I beg to move, That the Bill be now read a Second time.
This is a short routine Bill, the purpose of which is to make money available for the Public Works Loan Commissioners to lend to local authorities and certain other bodies. As the House knows, it is customary to present Bills at fairly frequent intervals so that Parliament may be kept informed and have an opportunity to review the extent of Exchequer lending to local authorities.
The last Public Works Loans Act received Royal Assent on 5th August last year and it enabled the Commissioners to lend up to a total of £500 million. This money has now been nearly spent and we must make further provision. When I introduced the 1965 Bill I said that the £500 million which we were asking Parliament to provide should be enough to meet the entitlement of local authorities until well into 1966.
As we seem to have had our summer for this year. I suppose that I could claim that we are on target. The truth is that the money has been running out rather more quickly than we anticipated, and this is because local authorities' total long-term borrowing needs have proved greater over the past year than we have expected.
There are a number of reasons for this, but in large part it is due to the fact that the authorities have been meeting more of their needs for capital by borrowing for one year or over, and have not been relying on short-term borrowing, which is, of course, a development which we encourage. The local authorities' temporary debt was scarcely any higher at 31st December, 1965, than on 31st December, 1964. In consequence, the percentage of temporary debt in the total debt had fallen from nearly 18 per cent. at the end of 1964 to 16¼ per cent. at the end of 1965.
The Public Works Loan Board is a very ancient body which has been making loans for public works since early in the last century. In more recent years it has been exclusively concerned with making loans to local authorities. As the House knows from 1945 until 1955, that is during the whole of the period of the post-war Labour Government and for a short time afterwards, the Board provided practically the whole of the longer-term finance required by local authorities. In 1955, the position completely changed and the Board then became a lender of last resort. That is to say, it only provided finance to a local authority which could demonstrate that it could not obtain it on the market.
Moreover, the rate of interest charged by the Board, which previously had been roughly equivalent to the current yield on gilt-edged securities of similar length to the period of borrowing—that is the Government rate of borrowing—was raised to a rate reflecting the current level of local authority credit in the market. I will not seek to dwell on the merits or otherwise of this policy. It is a matter which has been debated in this House on many occasions.
The only point I want to make is that it led, for quite understandable reasons, to a great increase in the temporary borrowing of local authorities. This worried the then Government and as a result they issued in 1963 the well-known White Paper on local borrowing, which was a complete reversal of their 1955 policy. They announced that as part of the policy of restraining local authority temporary borrowing authorities were to be permitted to obtain a proportion of their long-term finance from the Public Works Loan Board at Government credit rates.
This proportion was started at 20 per cent. and the aim was, as expressed in the White Paper, to increase that by 10 per cent. annually to 50 per cent. in the fourth year; and, in addition, to help the small authorities, there was to be a minimum entitlement of £50,000 from the Board which it was hoped to increase eventually to £100,000.
In 1964–65, the White Paper programme was followed, except that soon after the Labour Government came to power we raised the minimum concession to £100,00C in order to assist the smaller authorities following the rise in Bank Rate. In 1965–66 we followed the White Paper programme and raised the authorities' percentage access to 30 per cent. In addition, as part of our regional policy, we raised the percentage for authorities in the less prosperous regions—that is to say, in Scotland, Wales, the North and the North-West—to 40 per cent.
I think that that move was generally welcomed and it has proved of considerable assistance to authorities in those areas. Northern Ireland does not fall within the scope of the Public Works Loan Board activities and loans to authorities in Northern Ireland are dealt with by their own Government.
This year, as the House will know, we have decided that we cannot take the next step and increase the general percentage from 30 to 40 per cent. This is because the burden on the Exchequer of making such an increase would have been unacceptable in the present circumstances. The Exchequer would have had to borrow to provide the money needed, and I hardly need remind the House of the necessity at this stage of containing the Government's borrowing requirement.
In 1965–66, gross Exchequer loans to the local loans fund were £603 million. Our present estimate is that if the rules governing access were left unchanged and the percentage quota for all authorities were increased to 40 per cent. we should need to find over £700 million this year. Even to leave the general quota at 30 per cent. would not be enough to reduce the demands of the Exchequer to tolerable proportions, and, therefore, the rules for access have been changed. The combined effect of these two decisions is to reduce the estimate of gross Exchequer issues to under £500 million.
Under the new rules, an authority's quota will be reduced to the extent that it has already drawn a quota loan in one year on borrowing maturing in the succeeding year. This means that an authority which in, say, the year 1965–66 borrowed in the market a sum which is due to mature in 1966–67 and has earned a quota on it will not be able to earn another quota in 1966–67 when it re-borrows in the market to repay this debt. This decision not only helps to reduce the demand on the Exchequer, but, I would suggest, is equitable in itself and should allay the disquiet which I have reason to believe the Public Works Loan Commissioners were feeling about the operation of the arrangements.
Under last year's rules an authority earned a quota on all long-term borrowing, which is defined as borrowing for one year or over. If an authority borrowed for one year it could earn a quota in the year in which it made the borrowing originally and also in the following year when it reborrowed to finance the maturing debt. In that way over two years it would earn twice as much quota as an authority which had borrowed in the first place for a longer period. This, I think the House will agree, would clearly be inequitable as between authorities and we hope these new arrangements will help to remove the inequity.
The House may agree that in the circumstances I have described our decisions are fully justified. It is imperative to reduce the call on the Exchequer, and, as hon. Members will remember, my right hon. Friend the Chancellor of the Exchequer made strenuous efforts this year to reduce the Government's borrowing requirement, with considerable success.
The 1963 White Paper, in announcing the programme of the aim of a 10 per cent. increase in access each year, contained a clear warning that in certain circumstances it might not be possible to adhere to the proposed timetable. Perhaps I might remind the House of the wording of paragraph 18 of that White Paper:
It is estimated that the call on the Exchequer under these arrangements will amount to about £200 million in the first year and rise by about £100 million each year to £500 million in the fourth year, though these estimates could be falsified. If for example authorities were to reduce the length of their long-term borrowing it would bring forward their demands on the Public Works Loan Board and it might become necessary to implement the arrangements more gradually.
These estimates have indeed been falsified. Gross Exchequer issues in 1965–66 were, as I have said, £603 million instead of the £300 million estimated for that year in the White Paper.
There were various reasons for this, including the steps which the Government have already taken to which I have referred, to give special help to the smaller local authorities and others in the less prosperous regions. I think that it is clear that there has been a tendency among local authorities to shorten their long-term debt, and this is one of the factors which have produced the increased demand on the Public Works Loan Board. This is owing to the increased need to refinance maturing debts. It is right to say that there has also been an increase in the capital payments beyond the amount estimated at the time of the White Paper.
Even under the new arrangements the estimated gross Exchequer cost at £485 million will still be above the £400 million estimated for this year in the 1963 White Paper. In all, we estimate that the authorities will receive some £520 million gross from the Public Works Loan Board and this will represent 30 per cent. of the £1,700 million which we estimate authorities will need to raise by borrowing in the year 1966–67. To put it another way, this will represent over 60 per cent. of the £800 million new borrowing as opposed to refinancing.
I should like to take this opportunity of re-emphasising what the Chancellor of the Exchequer said in his Budget speech about local authority borrowing, namely, that the Government continue to adhere to the general principles of the 1963 White Paper.
I now turn to the provisions of the Bill.
Could the hon. and learned Gentleman tell us by how much he reckons local authority borrowing will increase in real terms in the current year over the year that has just ended?
It is a difficult calculation to make in real terms this year because a lot of the borrowing is the refinancing of maturing debt. Changes in the value of money are not relevant, because what is being refinanced is the face value of the moneys. In relation to what I have been saying, it is right to point out that there is still a substantial margin. The £485 million which we envisage as being the amount that will be loaned to local authorities through the Board will still be greater than the £400 million which was provided for in the White Paper.
I appreciate that. I am happy not to have it in real terms, though the White Paper recently published on the control of public expenditure gave figures in real terms. I am interested not in the percentage increase in the amount loaned through the Public Works Loans Board, but the percentage increase in total local authority borrowing.
I have not a figure at my fingertips, but I will see if I can obtain one. When I reply to the debate, assuming I have the leave of the House to do so, I will let the hon. Gentleman know.
There is only one Clause of substance in the Bill. The first subsection provides for a sum of £900 million to be put at the disposal of the Public Works Loan Commissioners. We estimate that that should meet their requirements until about the end of 1967. I say that with full awareness of the dangers of making prophecies in these matters, but it is right that I should tell the House for what period we envisage that the sum should last.
We are not concerned with the size of the local authorities' capital programmes, which are controlled in other ways, and that is well understood by the House. Nor are we concerned with the total borrowing requirements of the authorities. What we are concerned with is the narrow but nonetheless important question of the amounts which the local authorities borrow from the Exchequer instead of directly from the market. The amount that we are now asking Parliament to provide will eventually be reflected in Exchequer issues and, therefore, in the Budget.
The second part of the Clause limits issues under the Act to the period during which the Act is operative; that is, the period between the passing of this Bill and the next one.
The third subsection permits the Loan Commissioners, as they have been permitted in previous Acts, to undertake to make loans which will be met out of funds made available by the next Act. That provision is to ensure continuity of business.
The Bill provides that the amounts actually issued, plus the outstanding commitments, will not exceed £950 million. Therefore, the amount that the Loan Commissioners can agree to lend is £50 million more than the cash provision available to them.
I do not think that I need say any more about the Bill itself. But I should not wish to conclude without taking an opportunity of expressing my thanks and the thanks of the whole House to the Public Works Loan Commissioners for the services that they have rendered. As the House knows, those services are on an entirely voluntary basis. Last year, as the House will remember, we introduced a new system for borrowing by local authorities from the Board. Authorities no longer have to execute mortgage deeds in favour of the Board, but there is an automatic charge. That has simplified the work of the authorities, and the new arrangements have been working very smoothly. That is due in no small measure to the efficiency of the Commissioners and their staff.
May I follow the Financial Secretary in expressing our appreciation to the Commissioners for the tremendous amount of work that they do and the way in which they carry it out? My own thanks are specially due for the 90th Report of their work, which they have even managed to make sound interesting. It contains a detailed account of the history of the Board back to the year 1817, when I note that, even in those days, loans were issued carrying an interest rate of some 5 per cent. Our thanks on all sides of the House are due to the Commissioners for the work that they do continually on a voluntary basis.
