Orders of the Day — PUBLIC WORKS LOANS (No. 2) BILL

– in the House of Commons at 12:00 am on 19th June 1967.

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Order for Second Reading read.

11.47 a.m.

Photo of Mr Niall MacDermot Mr Niall MacDermot , Derby North

I beg to move, That the Bill be now read a Second time.

The main purpose of the Bill is to make funds available for the Public Works Loans Commissioners to lend to local authorities and certain other bodies after the funds made available by the Public Works Loans Act, 1966, run out. As background to this it may be helpful if I remind the House of the present arrangements for local authority borrowing from the Exchequer. Hon. Members will not want me to go into the history of local authority borrowing since the targets of the White Paper published in October 1963 have not been achieved. It is sufficient to say that the demands for finance from the Board have been rising much more quickly than the 1963 White Paper envisaged.

This is only partly because the capital expenditure of local authorities has been rising. Most of the unexpected increase has represented longer-term borrowing required to refinance maturing debts. The restrictions on the amount of temporary borrowing by local authorities have, as intended, led to a certain amount of this refinancing. In addition, particularly last year when interest rates were rising, some of the holders of longer-term debt took advantage of "break" clauses in order prematurely to call in loans to local authorities and re-lend at higher rates of interest, and this rebormwing usually qualified for quota.

In 1965 we were able to increase the percentage of longer-term borrowing available from the Public Works Loan Board from 20 per cent. to 30 per cent. for all authorities; and for authorities in Scotland, Wales and the Northern and North Western Regions we raised the percentage to 40 per cent. But the result of that increase, with the unexpectedly high requirements of local authorities for financing, brought the cost to the Exchequer for 1965–66 up to the level which the 1963 White Paper had expected would be reached only in 1967–68.

In the economic circumstances of the last two years, my right hon. Friend the Chancellor of the Exchequer has not felt able to increase the burden placed on the Exchequer by lending to local authorities. Accordingly, for 1966–67 the percentages for access remained at the figures established in 1965. This year, as the House will know from my right hon. Friend's Budget statement and from the White Paper on Consolidated Fund lending, we have introduced new formulae for calculating access to the P.W.L.B.

After consultation with local authority associations, we have decided to change to a formula under which access to the Board is related to capital payments rather than to borrowing requirements. This change of formula need not, in itself, affect the amount which local authorities borrow from the Board—it depends on the percentage allowed under the new formula—and with the new formula it will be easier to predict the call on the Exchequer.

In his Budget my right hon. Friend provided £480 million net for Exchequer issues to the P.W.L.B. in 1967–68. When account is taken of the repayments of existing loans, this will enable the Board to lend about £620 million this year, which is about £100 million more than was provided for in last year's Budget and only very slightly less than local authorities borrowed from the Board during the year.

These figures will enable local authorities under the new formula to borrow 34 per cent. of their net capital payments from the Board during the year, and 44 per cent. in areas which enjoy the higher rate of access, to which Devon and Cornwall have now been added. By "net capital payments" I mean the actual capital payments less capital receipts and central Government grants and loans. The "minimum entitlement" to raise up to £100,000 from the Board remains. It will be remembered that that was introduced to meet particularly the problems of the smaller authorities.

There is also a new supplementary quota which allows local authorities to raise from the Board 30 per cent.—or 40 per cent. in areas which enjoy the higher rates of access—of the longer-term borrowing required for the purpose of complying with the restrictions on temporary borrowing. Local authorities have now been given until 31st March, 1969, to bring their temporary borrowing within the limits laid down in 1963.

At the present rate of lending, the funds provided by the Public Works Loans Act, 1966, which received the Royal Assent on 26th May last year, will be exhausted during or very shortly after the Summer Recess, and we therefore need to make further provision before the Recess so that the Board may continue lending to local authorities without interruption.

The first Clause of the Bill provides for a sum of £900 million to be put at the disposal of the Public Works Loans Commissioners. At the present rate of access, this should last until early in 1969. As with previous Acts, this Clause includes a subsection which permits the Board to undertake to make loans, the funds for which would be made available by a subsequent Act. This is necessary to ensure continuity of business and planning, and enables the Commissioners to enter into commitments of £50 million over and above the cash provided in the Bill.

