors and their incompetence, in every expectation that they will be replaced in May—that is not my expectation, though it is probably his—by what the party members would consider to be a more competent authority, but which we know will not be.

To respond to the hon. Member for Isle of Wight as much as to anybody else, the key point is that there is a way of discriminating between good and bad local authority regimes, and it is called active local democracy. If people in Hackney cannot be removed by a better establishment, that says something about the political party's activities and the competence of the Opposition parties in Hackney. If there is good opposition and good electoral accountability, there is no need for that kind of regime.

I want to pick up a remark by the hon. Member for South Derbyshire, which I did not think to make myself, but which I thought was acute and perceptive. There is a serious chance that in future tensions will not be between parties on a council but between parties and the officers. On authorities such as mine, which have been balanced for some time—one might say hung—that tension is already manifest. The local authority is identified as having an officer party in addition to all its other political parties, and the Bill gives that officer party an extra weapon in its struggle.

I have the same reservations about the Audit Commission, which has moved over a decade or so from being accountants—bean counters or whatever we call them—to people who seem to have the right to make a range of discrete value judgments that are not always adequately evidenced by the financial information. The only thing that consoles me is that the Minister has said that he will use the provision sparingly and in extremis. That is better than using it

frequently, but it would be better still if it were not there at all.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr Derek Conway (Old Bexley & Sidcup, Conservative)

Usually after two and a half hours I would suspend the Committee for a short break, particularly for the benefit of those who serve the Committee and cannot go in and out as hon. Members can. However, I think that the usual channels would like to go a little beyond 5 o'clock tonight, although not to an excessive length, given the weather.

Mr Geoffrey Clifton-Brown (Cotswold, Conservative)

I beg to move amendment No. 106, in

clause 26, page 11, line 18, leave out from 'determined' to end of line 19 and insert

'by reference to such code or codes of practice as the appropriate person shall, by regulations, specify.'.

Mr Derek Conway (Old Bexley & Sidcup, Conservative)

With this it will be convenient to discuss amendment No. 107, in

clause 27, page 11, line 41, leave out 'regulations under'.

Mr Geoffrey Clifton-Brown (Cotswold, Conservative)

These are straightforward amendments, both of which deal with the amount of regulations introduced by the Bill. I have a philosophical dislike of regulations. If we are not careful, we shall drown in a sea of regulations introduced by the Bill. The corollary of introducing more and more regulations is that they receive less and less scrutiny. Therefore, de facto we are giving more and more power to the Secretary of State.

Amendment No. 106 would delete subsection (3). We see no reason why regulations need to be made here. Amendment No. 107 would simplify the drafting of clause 27(3), to which I would have added the words ''and if that reserve is not adequate, regulations will be made''. Why there have to be two subsections, each with regulations, I cannot imagine.

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

I appreciate that the aim of the amendments may be benign, substituting a code of practice for regulations, because, as the hon. Gentleman says, he has a pathological hatred of regulations. I shall not explore what may lie behind that. We believe that everything is appropriate for a particular purpose. Regulations have their place; they are not the panacea. We see other mechanisms being appropriate in different circumstances. However, I hope that when I have explained why it would be wrong to substitute for regulations the proposed code of practice, the hon. Gentleman will withdraw the amendment. I understand his wish to have an organisation such as CIPFA prepare the code. We all agree that CIPFA does an extremely important job. It is widely respected and we value its judgment.

One aspect of the reason for opposing the amendments is technical. It would not be appropriate to require an authority to follow a code as if it were firm law. Codes are usually in the form of guidance. The furthest that we would expect to go in legislation would be to require an authority to have regard to a code. Clause 25 provides for authorities to have regard to the guidance of their chief finance

officer, so it would not be appropriate to require them to have regard to another code. I hope that the hon. Gentleman recognises that.

Equally, if the desire is to involve CIPFA in the production of a code, I very much doubt that it would be willing to be involved if compliance with the code were mandatory. CIPFA made it clear in its 1995 guidance on reserves, and in the recent draft update, that it is not prepared to specify minima. In its view, it should be for the chief finance officer to recommend an appropriate level in the light of the specific circumstances of the authority. We agree with that view, as we made clear in the White Paper.

The power in clause 26 will be used only if the process fails. It is a default power where an authority has failed to have regard to the advice of its chief finance officer and it runs its reserve down in a dangerous way, as in the extreme cases that I have described. We are guarding against those circumstances. They are very unusual, so I sincerely hope that we will never have to use the powers, but they are a necessary safeguard and stopgap.

On the basis of that explanation, I hope that the hon. Gentleman recognises that his alternative, although well intentioned, is not an appropriate solution. I hope that he will withdraw the amendment.

Mr Geoffrey Clifton-Brown (Cotswold, Conservative)

The Minister has not explained, under amendment No. 107, why clause 27(3) could not have been more simply drafted, but I accept his reasonable explanation on amendment No. 106. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 26 ordered to stand part of the Bill.

Clauses 27 to 29 ordered to stand part of the Bill.