The Financial Secretary pointed out several times the need for the Exchequer to limit its borrowing this year, and that the Chancellor had been fairly successful in meeting that aim. In reply, I must point out that one of the reasons why the Chancellor has limited his borrowing this year—that is to say, borrowing for which he pays interest—is that, by various devices which the Financial Secretary will know, he has compelled everyone to make large interest-free loans to him, and, therefore, the amount for which he is having to pay is considerably reduced.
It is perhaps a little ironic that, at the beginning of the week, we were discussing a Measure under which local authorities would be compelled to make loans interest-free to the Government, and, at the end of the week, we are discussing a Measure whereby the Government will make loans to the local authorities for which they will charge them interest, albeit at a preferential rate.
The Financial Secretary gave a most lucid and helpful analysis of the Bill, of the Exchequer borrowing that will be required this year and of the issues from the Exchequer to the Public Works Loans Board. May I follow him in his analysis of the White Paper on Local Authority Borrowing, because there is not very much point in going over ground before that time? Present policy stems from that White Paper, and the policy which we now have before us in the Bill is to some extent a continuation and to some extent a modification of that policy.
At the outset, one can scarcely describe as a routine Bill one which provides about £900 million over a period of 18 months. It is an extremely important Bill. The £900 million amounts to virtually £45 for every family in the country; that is to say, every family has to provide £45 in order, then, to borrow it back.
Turning to the White Paper on Local Authority Borrowing, two and a half years have elapsed since it was presented, and I think it right that we should have a review to see how far its objectives have been attained. In introducing a similar Measure last year, the Financial Secretary pointed out that this year we should need to have a fresh look at the whole subject of local authority borrowing.
The White Paper covered three aspects of borrowing policy. First, it introduced a limit on short-term borrowing which it defined as borrowing of under 12 months' duration. Secondly, it provided for greater access to the Public Works Loans Board, with the aim that the Board should ultimately provide 50 per cent. of long-term borrowing needs. I take it that that objective has not been abandoned, but still remains. Thirdly, it provided for the modernisation of borrowing and lending techniques between the Board and the borrowers. I say nothing more about that third objective because, in the main, it has been attained and implemented by previous Acts passed after the White Paper was published.
We are concerned, therefore, with how far the first two objectives, relating to short-term money and enlarged access to the Public Works Loan Board, have been achieved. The aim of short-term borrowing was to reduce to 20 per cent. of total borrowing the amount of money borrowed short-term, and that was to be achieved by the 1st April, 1968. Local authorities had some four years in which to modify their financial arrangements. At that time, about 15 per cent. of the outstanding loan debt was in short-term money.
The first of the four years showed an alarming increase to the figure the hon. and learned Gentleman gave last year of nearly 19 per cent. although it has been modified this year, as a number of statistics are always modified in retrospect, to about 18 per cent.
We should clear up this point. I was struck by the difference myself. The explanation lies in the different dates. The figure of 19 per cent. was up to 31st March and the figure I gave today of nearly 18 per cent. was up to 31st December. That is the reason for the apparent discrepancy.
I am obliged to the hon. and learned Gentleman. In that case, the increase of short-term debt rose to about 19 per cent. of the total outstanding loan debt.
I think that this was probably because the first of the four years proved very inauspicious for funding. An interesting feature developed and it is a good illustration of what happens when one puts on a control of any kind. There is always a great deal of activity on the limits of the control. What happened was that short term borrowing lengthened and long term borrowing shortened and so there was a good deal of borrowing of money between one year and two years.
This had been envisaged in paragraph 18 of the original White Paper, and the hon. and learned Gentleman has quoted the warning given that, if this increase in money between one year and two years took place, it would have a quite serious effect on the quotas from the Board and the whole basis upon which the calculations had to be made.
I agree that the Government, therefore, had to take action, as the new trend would have had far-reaching implications for Exchequer management. We first had some indication that action would take place in the White Paper "Loans from the Consolidated Fund", which said, in paragraph 10:
An authority's quota will however be reduced to the extent that it has already drawn a quota loan in one year on borrowing maturing in the succeeding year. It is estimated that on this basis the Exchequer issues to finance loans by the Board in 1966–67 will be about £485 million gross (£398 million net).
It would seem perhaps easy to describe this new development as being tantamount to redefining short-term borrowing as a period of up to two years instead of a period of up to one year. Thus one finds, in a sense, that the first objective of the White Paper is not being achieved very fast, but that the borrowing development envisaged in the White Paper has taken place and this in itself is causing a reassessment of the future of local authority financing.
I turn now to the second point concerning enlarged access to the Board. As the hon. and learned Gentlemen said, the expectation was that the percentage access should be increased every year. It has, as we know, reached 30 per cent. a year for ordinary local authorities and 40 per cent. for those in specific regions. Looking back to last year, I remember that there a form was issued to the local authorities which led them to believe that they could borrow three-sevenths of their total long terms loans from the Board.
I had a similar difficulty in studying the figures. It might be helpful if I explained what the situation seems to be. Assuming that a local authority has a total capital expenditure in a year of £100,000, obviously 30 per cent. is £30,000. But for the purpose and method of calculation the Board, in its circular to the local authorities, did not use the figure of £100,000, but the figure of £70,000—which is £100,000 minus 30 per cent. The quota is, therefore, three-sevenths of that 70 per cent., which is £30,000 and still 30 per cent. of £100,000.
I did not have to deal with the forms but, having enquired from some local authorities and treasurers, I know that they expected this year to be able to borrow three-sevenths of their total long term borrowing. Some of them told me that they were rather disappointed that, with the new formula, the total amount they will be able to borrow is rather less than that. A number of them had already made plans on the basis that the old formula would continue and I think that even the hon. Gentleman would agree that the old formula—the formula which reigned before the one that the Financial Secretary has just explained—would have given them a higher amount from the Board than the new formula.
Indeed, had the larger amount been totalled up, the hon. and learned Gentleman has said that it would have come to much too high a sum for the Exchequer to bear and that is why it has been reduced. The effect is to cut the access this financial year by about £118 million. In some ways, I think that the local authorities themselves are critical of this arrangement. In the Local Government Chronicle of 7th May, 1966, on page 780, the following words occurred:
The provision made for loans to the nationalised industries is up by nearly £200 million; local authorities are still the poor nephews!".
I do not think that that comment is entirely warranted, as their borrowing was very considerably up last year and unexpectedly so, and I accept that the developments which have occurred in the changing borrowing habits of local authorities necessitated some changes in the policy of the Exchequer. The point is that the local authorities are wondering what will happen next. They have been making their plans on the basis of the White Paper on the basis of the old formula. This has suddenly been changed this year. What will happen next year?
How are they to make their plans for the future? The treasurers have to find the money and they suddenly have to revise their plans in the light of the amount which they can get from the Board. There is not a great deal they can do. They are told that they must not borrow short, so they attempt to borrow slightly longer. When they do, the effect of that is negatived. How long will that process go on? If they borrow slightly longer still, will the effect of that be negatived by the next Bill?
If they borrow really long, they will have to pay 7 per cent. or 7½ per cent. They will have to queue to get an issue from the Stock Exchange. They are in something of a difficulty in trying to find the money which Parliament, in its wisdom, has by Statute ordained that they must find. We make it clear that we do not blame treasurers for trying to borrow in a way that will reduce loan charges to the minimum. They are in some difficulty in trying to get their capital this year and are also worried as to what will happen next year.
During the Committee stage of last year's Act, the hon. and learned Gentleman pointed out that we would have to take a fresh look at the position of borrowing this year. I am not certain whether the policy he announced today and which became apparent in the White Paper issued with the Budget is a new policy or whether it is an interim policy. I suspect that it is the latter.
I ask, therefore, that we should soon have an announcement about the Government's long term policy. I understand that the local authorities regularly have discussions with the Treasury and an account of these sometimes appears in the Municipal Review. There was a supplement to the Municipal Review in May, 1966, which indicated the line some of the discussions had been taking. I quote from paragraph 11 of a record of one of the interviews with the Treasury, when the whole problem of shorter borrowing was discussed and the present policy was put up as an alternative. It states:
Subsequently an alternative proposal had been put to local authority associations which was to continue basing the calculation on gross longer-term borrowing but to reduce the quotas to the extent that an authority had already drawn a quota loan in one year on borrowings due to mature during the succeeding year,
this arrangement would affect loans raised for a period of from one to just under two years.
The next sentence is the important one from the point of view of this debate, for it states:
The Treasury would not regard this as necessarily suitable as a permanent arrangement but only as a possible interim measure pending a more thorough review of the problem.
That says, in effect, that what the Financial Secretary said today is only a temporary measure and I therefore ask him to give an indication of the kind of long-term permanent arrangement he is envisaging.
A great deal of the problem arises from the increased expenditure of local authorities—as my hon. Friend the Member for Oswestry (Mr. Biffen) pointed out by implication in a question to the Financial Secretary—and the total outstanding debt of local authorities is rising tremendously. One is tempted to wonder sometimes where it will end.
Considering the 90th Annual Report of the Public Works Loan Board, the figures in Appendix C show that in the year 1953–54 the total debt of local authorities to the Board and other lenders was £3,889 million. By 1958 it had risen to £6,030 million. By 1961–62 it had risen to £7,380 million and the latest estimate one can get for the year 1964–65 is £8,600 million.
Does the hon. Lady feel that local councils should spend less on housing, education and other essential amenities? She is implying that the amount of money being spent is far too high. Would she give an indication of where local councils should cut down on their expenditure?
I was not implying what the hon. Gentleman suggests. I was pointing out, as a matter of fact, how capital spending had risen, and it follows from that that when we are considering the policies, which we are not at the moment, of authorities in these respects, we must also consider how they are to meet the commitments which are placed on them. And, in considering that, it would seem relevant to consider the rate at which these commitments are rising. How far are the commitments likely to rise this year? How much loan sanction was given in 1965 and is currently being given?
The latest figures we can obtain are those in the 1964 Report of the Ministry of Homing and Local Government, and we see that loan sanctions in 1964 totalled £1,082 million. I suspect that in 1965 the figure will be up to over £1,100 million and I expect that in 1966 it will be up again, especially bearing in mind that local authority lending on mortgage is to be reintroduced.
These figures do not, of course, take into account the increases which local authorities will have to bear as a result of the last Budget. I cannot go into detail on the housing or education programmes, but in asking the Financial Secretary about his future policy, I urge him to remember that the figures we have had to date do not take account of increases which we know are already in the pipeline—increases not only in policy terms but brought about by the rising costs of housing and education, without even taking into account the new policies.