The Clause contains one innovation. Hitherto, each Act came into operation on the date of Royal Assent and any provision under a previous Act which had not been used by that date had lapsed and thus, in a sense, was "wasted". If this Bill were to come into force at the beginning of the Recess, as much as £100 million of the provision in the 1966 Act might be foregone. The Bill therefore provides that the Clause should come into effect on a day to be appointed by the Treasury instead of on the date of Royal Assent. This will enable the existing Act to continue in operation until the funds which it provides are exhausted. As I said, it is anticipated that that will be about the end of the Recess.

The second Clause contains purely technical provisions to amend some defects which have become apparent in the Public Works Loans Act, 1965. Section 2 of that Measure introduced a simpler borrowing procedure for local authorities, but it is defective in two respects. The first is that it does not take into account the fact that the Acts relating to some authorities contain lists of permitted methods of borrowing, thus raising the implication that other methods of borrowing are not open to these authorities. The effect of this has been that some authorities, including river authorities, have not been able to take advantage of the simplified borrowing procedure introduced by the 1965 Act but have had to continue to execute mortgage deeds. They have naturally asked that they should be able to adopt the simplified procedure, and I know that they will welcome the steps we are taking in this Measure to put the matter right.

The second defect occurs because Section 2(3) of the 1965 Act imposes an automatic charge on revenues in every case where an authority—other than those covered by the two Local Government Acts—borrows by agreement with the Board. For some of the authorities concerned, however, other legislation already provides for loans raised by them to be automatically charged on their revenues. Clause 2(2) of the Bill therefore limits the scope of Section 2(3) of the 1965 Act to those authorities whose legislation does not already provide for an automatic charge; and this subsection also contains a consequential extension to the definition of "automatic charge".

Clause 2(3) of the Bill amends paragraph 3 of the Schedule to the 1965 Act. This is a very technical point indeed and perhaps the House would prefer me to leave that until we come to consider the matter in Committee. If so, I need say no more about the contents of the Bill, although I should, perhaps, explain why the Bill is necessary at this time in view of my right hon. Friend's comment in his Budget Statement that he had instituted a general review of public sector borrowing arrangements. The answer is simply that the review will take some time to complete and that, even if it were to lead —and I do not know if it will—to proposals for changes in the arrangements for making funds available to, or borrowing by, local authorities from the P.W.L.B., legislation could not be introduced to give effect to such proposals until after the funds provided for P.W.L.B. lending in the 1966 Act are exhausted.

In these circumstances, and since we do not know what changes will emerge from the review, the only possible course is for us to ask Parliament to provide the necessary money to enable the Public Works Loan Commissioners to carry on their functions of lending to local authorities on the present basis for a further 18 months or so. This will not prevent us from introducing legislation in the meantime to give effect to any proposals that come out of the review, if it seems right to do so.

Photo of Sir Gerald Nabarro Sir Gerald Nabarro , Worcestershire South

My particular interest in the Bill is to know something about future trends of interest rates, which are so very high at the present time. The hon. and learned Gentleman has performed the extraordinary feat of talking about lending and asking the House to authorise the lending of £900 million to local authorities without saying a word about what the levels of interest rates are to be.

Photo of Mr Niall MacDermot Mr Niall MacDermot , Derby North

If the hon. Gentleman would like to make his own speech during the debate, I will seek to reply to any points he and other hon. Members make. However, there is no change contained in the Bill in the provisions relating to interest rates, and it did not seem necessary to me to make reference to them when moving the Second Reading of the Bill.

I am sure that all hon. Members will join with me in expressing thanks to the Public Works Loans Commissioners for the services which they have continued to render with such skill and, of course, on an entirely voluntary basis.

12 noon.

Photo of Mrs Margaret Thatcher Mrs Margaret Thatcher , Finchley

As the hon. and learned Gentleman has said, this is the second time in a comparatively short period that we have been discussing the lending of about £900 million, or making it available, to local authorities. It is a great pity that we have these debates either on a Monday or on a Friday morning, because these are vast sums of money and those mornings are perhaps not times when most hon. Members are present.

We should look at the Bill from three points of view—those of the Treasury and the local authority, which it is our duty to do, and the point already mentioned by my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro). But trying to look at it from the point of view of this last aspect—the future—is rather like looking into a crystal ball. I will deal, first, with the Treasury point of view.

