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.