One must also consider the effect of high loan charges on the rates. In 1965, for example, loan charges were £457 million, according to the White Paper issued with the Budget. That represents one-sixth of the total current expenditure of local authorities. Looked at from that angle, it is important to enlarge the access to the Public Works Loan Board to enable local authorities to borrow at a minimal rate of interest and to prevent them being driven on to the market for too high a proportion, which they must at present borrow at 7 per cent. to 7½ per cent.
I think the Financial Secretary will agree that it is unlikely that borrowing on long-term can be obtained by borrowing at lower rates of interest than those at present obtaining. I notice that the National Savings issue is 7¾ per cent. interest gross, and that seems a good indication of the price which the Government consider that they will have to pay for raising money in the long-term. It seems, therefore, that local authorities, if they go to the market for long-term maturities, will have to raise money at 7 per cent. to 7½ per cent. It therefore seems that local treasurers will attempt to raise as much short-term as possible, because that can be done at a very considerably reduced rate of interest below the 7 per cent.
I would not like to conclude without expressing admiration of the treasurers of local authorities because they have to grapple with all sorts of problems. They must raise money often without knowing from where it will come and, from their point of view, it is important that they should once again be able to decide their plans in the long-term.
My hon. Friends and I will, naturally, not oppose the Second Reading of the Bill in any way. We believe that it is partially a continuation of the White Paper, although we would like to know from the Financial Secretary what is the Government's policy for next year.
During the past three weeks, while I have been privileged to be a Member of this House, I have been trying to follow the advice given to me: that before rising to speak I should try to absorb the atmosphere of the House. I realise that there are attendant dangers in that, for one tends to become too overawed while waiting to speak. However, I have been encouraged by your kindness, Mr. Speaker, and the kindness and forbearance of hon. Members to risk that venture this morning.
I will refer, first, to East Walthamstow, the constituency which I have the privilege to represent. I cannot wax so lyrically about the constituency's geographical features as many of my hon. Friends have done about their constituences, but perhaps I might refer to two interesting poltical features of the area.
East Walthamstow has been a separate constituency since 1918 and, going back to 1885, it formed an identifiable part of South-West Essex. During the whole of that time it has been an area of fluctuating political fortunes, although it is a chastening thought that during the whole of that period it has never remained faithful to one political party for more than three successive General Elections. Perhaps I may be forgiven for expressing the hope—or should I say determination—that hereafter it will show more political stability.
I will refer to two of my predecessors and I refer to the first with no ambition or hope of emulation. He was a most eminent Parliamentarian and distinguished lawyer, Sir John Simon, as he then was. My immediate predecessor, Mr. John Harvey, had a splendid record of service in the House, as will be known by hon. Members who have more experience of this place than I have. I pay tribute to the splendid service which he rendered to his constituency during the 11 years he represented the district. He rightly earned the gratitude of all his constituents of whatever political persuasion or of none.
In describing East Walthamstow it would be true to say that although it has some light industry, bringing some employees into the area, it is mainly a dormitory suburb for workers in Central London. I am proud to have as residents in my constituency three members of the present Government, although that is a temporary measure since I understand that one of them was recently translated to the more rarefied atmosphere of Admiralty House.
Up to 1965, East Walthamstow formed part of the Borough of Walthamstow—a local authority which had a record second to none of progress in all fields of municipal activity. It had the ability to create, and created, a real feeling of community amongst the inhabitants of the area, and perhaps that feeling is exemplified by the motto of the borough, "Fellowship is Life"—taken from the writings of William Morris, who was born in Walthamstow and spent his early years there. Walthamstow now forms part of the London Borough of Waltham Forest and that name is a very pleasant reminder of the attachment of the area, physically and otherwise, to Epping Forest, which is such a tremendous blessing and delight to all residents of East London.
The area comprises Victorian and Edwardian villas and terrace houses, and this situation presents to the local authority a very urgent and special problem of urban renewal and the meeting of a housing shortage. There are many other problems that need to be tackled, such as the building and rebuilding of schools, the development of health and welfare services and a lot of other duties, many of which have only recently been placed on the borough by local government reorganisation in Greater London. Without question, there lies ahead for my local authority a large capital expenditure programme, which is, perhaps, the excuse for my entering into this debate.
My hon. and learned Friend the Financial Secretary said that this is a routine procedure Bill. I acknowledge that, but it is, perhaps, not irrelevant to refer to the difficulties confronting local authorities in the borrowing of money to carry out their responsibilities and duties. I join in the tribute paid to the Public Works Loan Commissioners for the tremendous help they have given to local authorities over the years, and I also express my appreciation of the services rendered to local authorities and ratepayers by borough treasurers.
I am sure that it is unnecessary for me to stress the tremendous impact that interest rates have on the general rate and, more particularly, their impact on housing rents. In my own locality it has been necessary for the borough council to increase council rents by an average of 22s. per week. Fortunately, and sensibly, the council is phasing the increase and has introduced a very workable and very good rent rebate scheme.
I acknowledge, as local authorities do, the help which the promise of the new housing subsidies gives in that direction, but I must warn my right hon. Friend the Minister of Housing and Local Government that I may subsequently be quarrelling with him over his application of the retrospective provision. Those of us who have served on local authorities look back with a considerable amount of nostalgia to the period 1949–51, when local authorities could borrow the whole of their requirements from the Public Works Loan Board and when the interest rate was never higher than 3⅛ per cent.
My experience has been that the restriction of borrowing powers from the Board has led local authorities to indulge in a somewhat undignified scramble in the money market. The competition between them has undoubtedly served to force up interest rates, and has brought with it the attendant difficulties of short-term borrowing. Obviously, one is not unappreciative of the difficulties confronting the Treasury and Her Majesty's Government in this matter, but I hope that when the financial climate improves, as I am confident it will, the Government will give first priority to a restoration to local authorities of the tremendous help resulting from being able to borrow all their requirements from the Board, and also the great benefit of a restoration of lower rates of interest.
I am very grateful to you, Mr. Speaker, for giving me the opportunity of catching your eye, and to hon. Members for their indulgence in listening to me.
I have listened with great interest to the maiden speech of the hon. Member for Waltham-stow, Fast (Mr. W. O. J. Robinson), but as I myself only made my own maiden speech about a week ago it would be presumptuous of me to congratulate him. I therefore leave that pleasant task to the hon. Member who follows me.
Capital expenditure by local government on housing, services and education over the last few years has been accounting for between one-fifth and one-seventh of our total capital expenditure. As demands for better housing and better services increase, I think that we can expect this proportion of total capital expenditure to accelerate between now and 1570. Whether it is right that an increasing proportion of our total capital expenditure should be invested in services rather than in industry, communications and agriculture is, fortunately not the subject we are debating today, but what we are debating is whether or not the present system of financing public works is efficient, and whether it could be improved upon.
It is all very simple and easy to cry out for cheaper rates of interest for housing and services, but it is more constructive and useful to discuss how this may be done. First, how it can be done without creating rapid inflation through overambitious investment in unproductive services. Secondly, how it can be done without damage to the strength of sterling. Thirdly, how public works can be financed without diminishing the enthusiasm for public service which exists in local government today. I should like to deal with each of these points in reverse order.
The crux of any argument surrounding the function and measure of assistance granted by the Public Works Loan Board is that although it would be much simpler and neater for all borrowing by local authorities to be channelled through the Board, it would not be in the interests of the independence of local government for this to occur. To take the extreme that has been mentioned, for local authorities to find the whole of their capital expenditure through the Board, this, in my view, would mean that the independence of local representative government would be seriously threatened. For he who pays the piper calls the tune.
As has been said before, his worship the mayor, without any control over the raising of capital for his own council, would become nothing more than a magnificent but powerless refuse collector. Likewise, his councillors without the power of decision over financial priorities would become mere local dignataries and figureheads, without having the responsibility that local representative government now gives them. Finally, the large reservoir of talent that we have amongst our local treasurers would be diminished. Our local treasurers and accountants are highly qualified and highly experienced people. If I may say so, in passing, they are to some extent more qualified in this field than one or two of the gentlemen in the Treasury who were educated in classics at Balliol and King's.
I believe that the 1963 White Paper on local government borrowing was basically right in suggesting that, for the future, local authorities should continue to raise the majority of their capital in the open market, but under stricter control, and that the Public Works Loan Board should provide them with a rather greater measure of their requirements than it had hitherto done. In 1965–66, the Board contributed about £525 million net to total local government capital expenditure of £1,050 million net. I quote the net figures—I think that the Financial Secretary was quoting the gross figures. In 1966–67, the Board will contribute only £398 million net—about £485 million gross—which is about £125 million less in the current year.
I would not be hasty in criticising the Financial Secretary or the Government for reducing Government borrowing. This is a move in the right direction. If they reduce Government borrowing it is perfectly logical that advances from the Public Works Loan Board need to be reduced as well. I only criticise the Government in one particular respect. It is the lack of foresight and help which is being given to treasurers throughout the country in raising the increased and additional amounts which they are now required to find on the open market.
This amount, I estimate from what the Financial Secretary said, to be well over £1,000 million. We are talking about cutting down something slightly over £100 million from the amount which will be forthcoming from the Public Works Loan Board, whereas there is £1,000 million plus to be raised in the market. The Government have clamped down tightly on the Public Works Loan Board and devices used by treasurers over the last few years to increase quota borrowing, but without giving further assistance to help them to raise it in the market.
Yes, I was about to make one or two suggestions for easing the problems which treasurers find as a result of the changes we are debating.
In doing so, I must declare my continuing interest in local government borrowing. It is a field in which I have been working to a minor extent over the last five years and I have a continuing interest in it. I played some small part in introducing with Manchester Corporation the negotiable bond—unfortunately now known as the yearling bond which is a misnomer for they can be from one to five years in life. This medium was introduced only two years ago and now finances about £150 million a year of local government capital expenditure. If the Financial Secretary would give consideration to relaxing the market in these negotiable bonds a little more he would have an extremely useful instrument to help treasurers now that they are forced further into the open market.
I suggest that the Treasury should allow treasurers to borrow by means of one-to five-year negotiable bonds up to 10 per cent. of their net outstanding debt. As the Financial Secretary will be aware, the present limit is £1 million for all local authorities, whether they are tiny rural district councils with a net outstanding debt of £500,000, or Liverpool Corporation with a debt of £137 million. It is nonsensical that the same £1 million limit should be set both for a rural district council and for Liverpool, Birmingham and Manchester. I suggest a reform in this direction so that local authorities could borrow up to 10 per cent. of their outstanding debt.