The hon. and learned Gentleman gave a few details of the history which has led to the Bill. Since 1955, access to the Board has been restricted, and I think that, since that time, treasurers have learnt a great deal more than ever before about the methods of raising finance. But they have raised a great deal by short-term borrowing because, although they had raised a lot from institutional sources and private lenders, this was not sufficient for the increasing burdens which local authorities have to meet.

The hon. and learned Gentleman knows the history which led to the 1963 White Paper, which was a great turning point in financing for local authorities. By that time, a great deal of borrowing had been done in the short-term. I do not think that we can blame the local authorities. It was their job to borrow in the most advantageous way for their ratepayers. The 1963 White Paper set out to give greater access to the Board, in parallel—and this is the important point —with an agreement to reduce the amount of short-term debt.

There clearly was a quid pro quo that local authorities should have increasing access to the Board-20 per cent. in the first year, 30 per cent. in the second, 40 per cent. in the third and 50 per cent. in the fourth—for long-term borrowings in parallel with a reduction in the short-term debt. This parallel commitment is important for us to realise when, later, we look at it from the point of view of the local authorities. There were certain de minimis provisions covering a large number of small local authorities.

I agree with the hon. and learned Gentleman that the White Paper was quite clear that it expected by the end of the fourth year of the programme that the burden to the Exchequer would be about £500 million. In fact, that figure was reached by the end of the second year and I accept that the Treasury, therefore, had to look again at the arrangements in the White Paper. Indeed, the White Paper had forecast that something of that nature might happen.

It is interesting to look back on the figures to see how rapidly the calls rose on the Board. During the first year—the 20 per cent. year—the net issues were E209 million in the next, the 30 per cent. year, the net issues were £525 million. That stresses the point I have made—that, by the end of the second year, the quota which had been expected to be reached by the end of the fourth year had already been reached.

The Chancellor of the Exchequer therefore announced certain changes in the plans which had been foreshadowed in the White Paper and we did not oppose them because we realised that they were brought about by a situation which had been envisaged at the time the White Paper was published. In paragraph 18 of the White Paper—although it appears to be in rather small print—it was pointed out that If, for example, authorities were to reduce the length of their long-term borrowing it would bring forward their demands on the Board and it might become necessary to implement the arrangements more gradually. That, apparently, is what we did last year. The increase in the quota was not forthcoming except for development areas and the Chancellor made certain changes in the long-term borrowing definition. Until that time, one-year borrowing had ranked for quota. Obviously, the local authorities, doing their best, increased comparatively short-term borrowings— the amount of borrowing from one to two years—in order to be able to increase the quota they were getting from the Board.

This was a change which the Chancellor made last year, and so one-year borrowings last year no longer rank for quota. There was a great deal of activity on the margin of local authorities which borrowed slightly longer and still had considerable quota from the Board. The Chancellor's estimate last year of borrowings has been greatly exceeded again. He estimated that he would need about £318 million from the Board. Net issues were made of £515 million which, of course, put his estimate way out. It is only natural that he should look for some further change this year to try to get a more accurate estimate of the money which the Treasury should put aside for the local authorities.

As I have said, last year £515 million of net issues was made. This year, the Chancellor is to reduce the amount to £480 million if his estimate is not falsified. So he is cutting by about £35 million this year the amount he expects to make available net through the Board. That is a very considerable reduction from the point of view of the local authorities. I expect that, from the Treasury point of view, he could not have ever increasing amounts and he has changed the whole basis upon which the money is made available.

I do not think that the hon. and learned Gentleman stressed that quite enough. The basis of a proportion of long-term borrowings, plus fundings, has gone. Therefore, the whole basis of the White Paper has gone, because the basis was increasing the quota of long-term borrowing in return for a reduction in parallel of short-term borrowing. Once the Chancellor changes the whole basis of the quota on long-term borrowing to something else, it seems to me that the basis of the White Paper has gone.