Considering that local authorities are now being forced further than was expected on to the open market, we should give very close consideration to the effects which this will have on the management of sterling. It is not often appreciated that one of the principal reasons for the 1963 White Paper on local authority borrowing was the very serious effects which temporary borrowing by local authorities was having on the management of sterling. Before the last sterling crisis up to £500 million had been invested by non-residents from abroad in our public works.
These amounts were invested through the banking system in seven-day, one-month or three-month deposits. When the sterling crisis occurred a year to 18 months ago, the confidence in sterling of those overseas depositors was shaken and they withdrew their funds from the local authority market. This led to an enormous demand for local authority treasurers to replace the moneys withdrawn from this country and forced up interest rates in the local authority temporary money market with consequent effects upon the whole economy.
I should like to see a small change made in the foreign exchange regulations which would be highly beneficial to the whole country and to local authorities generally. At present, if a non-resident buys a security which has a life of over 364 days and sells it before it matures, he is credited with blocked sterling, whereas if he buys a Treasury Bill or a local authority bill which has under 364 days' life he is credited with external sterling.
The effect is that non-residents are reluctant to invest in one- to five-year local authority bonds and other local authority stocks. They know that if they sell they will have to bear the discount on blocked sterling. If we were to make a small change whereby they received, instead of blocked sterling, external sterling, this would have advantageous results as it could attract more money from abroad to local authorities and might also fund some foreign deposits into longer bonds. The market would counteract withdrawals by falling prices to a greater extent than any discount on blocked sterling. Practically every other country in Europe sets out to attract foreign investment in its public works, hut this country by small foreign exchange anomalies discourages it.
Of course, we would all like to see this country have cheaper rates of interest for housing and services, but we cannot provide cheaper rates of interest if they contribute to increasing inflation and damage our economy. The way in which cheaper rates have been achieved in the last 18 months has been by a subsidy offered to local authorities through the Public Works Loan Board which, in the end, must be inflationary if it is carried too far. At present, quota loans through the Board of up to five years are bearing interest at 5⅝ per cent., which is practically the same as the Treasury bill rate and more than 1 per cent. above the rate at which the Government is borrowing for five-year securities.
A far better way of reducing rates of interest for local authorities, but by nothing like the same amount as a subsidy, would be as follows. If the Treasury and the Bank of England were to allow negotiable bonds which treasurers are using as a borrowing instrument to be eligible security at the Bank of England, that would immediately lead to a fall in interest rates to local authorities of at least ¼ per cent. I am aware that this would expand the credit base, but use more than a comparable issue of Treasury bills to finance the Public Works Loan Board.
The whole of the £150 million plus—it is a figure which is growing the whole time as local authority financial requirements increase—would certainly see a drop in the cost of interest by at least ¼ per cent. This would be achieved without any form of Government subsidy and with less damage to the economy through creating inflationary tendencies than occurs if subsidies are continued to be granted below market rates and when a two-tier interest rate structure is in operation.
This is a technical matter, but I do not apologise for raising it this morning. The lowering of interest rates by ¼ per cent. on £150 million, which is a fairly simple thing to do, is relevant to the problems we are discussing.
I believe, also, that if this were done the interest of small savers in these securities would be increased. What we must do to finance our public works is to provide some kind of medium for the small saver to invest in the town hall and to invest—but this is a different point—in the nationalised industries, so that they are protected against inflation. We have reached the position where, if he desires to protect himself against inflation, a small saver or investor buys a unit trust with an equity hedge. The demands for public sector finance are increasing year by year but without being able to draw on savings in the same way as the private sector.
It is only sensible that the Government should give consideration to protecting the small saver against inflation if he should wish to put small savings of £100 or £200 into the town hall. I therefore ask the Government to consider some form of bond indexed to the cost of living, although I am well aware that there are many important economic arguments against a form of indexed bond. I would only say that if such a bond could be introduced to a limited extent over the counter at town halls it would draw a great deal of savings into public works which are not now going into the public sector at all.
I want, first, to congratulate my hon. Friend the Member for Walthamstow, East (Mr. W. O. J. Robinson) on a lucid and confident maiden speech. We on this side know of his long experience in local government. We listened with interest to his review of the problems of his own local authority, which are common to many local authorities. I can assure my hon. Friend that he struck a sympathetic chord on this side of the House when he spoke of the impact of high interest rates on local authority rents and rates. We hope that my hon. Friend will join us in debates on local government and matters such as this in the future.
The hon. Lady the Member for Finchley (Mrs. Thatcher) made a speech in moderate terms. However, she expressed concern at the impact on local authorities of high rates of interest. She complained about "interest-free loans" made by local authorities to the Government She said that high loan charges would have repercussions on the rates. She is quite right there. However, the record of hon. Members opposite in past years should be set against statements of that kind.
The hon. Lady said that she did not want to go beyond the 1963 White Paper This is not surprising. Mention has been made this morning of bringing Public Works Loans Bills forward at fairly frequent intervals so that matters of local authority finance can be discussed. It is worth remembering that after 1957 there was an interval of over six years before the next Public Works Loans Bill was introduced at the end of 1963.
When an assessment is being made of the present condition of local authority borrowing and the burden which local authorities have in servicing their debts, it should be remembered that it was the Tory Party which threw local authorities on to the open market in October, 1955 and left them there until March, 1964. Further, the Tories made the Loan Board a lender of last resort and a lender, not at the Government credit rate, but at the local authority credit rate, which was higher than the Government rate.
The Tories produced a queue in the market which resulted in extensive short-term borrowing, particularly after 1957, which the Radcliffe Committee said was forced on local authorities by the decisions of the central Government. The Tories forced local authorities on to the mortgage market because of the queue in the stock market. The main effect of those policies was to make borrowing by local authorities much more expensive than it need have been.
The Tory Government rejected the recommendations of the Radcliffe Committee. Mr. Heathcoat Amory, the then Conservative Chancellor, told the House that the queue was orderly and that, while local authorities were waiting their place in the queue, they could go on to the short-term money market. We all know what the effect of so doing was.
The Report of the Radcliffe Committee was debated in 1960, but it was not until October, 1963, that the White Paper was brought forward giving proposals for a change in the system of local authority borrowing. It is obvious from reading that White Paper and the subsequent debates that the purpose of the White Paper was not particularly to help local authorities. It was because the Government found that, because of their policies, they had placed our external position in a degree of jeopardy in which it never need have been.
When the Public Works Loans Bill of 1963 was given a Second Reading, not one Tory Member from England. Scotland or Wales was interested enough to speak in the debate. The then Economic Secretary to the Treasury, in moving the Second Reading, emphasised that the Bill was being introduced and changes were being made in the pattern and procedure for local authority borrowing because of the Treasury's fears of a growing short-term debt. There is no evidence in the then Economic Secretary's speech that the Treasury was considering the very real burden being thrown on to local authorities and local authority rates at that time.
It is well to bear in mind the very real help which the Labour Government have given to local authorities in the last two years, in spite of all the economic difficulties and the dangerous external situation with which we have been faced.
Is not the hon. Gentleman aware that it was the White Paper which was produced by the Conservative Government which suggested greater access, going up to 50 per cent., for local authorities to the Public Works Loan Board? It is the present Government who are suggesting that it should not go up to 40 per cent. but should be kept back at 30 per cent.
Of course I am aware of it. What I am saving is that the Conservative Government rejected the recommendations of the Radcliffe Committee in 1960. It took them three years to make up their minds that they would do anything, and, when they did, it was what the then Economic Secretary described as a compromise proposal. The present Government are not only continuing the recommendations of the White Paper but in some respects, in terms of the regions, for example, they have gone further.
I think that my hon. and learned Friend the Financial Secretary mentioned the special assistance for the regions. He mentioned that the first £100,000 of local authority borrowing could be taken at the quota rate. I know that this was recommended in the White Paper, but there is a very great difference between making recommendations and suggestions in a White Paper and implementing them when economic conditions change.
The country has taken well the argument as to whose was the responsibility for the kind of economic situation with which the Government were faced when they took office in October, 1964. In addition to the special assistance in the regions, the raising of the £50,000 limit to a limit of £100,000, which probably cost about £30 million in a year of economic difficulties, it should also be noticed that after the Bank Rate increase in the economic crisis after October, 1964, the Chancellor helped the local authorities by fixing a rate for quota loans the result of which was that the differential between the quota rate and the last resort rate widened.
It should also be remembered in this context—I do not want to go beyond the bounds of order, Mr. Speaker—that the General Grant (Increase) Order of December, 1965, was intended to help inter alia the increased cost of servicing loans and the increased cost of the debt of local authorities. In passing, one should in this context mention the rate rebate system that we have introduced, the Housing Subsidies Bill of last Session, and the proposals of the Government for short and medium term help to the local authorities as laid down in the White Paper of February, 1966.
Having said that about the Opposition, I think that I am then entitled to make some comments about the situation with which the local authorities are now faced as a result of more recent Government policy. I believe that everyone on these benches is disappointed that we are not to move forward from the 30 per cent. quota rate to 40 per cent. I believe that we are all disappointed at the restriction of the basis of assessing that quota so that the sum borrowed for the previous year shall not count in the calculated quota. I welcome this aspect of the Government's announcement in so far as it will cut the amount of short-term borrowing, because I believe this is one of the most dangerous features of local finance at the moment; but to the extent that it cuts the amount of quota borrowing which the local authorities will be able to make in the coming year—we understand this will be within the range of about £100 million to £180 million—obviously all of us, thinking about the position of our own local authorities, are disappointed at this situation.
We listened with some pleasure when the Financial Secretary said that the formula of the White Paper had not been disregarded, and I think that the implication is clear that it is because of the economic and financial circumstances., and I would imagine because of a number of external factors, that the Government have found themselves in a position where they have had to maintain or increase the 30 per cent. quota for this year.
In examining this problem we should have a threefold aim in determining how local authority capital expenditure and debt servicing should be financed. First of all, the money should be raised at as cheap a rate as possible and in the most efficient manner possible. Secondly, local authorities should finance their expenditure on sound principles of monetary management. I do not regard the present state of the short-term unsecured borrowings of many of the local authorities as conforming to those sound principles. I believe that the third aim—since we are considering such large and increasingly large sums of money—should be that the Government should maximise their influence over the timing and nature of monetary movements with a view to safeguarding our external position and controlling the demand on the markets.
With those three aims in mind all of us must be in some degree worried at the present situation. I think that the first thing about which the Treasury must obviously be concerned is the amount of short-term debt. In 1963, we were told that it was about 15 per cent. of the total debt of the local authorities. I remember very well my hon. Friend who is now the Minister of Defence for the Army saying that he believed that one result of the White Paper would be that within the next two years, after 1963, there would be an increase in the short-term debt, and, in fact, this is precisely what has happened. On the figures that I have seen, I understand that at 31st March last year the short-term debt was running at £825 million, which is 18·3 per cent. of the total debt of the local authorities.
The hon. Member for Finchley said, I believe, that there was a tendency for long-term local authority borrowing to shorten and for short-term local authority borrowing to lengthen. I hope this is right, but on the figures which I have I do not see any indication that the second part of her proposition is true. In fact, if I have taken the statistics accurately, as I understand it, at 31st March, 1965, there were £1,141 million of seven-day debt. By the end of 1965 that had risen to £1,257 million of seven day debt, whereas the amount of borrowing taken under three months terms and over seven days had fallen somewhat.
I was pleased when the Financial Secretary said that the percentage of the total debt of local authorities which was new short-term debt had fallen to 16·25 per cent. but I do not think he said what was the actual figure. This is the worrying feature of the situation, that even if one knocks that down to below 20 per cent. or even below 15 per cent., because of the increasing activities of the local authorities in the market the global sum will increase as the years go on, and I think that this presents a very real threat to our system of monetary management.
The Financial Secretary said on 26th July last year that a number of local authorities had got short-term debts of over 20 per cent., and he added:
The real objective is to get them down."—[OFFICIAL REPORT, 26th July, 1965; Vol. 717, c. 170.]
With respect, this is not the real objective of these operations. The principles of sound monetary management by the local authorities constitutes only a very small part of the problem. We have to look at it from a much wider point of view than that.
There are a number of dangers and objections to the present amount of short-term debt incurred by local authorities. First, the rates paid by the local authorities are above the Treasury bill rates, and we on this side of the House complained for years when we were in opposition that we wanted to see cheaper rates of interest for local authorities for all the socially desirable purposes for which local authorities cater.
The second objection, if I understand the situation aright, is that the large amount of short-term local authority paper affects the market for central Government bonds, and obviously affects monetary conditions generally. The hon. Member for Louth (Sir C. Osborne), who is no longer present, asked the Financial Secretary what would be the likely impact on interest rates if the Government raised much more money from Treasury bills. My view is that, if there were a drastic cutting-down of the amount of short-term and longer-term borrowing by the local authorities in the money markets, it would make it easier for the issuing of Treasury bills by the Government.
The third principal objection to the short-term debt is that it is a dangerous chink in our financial armour. I need not enlarge on that, because the hon. Member for St. Ives (Mr. Nott) did so only a few minutes ago and set out the situation very effectively and accurately. The danger is that we know very little about this money. Both when the Opposition were in power and in the debates last year, when Questions were asked, by, for example, my right hon. Friend the present Minister without Portfolio, as to how much of this money was foreign money, all we could be told was that at one period £160 million of it came through foreign banks, but we did not know what proportion of it was foreign money coming through English banks and other sources in this country. Therefore, if it is true, as Front Bench spokesmen have said over a period, that one cannot find out with accuracy where this money comes from, I think it essential to cut that amount of short-term borrowing as quickly and as drastically as possible.
The fourth objection to the local authorities having a large amount of short-term debt is that the Government need to influence interest rates in the fields where foreign funds are substantially attracted. The evidence, certainly in recent years, is that this is one field in which foreign funds have been substantially attracted. Therefore, to the extent that the new restrictions, announced by the Financial Secretary this morning and made clear in the White Paper a few weeks ago, on refinancing 365-day loans through the quota will prevent or hold down short-term borrowing, I welcome them. It is an interesting reflection on the new policy that in nearly £3 million of issues of recent bonds there have been no yearling bonds at all; they have been for two or three years.
On the other hand—we have a responsibility to look at the position of the local authorities here—one of the side effects of the tighter restrictions of the Public Works Loan Board has been that short-term money rates have been hardening. The seven-day, three-month and six-month rates have all hardened. Therefore, one effect of this tightening up and of the new regulations is that local authorities are likely to have to pay more for their short-term money than in the past.
I turn next to the problem of longer-term market borrowing. Once again, this is more expensive for the local authorities than getting money at the Government credit rate, and I believe that it is still useful to turn back to the recommendations of the Radcliffe Committee on this subject, which pointed out that, considering the large and growing sums of money involved, from the point of view of monetary control it was preferable that the timing should be entirely at the discretion of the central Government.
The Committee went on to say that the fragmentation implied by independent borrowing involved unnecessary cost
in that the lower marketability of small issues has to be paid for in a yield differential which, if they borrowed from the Exchequer via the Public Works Loan Board, could be avoided.
In my view, when a local authority has received loan sanction from the Government for capital expenditure, the Government have expressed the opinion that this expenditure is socially desirable. Therefore, I begin from the
premise that one should attempt to provide the local authorities with money at the cheapest rates of interest possible within the economic circumstances of the time. Therefore, I believe, first, that the Public Works Loan Board should in principle provide the bulk of the long-term capital of the local authorities. Here I differ from the hon. Member for St. Ives, because I do not consider that this is a question of independence, although I shall in a few minutes have a comment to make on what he said about it.
Secondly, what we should be aiming for in principle and in the longer-term taking into account possible economic and financial fluctuations, is that the Public Works Loan Board should eventually provide, perhaps, 75 or 80 per cent. of the money for local authority capital expenditure, which would still give the local authorities scope to raise locally money which might not otherwise find its way into the gilt-edged market.
Thirdly, the short-term borrowing should essentially be bridging finance and no more than that.
I stress that I am putting these propositions to the Government in principle, fully realising the economic difficulties and financial implications of any steps which they might take at this time, but, in putting them to the Government, I point out that it makes little difference whether the Public Works Loan Board or the Government raise the money or whether the local authorities raise part of it on the market because the total pressure on resources is the same. On 6th April last year, when talking of giving help to the regions and saying that it would cost about £40 million, the Chancellor of the Exchequer said:
This is money which the local authorities would otherwise have had to borrow on the market, and the change does not, therefore, make new demands on our resources."—[OFFICIAL REPORT, 6th April, 1965; Vol. 710, c. 283.]
If one were to have this large-scale switch over a period from the local authorities raising money on the open market to a situation in which the Government raised the money, it would actually help the Treasury bill rate, contrary to what the hon. Member for Louth has suggested. One argument against this, that an increase of Treasury
bills would make the position of the banks more liquid, is acceptable only in limited terms, and I should have thought that this situation could be controlled in other ways.
In principle, I would like the Public Works Loan Board to issue the bulk of the money which local authorities need for their capital expenditure and for the servicing of their debt. I recognise that there are problems. I recognise, first, the problem that, from the standpoint of central monetary management, the Exchequer would need a period for switching. This was the reason why the White Paper suggested having 20 per cent. one year, then going to 30, 40 and up to 50 per cent. One accepts the need for time for switching.
I accept, also—I have a great respect for the judgment of my right hon. Friend the Chancellor—that there may well be external considerations which make it necessary to restrict the quota level to 30 per cent. this year. I hope that this situation will be short-term. We are aware that there will be a large increase in the amount of public investment on the social infrastructure by 1970. I do not want to see the local authorities being thrown on to the open market for this vastly increased sum for various reasons, for instance, the danger of the short-term debt as well as the fact that it is more expensive for the local authorities.
Therefore, while accepting the Government's judgment, as I think we must, in restricting the quota percentage to 30 this year, I hope that the Financial Secretary will at least consider not only that we should eventually go to 50 per cent. but that we should go well beyond that. I remind my hon. and learned Friend that this was described by the Opposition as a compromise solution when the White Paper was produced. What is acceptable to the Opposition as a compromise solution is not likely to be acceptable to many of us on these benches, or, for that matter, to my hon. and right hon. Friends who are now members of the Government.
In the comments made during past debates on this subject by several members of this Government, both senior and junior, we were told that the 1963 proposals were very modest and that we ought to go further and further liberalise the system. I believe that there is a body of opinion within this party which believes that the Public Works Loan Board should be supplying most of the money for local authorities. I hope that the Financial Secretary will consider this.
Lastly, I believe that in the raising of this money and in the distribution of these loans to local authorities there is a great need for the streamlining of Exchequer lending arrangements and the Parliamentary scrutiny of those arrangements. It is notable that we not only have local authority borrowing from the Public Works Loan Board through the Exchequer, but we also have large amounts of borrowing by the nationalised industries. There we have a number of borrowing Acts which provide for the expected requirements of the nationalised industries for between four and seven years, divided into two parts by an intermediate limit which may not be exceeded without an affirmative Resolution of the House of Commons.
I look forward to the day when we can have a bringing together of these lending arrangements by the Treasury so that the whole of public expenditure of this type in terms of loans to publicly owned industries and the municipal authorities will be brought together. I should like to see, to succeed the present organisations, a body of "Industrial and Social Investment Commissioners" to act on behalf of the Ministries and replace the very untidy and in many ways illogical and unsatisfactory situation that we have at the moment.
I suppose that it is the fate of all later speakers to find their speeches decimated as time goes on. As this is only my second contribution in this Chamber, I am not sure how capable I am of dealing with this crisis.
The first point that I wish to make is a slightly technical one. Might we know whether there is or is not a loophole in the Bill? I do not claim any originality in this respect, but I was interested, in reading the City columns of one of our great journals of opinion which may not thunder quite as much as it used to, to learn that the consequence of the regulation which has been published by the Public Works Loan Board may be damage for local authority finance in ways only now being foreseen.
The point at issue is fairly clear, that if an authority borrows money in the month of April in year A and repays it, say, 13 months later, in year B, it is not eligible for quota. But if the city treasurer is sufficiently farsighted to borrow the money a few days before 31st March and repay it a few days after 1st April in the next year but one, it can attract quota.
If this is a loophole, obviously many of the more astute treasurers, not of rural districts but of the great cities perhaps, will manage to increase the burden of the borrowings from the Exchequer. If this is also true, it will mean that local authorities will find that they will have to pay a premium rate for any short-term borrowing that they make in the second half of, say, March each year. I should very much like to know what the answer to this is in both respects because I think that this will be of some importance to local authorities.