Still looking at it from the Treasury's point of view, I suggest that the Chancellor has changed the yardstick to a proportion of net capital expenditure. From that point of view, that would not seem unreasonable, because it would seem that one hase a more accurate figure there on which one can calculate the Treasury's early estimate. It would seem much more logical and reasonable, because loan sanctions depend on permission from the Ministry of Housing and Local Government. According to the annual Report of the Ministry, £1,195 million of loans were sanctioned by the Ministry of Housing and Local Government and by the Secretary of State for Wales in 1966. I shall return to this aspect when I look at the subject from the local authorities' point of view.

It is reasonable to expect that the Chancellor will get better estimates in taking the proportion of capital expenditure in the ensuing year than he would from the other method of calculation. I hope that the House appreciates that this really is a fundamental change. But surely the 34 per cent. the hon. and learned Gentleman mentioned, plus the supplementary quota, is really nothing akin to the previous 30 per cent. which we had under the White Paper arrangements. It is 34 per cent. of a different figure, calculated quite differently. It must come out of rather less than the previous arrangements, because less has been made available.

So far, I have dealt with this from the Treasury viewpoint, which is that all of its estimates were insufficient for the amount of borrowing that came about, and, therefore, it has now changed the basis. May I now look at it from the local authority's viewpoint, because we also have a duty to do this. We lay duties upon the local authorities and it is because of them that they have had vastly increased capital expenditure.

If one looks at the 91st annual Report of the Public Works Loan Board, which was published this year, one sees that the total debt of local authorities outstanding nine years ago, 1956–57, was £5,252 million. This year it is almost double, about £10,500 million. This is because we have laid upon local authorities certain duties, and we must also see that they have the loan resources available to meet those duties.

Let us look at it from the local authority's point of view. Historically, they borrow short because of necessity, because it is wiser to borrow short rather than long when interest rates are higher, because one hopes that one day they will come down. Their capital expenditure was rising fast. They had before them a plan in the White Paper of 20 per cent. one year, 30 per cent. the next, 40 per cent. the year after that, and so on. They got their 30 per cent. increase in quota on time.

As I have said, this led to an enormous rise in borrowing but their commitments were far greater. So, the treasurers adapted themselves by doing more one to three year borrowing. Last year, when the ordinary one-year bonds were forbidden to rank for quota, there came into operation rather more borrowings of just over one year in length. We anticipated this in the debate we had on this last year. I referred to it at column 791 of the OFFICIAL REPORT for 13th May, 1966.

Local authorities were entitled to expect that borrowings which were of slightly less than one year would still rank this year for quota, and that the whole basis of quota would not be changed. What the Financial Secretary is doing is stopping all renewals of loans from ranking for quota at all. There will be many local authorities who have loans maturing this year and who are expecting that they will rank for quota. They are loans which have never before ranked for quota, and they will not now be able to draw on the Public Works Loan Board in respect of them. From this point of view it is a very considerable change.

They have also been asked, to rephase their loans by the statement of 27th July last year. Undoubtedly this will have caused local authorities a great deal of concern and worry. They are entitled to feel a little aggrieved and bewildered at the suddenness of the change. I know that they were consulted, but it seems that the consultations were short, and perhaps rather cursory.

When we were looking at this from the Treasury point of view, I mentioned that I thought it was reasonable that a proportion of capital expenditure was probably more calculable than a proportion of long term borrowing. I still think that there will be a certain amount of guess-work in this, because quite a number of local authorities have hitherto dealt with capital expenditure by way of revenue income in their revenue account.

Has the Financial Secretary seen a paper from the annual conference at Brighton of the Institute of Municipal Treasurers and Accountants held on 15th June this year? Page 24 of the report of the conference, dealing with the capital sector, says: Where capital expenditure is concerned, none know in advance whether or not current actions are going to be best in the long run. The hardy argument of "pay as you go versus long term borrowing" is now often relatively academic because rates of grant or functions or areas may be altered in the future. Those who have, for instance, met all school meals capital expenditure from revenue profited by the change in the school meals grant this year, because they have already been 100 per cent. reimbursed; whilst those who borrowed are left with the balance outstanding which they must now meet. It seems that this is yet one more complication for local authorities—they will extract from capital account expenditure which formerly they met out of revenue. One has only to look at the form which has gone out from the Public Works Loan Board, a copy of which went out with every Circular 11 to see that the local authorities will be concerned to get as much expenditure under the heading of capital as they can. The form says that capital payments will include …payments actually made in the year by the local authority for: (i) acquisition of land and existing buildings; (ii) building and civil engineering, i.e. works of construction, conversion, renewal or replacement;…(v) salaries…to the extent that they are properly chargeable to capital; (vi) improvement grants and clean air grants; (vii) loans made by the authority,…; (viii) other items properly chargeable to capital, e.g. stamp duty, development charges, loan procuration costs;". There will be quite a good deal of latitude there to get into capital payments things which the local authorities have been dealing with by way of revenue payments. It is quite true to say in the Government's defence that the increasing costs placed on local authorities will be offset to some extent by a subsidised interest rate for housing capital expenditure, whereby a grant will be made to a local authority to bring down its interest rates, in so far as capital is related to housing, to 4 per cent. On the other hand, there is the fact that the loan rates through the Public Works Loan Board have been increased.