My second point has already been made very eloquently by my hon. Friend the Member for Rotherham (Mr. O'Malley). Here I speak in support of the general argument for the financing of the services provided by local authorities through money provided by the Public Works Loan Board. The hon. Member for St. Ives (Mr. Nott) argued very forcibly in terms of principle against this. He said that it would make local treasurers much more unenterprising than they had been before and that it would create in the whole field of local government finance a sense of atrophy akin to a loss of independence.
I think that it is true that in the last few years of riotous Tory living in the field of finance city treasurers have become quite different beings. Whereas they used to deal in bonds and gilt-edged securities, they have been forced into all sorts of areas of activity which previously they might not have regarded as being altogether respectable. They have had to acquaint themselves with the terrible business of city centre development, property deals, and so on. They have had to make a nodding acquaintance with equities in relation to their superannuation funds.
In respect of the sort of finance that we are talking about today they have had to widen their experience in most peculiar ways. They have had to understand that if they wanted money they might have to get it from the workingmen's club round the corner, which was much more prosperous than the local authority. They have had to understand that their facilities for borrowing money would probably be a function, in terms of both amount and the interest that they would have to pay, of such things as the state of the United States balance of payments. This is very important. It has added to their experience, and one would never like to put them in a straitjacket in future.
While one must attach importance to experience, one must, I think, regard the sums involved here and the objectives which they are intended to finance as a public service. This is an area of activity which is just as entitled to public money as central Government expenditure—even the payment of our salaries, and such things as nationalised industries. It is interesting to go back to 1955–56 and ask why the local authorities were so unceremoniously thrown out of the Budget and the nationalised industries were brought in. It was because the Government felt that they could control the nationalised industries more easily within the Budget than if they left them outside and that, in any case, they could trust local authorities if they put them into the market. This has not proved to be altogether true.
The hon. Member for St. Ives said that in principle he was against this because he felt that no public authority should wholly finance local government. Then he began to erect a series of controls, both internal and external, which we on this side of the House would suggest was similar in spirit to providing the money from Budget funds in any cases. What we have created is an intolerable situation. Not only have we created a situation in which the interest rate problem has become absolutely out of hand, but we have created a situation in which the problems produced for the monetary managers in this country are much more serious in this situation in which local government finance is outside the Budget than they could possibly be if it were inside it.
We have created a situation in which we have an enormous amount of borrowing which is completely insensitive to interest rates at all. We have created a situation in which we have produced a volume of liquid assets which makes monetary policy extremely difficult of achievement. Indeed, we have created a situation in which our balance-of-payments problems are very much increased as a result of this.
I should like to say more about that, but I will merely make a plea for some rationalisation of this jungle of local authority finance. If the Conservatives put the local authorities out of the Budget, we hope that the present Government will put them back into the Budget. No doubt my right hon. Friend the Chancellor will say that this cannot be done because his net borrowing requirements would be such as not to recommend themselves to the gnomes of Zurich or the financial gentlemen abroad. We must take their feelings into account. They rule our destiny. But these are people who are not educated in the true milk of the Keynesian doctrine, and they need to be so educated.
We have an outrageous Budget system, which the present Chancellor, fortunately, is putting right, although he has not gone far enough. If we could educate our foreign financial masters to appreciate that we have certain conventional Budget items dealing with current account but that we have below the line a capital Budget which is related not to prodigality or to spendthrift expenditure, but to the creation of assets in terms of the nationalised industries or local authority services, they would more fully accept the fact that a net borrowing requirement is not a true index of financial prodigality or prudence.
I hope that the Chancellor will bring the Public Works Loan Board's operations back into the Budget and that he will be a little more realistic about the Budget. I hope that he will do what my hon. Friend implied, if he did not actually say it—make the Treasury bill market available to local authorities. It is an outrage that local authorities are the only major institutions in the country without access to this important area of finance. What is good for the Prudential is good for the local authorities. I hope that that point will be borne in mind, too.
I welcome the Bill, as far as it goes, and, to the extent that it will make it easier for local authorities to borrow from the Public Works Loan Board, I, like other hon. Members, give an enthusiastic welcome to the Bill. I should also like to join in the tribute to the work which is done by borough treasurers throughout the country. Sometimes we tend to take borough treasurers for granted. We do not seem to appreciate the tremendous strain which their everyday working imposes on them, certainly if they are borough treasurers of very large local authorities. I know from my own experience as a member of a local council the amount of work which borough treasurers do and their contribution to a local community.
It is a feeling which I have expressed in speeches outside the House over a period of years that when local councils undertake essential work, they should not be penalised by the way in which they have to raise money. It has always seemed to me to be wrong—and this view is shared by all my hon. Friends—that local authorities have to go on the open money market for most of their loans, and I have always felt that local councils should be able to approach the Public Works Loan Board.
When I began my speech I said that I welcomed the Bill to the extent that it will allow local authorities to approach the Board. But what disturbs me, as it must disturb my hon. Friends, is that there is no increase in the quota laying down the extent to which local authorities will be able to borrow from a Government agency, the Board.
I listened with much interest to the speech of the hon. Lady the Member for Finchley (Mrs. Thatcher). Although I agree with some of her comments—and I nodded assent while she was speaking—I must point out to her that during the period that the Conservatives were in office local authorities were certainly not in a more favourable position with local government finance. To a very large extent they were in a far worse position. It is only right and proper that we should say that local government is able to carry on its finances in a much more favourable way under this Government than under the previous Conservative Administration.
We must not get away from the essential point that under the terms of the Bill local councils will still have to go on the open money market to borrow most of their money. I hope that when the Financial Secretary replies to the debate he will show that he recognises that there is a great deal of impatience among his hon. Friends for some improvement in the present position. I hope that I shall not be taken to task for criticising a Minister of my own Government, but perhaps I detected a slight note of complacency when the Financial Secretary made his opening speech.
I recognise the very serious economic position which the country is in. It may well be argued that at the moment there is no alternative to the present arrangement as set out in the Bill, but the Government should accept that there is a great deal of impatience on this side of the House among hon. Members who feel that local councils should be able to borrow far more from the Public Works Loan Board than the amount set out in the Bill.
There is no doubt that in the years ahead, and despite plenty of restrictions, local councils will have to find more and more money. One hon. Member opposite argued that it would be wrong for local councils to be able to borrow an immense amount of money from a Government agency. He argued that it would be wrong because it would be a form of central Government control. That argument makes little impact on me. After all, before local councils are in a position to borrow, they have to get loan approval from the Government. Surely this is a form of central Government dictation.
How many local councils can go ahead and borrow money from the Public Works Loan Board or on the open market without loan sanction approval from a Government agency? It is rather silly for hon. Members opposite—there do not seem to be many present at the moment—to argue that it would mean central dictation from the central Government when to a large extent we already have central control by the Government.
This should be recognised by hon. Members opposite.
If I may make a local point, it should be said that in certain areas of the country local councils are faced with a need to increase council rents by very substantial amounts as a result of the manner in which money is borrowed on the open market. For example, in Croydon, rents have recently gone up by over £1 per week. The hon. Member for Waltham-stow, East (Mr. W. O. J. Robinson), who made an excellent speech, said that in his borough the local council had decided to phase these increases. In the constituency which I represent, the local council decided to slam on an increase of over £1 a week in council rents without any phasing and in one go. There has been a great deal of hitter resentment in Croydon among council tenants at the way in which these increases have been imposed, and I have tabled various Questions in the House.
Local councils should not be penalised when they undertake essential community development such as housing, education, the provision of essential amenities. Two subjects arise—the way in which to raise the money, which is the subject of the debate, and interest rates, which it would be out of order to discuss now. The mechanics of raising money by local authorities is a very important issue and is the reason why I shall listen with keen interest to the Government's reply to the debate.
There is a great need for a complete change in local government finance, which is now completely chaotic. I can see no justification for the way in which it has been organised for the last 500 years, although I cannot pursue that subject now. However, I hope that over the time of this Parliament we will have an opportunity to debate local government finance and to put forward our views, as the Government will be able to put forward theirs, on how to change the present chaotic system to a fairer way of raising money for local purposes.
I am sure that the whole House would like to congratulate the hon. Member for Walthamstow, East (Mr. W. O. J. Robinson) on his admirable maiden speech. We on this side of the House naturally welcomed his glowing tribute to his predecessor, Mr. John Harvey. Mr. Harvey will be remembered on this side of the House certainly, and, I think, throughout the House, with great affection and admiration.
The hon. Gentleman spoke of the housing problems in his constituency and the House will have noted with interest that those housing problems are being solved in some way by removing some of the constituency's more eminent residents into the new quarters of the Ministry of Defence at the Admiralty. The hon. Gentleman argued for cheaper interest rates for local authorities, which has been the constant theme throughout the debate from hon. Members opposite, as in every debate in the last two years on the Public Works Loans Bills.
My hon. Friend the Member for St. Ives (Mr. Nott) spoke very fluently and with obvious technical knowledge about the marketing of short-term local authority bills and contributed a great deal of expert knowledge to the debate. I sometimes feel that it is with the entry of people of the calibre of my hon. Friend, combining business experience and knowledge with their duties to the House, which altogether knocks the argument that the sittings of the House should be held as a whole day operation. My hon. Friend's contribution was admirably lucid and to the point and I am certain that the House took his point about the independence of local authorities and their importance.
The hon. Member for Rotherham (Mr. O'Malley) indulged in an interesting historical survey. He will forgive me if I do not comment on some of his rather contentious remarks. He spoke more like a Socialist politician until we suddenly came to the last eighteen months, when he began to talk in terms of a banker. The expressions he was using seemed to change markedly and the whole tone of his speech altered.
He expressed disquiet, as have other hon. Members, about the type and extent of short-term borrowing. He made a short reference to his hon. Friend the Member for Islington, North (Mr. Reynolds). He may recall that in the corresponding debate last year the hon. Gentleman was recommending completely free access to the Public Works Loans Board for housing.
I cannot recall what the hon. Gentleman said about his right hon. Friend, but certainly the hon. Member for Islington, North in the debate last year urged completely free access to the Board for housing, and I did not notice that kind of remarking coming from the Government side during this debate.
The hon. Member for Stoke-on-Trent, Central (Mr. Cant) referred to the issuing of local authority bills. There was a movement among local authorities last year for local authority bills to be issued and it was said that they were guaranteed a warm welcome in the City. The Radcliffe Report dealt with this matter carefully and cogently, the point being that if local authorities are allowed to issue their own bills, the clearing bank systems would be allowed to count local authority bills as part of their portfolios, and thus the Government's ability to have an effect on and to control total expenditure to that extent would be nullified.