From the beginning of June they were put up from the old rate of 5⅐ per cent. to 6 per cent., to the new rate of 6¼ per cent. to 6¾ per cent. I should imagine that this is to reduce the amount of subsidy on the interest rates on Public Works Loan Board loans which, from a Parliamentary Answer given last year by the Financial Secretary to my hon. Friend the Member for Horsham (Mr. Hordern), amounted to £5 million in a year.

The local authorities have had to face a complete change in the basis of the grants, a quite fundamental change. They will now have to extract from revenue account items of capital expenditure which will now rank for grant when previously they did not. They will not get maturing loans this year ranking for grant, but they will get more interest in respect of housing capital expenditure. There will be higher interest charges in respect of ordinary capital expenditure, because the rate has been put up.

We also learn from the Report of the Prices and Incomes Board on bank charges—some of us for the first time—that local authorities have to pay ½ per cent. more than nationalised industries for money from banks. Once again, from their point of view, they have a good deal of doubt and expense to face during the coming year. When we were debating this question last year, I asked the Financial Secretary a question, which I know it was not entirely for him to answer, but I had hoped that we would have something during the year.

I said then: 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."—[OFFICIAL REPORT, 13th May, 1956; Vol. 6728, c. 791.] Last year's was an interim policy. This year, there has been a change, but I suspect that it is an interim change, pending a review. It means that local authorities have to go on without any certainty as to the future. It would seem that the basis of the 1963 White Paper to which they were clinging has gone.

I turn to the future. The Chancellor of the Exchequer's Budget speech mentioned that a review would be put in hand. This was linked with the right hon. Gentleman's comments about reducing the apparent size of the Budget deficit, because the apparent size, according to his thesis, was swelled by the amount of borrowing by local authorities and nationalised industries. Today we are dealing only with local authorities. As my hon. Friend the Member for St. Ives (Mr. Nott) said in the Budget debate, local authority expenditure is Government expenditure and, therefore, is a rightful charge on the Budget. Nationalised industries may be another matter.

Photo of Mrs Margaret Thatcher Mrs Margaret Thatcher , Finchley

I said "may be". I was not committing myself on that point because it is not within our terms of reference today.

But what I suspect the Chancellor was doing was not putting a review in hand with the amount of expenditure in mind, but attempting to take it out of the Budget and, therefore, make it seem to some of our foreign creditors that there was less Government expenditure than, in fact, was the case.

I thought that the point was put extremely well by the Sunday Times, in an article on 16th April, in which it was said: What the foreign creditors are interested in is not how much or where the money is raised but how much and where it is spent. It is on the mechanics of expenditure control that more light needs to be thrown. That is the crucial point, not whether this should be a charge on the Budget.

Photo of Sir Gerald Nabarro Sir Gerald Nabarro , Worcestershire South

Would not my hon. Friend agree that it is impossible to have expenditure control without detailed consideration of interest rates? As the Treasury put out a Press statement on 30th May delineating all the interest rates from the Public Works Loan Board—quota and non-quota, short and long—is it not rather insolent to the House of Commons that the Treasury spokesman should omit to make any reference to interest rates?

Photo of Mrs Margaret Thatcher Mrs Margaret Thatcher , Finchley

I agree that interest rates are crucial in this matter. I feel sure that the Financial Secretary, in replying to the debate, will answer my hon. Friend very fully after he has made, as I am sure he will wish to do, his own contribution.

We are all interested in what the Financial Secretary will have to say, particularly in view of the Report of the Prices and Incomes Board, which, I thought, went a little beyond its terms of reference, but undoubtedly made some interesting comments about local authority financing.

In the meantime, various arrangements are being mooted by some local authorities and by people who give great thought to these matters. There is discussion of other central borrowing organisations in the Local Government Finance issue of February, 1967. There were comments in the Bank of England Quarterly Bulletin in December, 1966, which ran as follows: The present arrangements for dividing local authority borrowing between the Exchequer and the capital and money markets has suited conditions in the recent past, but as conditions change so it may be preferable to alter the balance. All, I think, including the Financial Secretary, are aware of the problem, but it is taking rather a long time to solve it.

Meanwhile, we have to rely on the ingenuity and ability of local treasurers. I think that perhaps the change has undermined their confidence a little. I quote from the Local Government Chronicle of April, 1967: To relate P.W.L.B. quota loans to annual capital expenditure rather than to borrowings would be logical. But it is indefensible that local authorities should still be in the dark as to how they stand. And any suggestion that a Treasury change of front is justified by the fact that councils repeatedly borrowing for short periods have not played the game would call for two comments: first, that on a lender's market and in an inflationary situation they have had no alternative, and, second, that it is a curious sort of game in which the rules are changed during the course of play. That indicates how local authorities feel.

From the Treasury viewpoint, one recognises that certain changes were called for because of the rapidly increasing commitment. Those changes have left local authorities aggrieved and bewildered, and I hope that, since last year's interim policy has become a holding policy this year, a definite policy will have been outlined by next year which local authorities know they can rely on for a number of years to come.

12.25 p.m.

Photo of Mr John Nott Mr John Nott , St Ives

My hon. Friend the Member for Finchley (Mrs. Thatcher) is absolutely correct in saying that the Bill reorganises fundamentally the basis on which local authorities may approach the Public Works Loan Board. The change to 34 and 44 per cent. of net capital expenditure is very different from the previous arrangement of 30 per cent. and 40 per cent. at long term borrowing. Nevertheless, I feel that, on the whole, the new criterion of assessment is probably an improvement on the old one.

The old system, set out in the 1963 White Paper, which, in effect, sanctified a permanent amount of temporary borrowing—I think that one can describe it in that way—was never a very satisfactory criterion for assessing the amount for which local authorities could go to the Board. The new system is probably an improvement, certainly from the Treasury's point of view.

I was surprised that the Financial Secretary did not dwell rather more on interest rates because, although they are not specifically mentioned in the Bill, the Bill concerns the whole question of local authority capital borrowing and capital expenditure, which goes to the root of the matter. I see no reason why local authorities should be subsidised on interest rates. I have never seen any argument for that. It would be very much better if they paid the market rate of interest. I am, therefore, glad to see that the interest rates have been raised for access to the Board.

In pactice, that is unlikely to put any great strain on local authorities, because the Housing Subsidies Bill will offset, to some extent, the rise in the Board's interest rate. There is also the point that at the moment interest rates are falling. It is likely, in any event, that over the coming year there will not be very much difference in the aggregate rate of interest which local authorities have to pay as a result of these two factors. Nevertheless, there is an element of uncertainty about it, and I fully support what my hon. Friend the Member for Finchley said. One has only to read what is said about local government finance in local authority journals to know that treasurers are very concerned about the element of uncertainty.

There is one aspect of these new arrangements which seems to me wholly regrettable. In the White Paper Cmnd. 3243, entitled "Loans from the Consolidated Fund 1967–68", mention is made of additional help which local authorities are being given whose temporary debt is in excess of 20 per cent. of their total outstanding debt. These local authorities are being given additional help to borrow from the Board in order to fund the element in excess of the 20 per cent. temporary amount.

This seems to me wholly wrong, because it penalises "the good boys"—those local authorities which have acted within the rules and have kept their temporary borrowing down to the limit which they were asked to follow. They are now, in practice, being made to borrow at the new interest rates, whereas local authorities which have not played the game and have not abided by the rules will be given special assistance. This goes back to the 1963 White Paper and the limit of 20 per cent. on temporary borrowing then set, because the effect of that has been that all those local authorities which were—

It being half-past Twelve o'clock, the debate stood adjourned.

Debate to be resumed Tomorrow.