The hon. Member for Croydon, South (Mr. Winnick) strongly criticised the limitation of the quota. The criticism of hon. Members opposite in previous years has always been that the interest rate charged by the Board was too high and they have argued for a differential rate. This is a very old argument. It was Francis Bacon who, more than 300 years ago, said that there was a very strong argument for differentiating interest rates—one rate for Bacon and other rates for everybody else. I believe that the Government have become far more responsible, in terms of action rather than talk, since they have been in power on interest rates in general, obviously for reasons not all of which have been within their control.
When the Financial Secretary introduced the last Public Works Loans Bill in July, he said that he expected the £500 million then to be provided to last well into next year. It is difficult to know whether at that time he meant the calendar year or the financial year, but we have not got very far into this financial year yet and he is asking for another £900 million. It is reasonable to ask how long he expects it will last this time. I think that he said that it might last until the middle of next year.
I do not know how he can work out just how long it will last, because these matters are not capable of precise estimates. The estimated net cost to the Board last year was supposed to be £360 million, but the outturn was £525 million, or about 30 per cent. out. The estimate for this year is £398 million. One cannot help but admire the precision with which the Treasury makes these estimates within £1 million. It is rather like the racing tipster giving not just the first three horses, but the first six and the distance between each. I think that these figures should be regarded with precisely the same amount of suspicion as one would regard the racing tipster.
The fact is that this estimate is just as likely as the estimate of time to be as much a shot in the dark this year as last. It is therefore interesting to review the course of events of the past year and to see see whether it is possible to draw any conclusions about this year's Bill. During the course of Second Reading last year, on 19th July, the Financial Secretary said that local authority temporary debt was 19 per cent. of total local authority debt as at 31st March.
He did not know, he said, what proportion of the debt came from abroad. He must have known that it was a pretty high proportion, because he must have observed the effect of the massive withdrawal of funds during the months of the sterling crisis. I can well remember during that period local authorities paying 8 per cent. to 9 per cent. for seven-day money. On one occasion that I can recall local authorites were offering up to 12 per cent. and 13 per cent. for overnight money. That was the position during the sterling crisis. Certainly the effect was that of the total estimate of £360 million net for the whole year no less than £157 million was drawn from the Board in the first 10 weeks of the year.
This is where the effect of the sterling crisis was felt—not just on the country's monetary reserves but in the coffers of the town halls. So many of the activities of the town halls are necessarily longer-term activities, ranging from housing to drainage, and these activities were being financed short-term by foreign funds, as the hon. Member for Rotherham, has said. The Government's mishandling of the economy which led to the crisis of confidence had an immediate reaction on the local authorities.
Presumably, even if one accepted the hon. Gentleman's arguments about the mishandling of the economy, he would accept that there was similar mishandling in 1957 when the same thing happened?
I am not denying that there was a sterling crisis in 1957. What I am saying is that this crisis, if one wants to indulge in crises, was very much more severe. I do not think that we shall get very far, or be in order if we discussed sterling crises.
It was to control the economy more effectively that the Conservative Government introduced the Public Works Loans Bill of 1963. The method in the Bill was to induce local authorities to borrow for longer periods by giving them access to the Board in increasing proportions each year and at the same time to reduce their ratio of short to longer term borrowings to 20 per cent. over four years. One dreads to think what would have happened to local authorities if money from the Public Works Loan Board had not been forthcoming during last year's crisis. Despite the success of this salvaging operation and the fact that the Chancellor, in his Budget speech, said that he adhered to the general principles of the 1963 White Paper, the truth is that the understanding of the rules has now been changed. Instead of 40 per cent., local authorities are only being allowed access to 30 per cent.
Why is this? Is it because the calls on the 30 per cent. rate are too heavy? I should imagine that that is true, but surely it is monstrous to change the rules or the understanding of the rules which local authorities had because of the Government's own ineptitude. This is what has happened. I am aware that some authorities have made full use of the provision under which a yearling bond or a one-year loan could be counted as the basis of a 10-year loan from the Public Works Loan Board and renew that loan to get further access. I can see no cure for this situation in the new Regulations. There is nothing to prevent a local authority which wishes to do so from issuing a 13-month loan at 31st March next and, when that loan runs out, being eligible for its quota from the Board. I do not think that that Regulation is effective, except in so far as it has prevented local authorities borrowing from the Board at less than two-yearly periods. It is unlikely to be effective upon those few authorities which are borrowing quite rightly and legally as much money as they are entitled to do.
There would appear to be three possible reasons why access at 40 per cent. is to be denied: first, because of the run on the £ and secondly because of the cost of subsidising the special rate of interest which the Public Works Loan Board has, of 5⅞ per cent. A third possible reason is because some local authorities make full use of the provisions, to which they are perfectly properly and legally entitled. The Government are forcing the great majority of local authorities into borrowing from the market when they could reasonably have anticipated getting their quota cheaply at 40 per cent. I wonder if the Government have worked out what the likely effect of this change in the rules will be. First of all, there is bound to be an enormous strain on the capital market in any case. This will be aggravated by the increase in the loan sanctions allowed for this year.
I understand that loan sanctions amounting to £1,351 million were approved in 1964–65 and that the figure for this year which has finished was £1,533 million which represents an increase of 13·4 per cent. I wonder if the Chancellor has taken the effect on the short market of these extra borrowing requirements. Last year the ratio of short- to long-term debt was 16·3 per cent. I wonder what it is now. Perhaps the Financial Secretary could give us more recent information? There seems to be plenty of scope for increase from this proportion of 16·3 per cent. to the 20 per cent. which local authorities are allowed to borrow short-term overall. It seems to us that the Government are encouraging authorities to borrow short in order to lend long—the classic prescription for bankruptcy. If there is any strain on the £ in future months, which we devoutly hope there will not be, the Chancellor's ability to control the economy has been quite sharply reduced.
I hope that he is not being too optimistic in his latest Budget cuts, for, although it is true that he has reduced the total borrowing requirements from £576 million to £287 million, he is relying upon savings to cover the deficit. It is worth making a point that withdrawals exceeded deposits last year in savings by £65 million. The whole House hopes that the new National Savings Certificates will be successful in covering this deficit, but it is by no means certain and we cannot rely upon it.
The Chancellor's task is not made any easier by the higher interest rates prevailing in other countries. Some years ago, when Bank Rate was raised to 7 per cent., this was regarded as a very effective weapon because there was a very considerable disparity between that rate and rates being applied in other countries. But during the last two years Bank Rates have been increased in the United States, Belgium, France, Italy. Holland and Germany. Thus, the flow of funds from one country to another has been nullified. Throughout the world there is an overall hunger for capital, partly based on shortage of international liquidity and partly upon the fact that there is full employment in industrialised countries.
If one adds to these general difficulties that the Chancellor is in on interest rates, the particular pressures on fixed-interest borrowing caused by Government action, the position is very much worse. There was the effect in the Budget of last year, of Corporation Tax, which meant that industrial companies started to issue debentures instead of ordinary shares. There is the effect of the competition of short-term and medium-term funds created by the new National Savings Certificates. There is also the future potential increase in the printing of money due to the steel nationalisation Bill and the pressure for higher building society rates.
All of these issues have a bearing on what is already a weak and over-strained gilt-edged market. One has only to look at the recent issue of the Surrey County Council stock, which is yielding over 7 per cent. on an eight-year loan. We have an ever-increasing demand for funds, higher interest rates and a weak gilt-edged market. I wonder whether the Government, even now, appreciate the full extent of its problem. Just over 10 years ago the proportion of short to long-term debts of local authorities was 3½ per cent. It is now 16·3 per cent. on the latest figures which I have. In March of last year the total of short-term debt was some £1,600 million. By December, nine months later, the figure was £1,740 million.
I wonder whether the Financial Secretary can tell us what the latest figure is. All the signs are that local authority expenditure will climb ever higher. We are not objecting to this; we are just making the observation. We have the evidence of an increase of loan sanctions of 13·4 per cent. this year. We have also the forecasts of the National Plan, according to which investment in housing will rise by 33 per cent. between 1964–65 and 1969–70 from £519 million to £691 million. However little confidence one has in predictions in the National Plan, what we must consider is the trend of future public expenditure.
In addition, we have to estimate the cost of making schools into comprehensive schools and the cost of direct building. Three years ago the total of local authority expenditure was one-seventh of the total capital expenditure in the country. On the latest figures which I have, it is very nearly one-fifth of total capital expenditure. The plain fact is that the longer production remains stagnant, as it does today, the more local authorities and Government expenditure will eat into our productive resources. This is inevitable. We are not concerned in this debate with whether this is a healthy trend. All I can say is that without an increase in productivity, which we are not getting at the moment, we cannot continue at this rate of public and social expenditure without seriously affecting our future industrial development and our economic position.
We are, however, vitally concerned in this Bill with the financing of this rapid development. It certainly will not be financed through savings. There remains only borrowing or taxation. Understandably, perhaps, from the Government's point of view, the Government do not want to come to the aid of the Public Works Loan Board quite as quickly as they did last year, or to the same extent. But I should like to ask the Financial Secretary what was the cost to the Exchequer of holding the Public Works Loan Board rate at 5⅞ per cent. on its 10-year lending. As the hon. and learned Gentleman knows very well, the Government cannot possibly borrow for that period of time at under 6½ per cent. The cost therefore must be very considerable.
The hon. and learned Gentleman will recall that in the 1963 White Paper the aim was to hold the interest rate offered by the Board at the Government's own rate, or very near it. The House should be told why this plan has been changed and what it will cost. It is our contention on this side of the House that local authority borrowing has grown and is growing, and ought to bear some relation to the growth of national productivity. It seems to us that the Government are not prepared to face the consequences of their own social legislation. They are flying in the face, not only of their own 1963 White Paper, but of the Radcliffe Report. This has grave implications for the management of the economy and indeed for the strength of sterling.
We therefore hope that the Government will increase the local authorities' access to the Public Works Loan Board as laid down in our White Paper and get, at the same time, better control of local authority expenditure. I know that whenever anybody mentions control of Government or local authority expenditure, hon. Members opposite become very suspicious, but I believe that there is a strong case for the creation of a Public Accounts Committee to examine local authority expenditure. I am not talking about loan sanctions. There is a strong case for examining how that money is spent to see whether there is a great deal of waste, as I am convinced there is.
I referred to this point in an intervention in the speech of the hon. Lady the Member for Finchley (Mrs. Thatcher). Again there seems to be the same implication. Is the hon. Gentleman suggesting that less money should be spent by local councils on housing, education and basic amenities? It seems that this is precisely what hon. Members opposite want.
I hesitate to say so, but I think that the hon. Gentleman is out of order. If he is not, I should like to answer his intervention. We are all for increasing public and local authority expenditure, provided that the country can afford it and the provision of these essential benefits is not made at the expense of industrial growth, which is absolutely vital to the country's future.
It is in the belief that the objectives which I have mentioned are possible under the Bill that we on this side of the House are prepared to give it our support.
With your leave, Mr. Deputy Speaker, and that of the House, I should like to reply to some of the points raised in the debate.
First, it is my very pleasant task to congratulate my hon. Friend the Member for Walthamstow, East (Mr. W. O. J. Robinson) on his maiden speech. He spoke with great charm and obvious knowledge about his own constituency. He brought to the debate an experience which is the result of a very long and distinguished period of service in local government. I will come to the main point of his speech later.
It is also pleasant for me to welcome and congratulate the hon. Member for Horsham (Mr. Hordern) on his first speech from the Opposition Front Bench. It is a curious coincidence, but I think I am right in saying that I had the pleasure of congratulating the hon. Member on his maiden speech. It is somewhat unusual that I should find myself congratulating him again. We have one thing in common which we share with one other hon. Member. We both went to a school in Australia to which a rather distinguished pupil went recently.
Before I turn to the questions which I was asked by the hon. Lady the Member for Finchley (Mrs. Thatcher), I should like to deal with the intervention of the hon. Member for Oswestry (Mr. Biffen). He asked me to state in percentage terms what would be the increase in total borrowing by local authorities, according to our estimates. I think that there is some misapprehension. We do not expect that either the net or the gross total borrowing in the coming year will be very different from last year. In fact, there may well be some decrease.
The hon. Lady the Member for Finchley, if I may say so without sounding patronising, made a very helpful and responsible speech and showed great understanding of the reasons why we had been unable—and it is a matter of great regret for us that we are unable—to implement the aim of a further 10 per cent. increase in access to the Public Works Loan Board this year. She asked me to confirm that the policy to which I referred today and the alteration in the rules on one-year borrowings was an interim policy. She suggested that the effect of this change in the rules was tantamount to redefining short-term borrowing from one year to two years.
I take the hon. Lady's point. I do not think that it is quite accurate, because one-year borrowing still qualifies for quota, but not more than once. As was explained to the local authority representatives when this matter was first discussed with them, this is meant to be an interim solution, but we must face the fact that the problem of the inequity between the one-year borrowing and the something over one year borrowing—be it 13 months or two years—which qualifies for a double quota will remain. This is something which we are discussing with the local authorities and we are inviting suggestions from them. We shall have to try to think of a proper solution to this problem.
That also involves the point which was raised by my hon. Friend the Member for Stoke-on-Trent, Central (Mr. Cant), in an extremely well-informed speech. He pointed out that there might be an attempt to evade the spirit of this new provision by means of a 13-month loan raised just before the end of the financial year. Fortunately, it is some time before we get to the end of the financial year, and no doubt that is one of the matters which we shall have to consider and discuss with the local authorities.
The hon. Lady invited me, as did other hon. Members, to comment on and enlighten the House more about what our policy might be next year and what our longer term policy is. I am sure that no one was so optimistic as to expect me to stick my neck out by saying now what we will be able to do next year. If I knew that, I would have said it in my opening speech. It is precisely because it must depend on the extent of our recovery and our general economic position that I am unable to say now what we shall do next year. I reaffirm that it is certainly our policy to implement the target set in the White Paper as soon as we are able to do so.
As I fully expected and as happened last year, a number of my hon. Friends pressed me to go further than that. The hon. Member for Walthamstow, East, in his maiden speech, and my hon. Friends the Members for Rotherham (Mr. O'Malley), for Croydon, South (Mr. Winnick) and for Stoke-on-Trent, Central all want to see a move towards a restoration of the post-war position where local authorities obtained virtually the whole of their borrowing through the Public Works Loans Board. That, of course, has for long been the goal of many hon. Members on this side. Obviously, it involves a very important policy decision, and it would not be right for me to go further than say that we are very conscious of that feeling by hon. Members on this side and by many people outside the House. In the meantime, our first goal must be to implement the targets which were laid down in the White Paper as early as we can.
I am sorry if I gave my hon. Friend the Member for Croydon, South the impression that I was in any way complacent about the situation. I assure him that that is not so. If nearly two years in the Treasury have taught me anything, it is that there is no room for complacency.
The hon. Lady the Member for Finchley, followed by a number of hon. Members on both sides, paid a tribute to the work of borough treasurers, who have had great difficulties to contend with. I think that we all join in admiration for them in the way in which they have handled these problems.
The hon. Member for St. Ives (Mr. Nott), in his post-maiden speech, made an extremely well informed contribution and over-modestly described the part that he himself had played in the introduction of the yearling bonds, though that is not the term by which he likes them to be known. They have played an important part in local authority finance in the past year. Like him, I do not seek to criticise local authorities for the measures they have adopted and were fully entitled to adopt, even though they have resulted in our having had to alter the rules, for reasons which I have explained and which are fully understood.
The hon. Member put forward three suggestions of a somewhat technical character on which I should like to comment briefly, but by no means finally. First of all, he raised the question of the million pound limit for these negotiable bonds. I think that I am right in saying that that was the limit originally proposed by the local authorities themselves. But, quite clearly, a problem will arise shortly, when those quotas have been taken up, of what are to be the future limits which will be allowed and what should be the basis for them. That is something which we shall want to consider further and discuss with representatives of the authorities.
The hon. Member then suggested an alteration of the exchange control regulations in a way which he considered would encourage non-resident investors who were lending to local authorities to lend on a rather longer term basis than at the moment. I am not sure that the facts as he stated them were quite complete. The matter is a little complicated. At the moment, a non-resident can invest or disinvest as follows. If he invests short-term, he buys with official exchange and gets official exchange on selling either at or before maturity, as the hon. Gentleman stated.
For a term of from one to five years, he buys with official exchange and gets security sterling on selling before maturity or official sterling on selling at maturity. Over five years, he buys with security sterling and gets security sterling on selling before maturity or official sterling on selling at maturity. So that it is true that there is a slight penalising of one to five year lending compared with either short-term or longer term lending.
To make the alterations which were suggested by the hon. Member would reduce the protection given to the reserves by the security sterling system against sudden large disinvestment by non-residents. Moreover, it is only fair to concede that at present the disincentive is not very great, because the discount on security sterling itself is low. However, I will undertake to look into the suggestion made by the hon. Member, and, if he wishes to elaborate further on the matter by letter, I will be very glad to reply.
The third point which he raised was a suggestion for allowing five to 10-year bonds to be eligible security at the Bank of England. Again, that is something which we shall be prepared to look at with the Bank of England, but my first reaction is not to think that I can lend the hon. Gentleman any great encouragement.
The hon. Member also raised the rather wider question of an index bond for local authorities, tied in some way to the cost-of-living index. As he said himself, there are formidable objections to a proposal of that kind, because it raises very much wider implications for the whole savings policy.
Of the other specific questions that I was asked, my hon. Friend the Member for Rotherham, who again made an extremely well informed speech, asked me to give not merely the percentage figure but the total amount of short-term borrowings by local authorities. The latest figure that I have is £1,738 million.
The hon. Member for Stoke-on-Trent, Central, like some other hon. Members, was pressing the point of the disadvantage of local authorities in the market and suggesting that we should make the Treasury bill market available to local authorities. Of course, more local authorities are issuing bills and getting some benefit from the bill market, but, for reasons of monetary management, it is not possible for us to permit an uncontrolled expansion in the number of those bills.
My hon. and learned Friend has used the phrase "uncontrolled expansion". We have spent much time today discussing this phenomenon of uncontrolled expansion of local authority short-term borrowing. Is not this a much bigger factor than anything likely to take place through the issue of Treasury bills? Indeed, I think that the Treasury bill in the last 18 months to two years has been in decline and that local authority participation in this market could institute a revival.
I think that the figures I gave show that there has not been an uncontrolled expansion of short-term borrowing by local authorities. One of the achievements of the changes since the White Paper was published has been a much greater control over short-term borrowing by local authorities.
Does not the particular answer to the point raised by the hon. Member for Stoke-on-Trent, Central (Mr. Cant) lie in the Radcliffe Report, which stated that the issuing of public authority local Treasury bills or the equivalent thereof counts as part of the clearing banks' free reserves and, therefore, if monetary authorities should wish to squeeze the banking reserves, to that extent these local authority bills would lie outside the system, thus allowing the clearing banks to remain outside the policy?
That is another aspect of the problem. The hon. Member for Horsham, I think, in his winding-up speech, yielded to the temptation to be rather more political than the hon. Lady the Member for Finchley. He referred to what he called a "monstrous change" in the rules from 40 per cent. to 30 per cent.
There has not been a change in the rules. The position is that aims were put forward in the 1963 White Paper and that the achievement of these aims was dependent upon certain conditions being satisfied. For the reasons I have stated, it has not been possible this year to achieve the 40 per cent. target for the coming year. But I do not think it right or fair to call this a change, still less a monstrous change, in the rules.
The only change in the rules that has taken place is the one I referred to about short term borrowing and for the reasons I have given this is accepted, I believe, as being not only a necessary measure but a fair measure and fair as between different local authorities. The hon. Gentleman asked me in particular for the latest figure, referring to the 16 per cent. figure that I gave in December, of the percentage of short term borrowing by local authorities. That is still the latest available figure. The end of March figure is not yet available. The hon. Gentleman asked me another question at the conclusion of his speech and because of this timing I am not yet in a position to reply. I will write to him when I can do so.
These are the best answers that I can give to the specific points raised. The general trend of the debate has been to show that, among hon. Members on both sides of the House who have brought a great deal of expert knowledge to bear upon the Bill, there is a general understanding of the reasons why we have not been able to go further than we have to help local authorities by increased access to the Board. I note the strong feelings on this subject. We are aware of them.
We are grateful generally for the understanding reaction that there has been both inside and outside the House to the unpalatable steps we have had to take this year, and I hope that we can look forward before too long to a general improvement in the economy which will enable us to make further progress on the lines of the White Paper policy.
I hope that the House will now think it right to give the Bill its Second Reading.