Local Government Bill

Public Bill Committee, 21 January 2003.

Standing Committee A

Local Government Bill

Nick Raynsford (Labour, Greenwich and Woolwich)

I beg to move,

That—

(1) during proceedings on the Local Government Bill, the Standing Committee do meet when the House is sitting on Tuesdays and Thursdays at 8.55 am and 2.30 pm, except that the Committee shall not meet on Thursday 23rd January 2003;

(2) 14 sittings in all shall be allotted to the consideration of the Bill by the Committee;

(3) the Committee shall report the Bill to the House not later than Thursday 13th February 2003;

(4) the proceedings to be taken at a sitting shall be as shown in the second column of the Table below and shall be taken in the order so shown;

(5) the proceedings which under paragraph (4) are to be taken at any sitting shall (so far as not previously concluded) be brought to a conclusion at the time specified in the third column of the Table;

(6) paragraph (4) does not prevent proceedings being taken (in the order shown in the second column of the Table) at any earlier sitting than that provided for under paragraph (4) if all previous proceedings have already been concluded.

TABLE

Sitting

Proceedings

Time for conclusion of proceedings

1st to 6th

Clauses 1 to 19, Schedule 1, Clauses 20 to 42, Schedule 2 and Clauses 43 to 73

5 pm at 6th sitting

7th to 11th

Clauses 74 to 100, Schedule 3, Clauses 101 to 105, Schedule 4, Clause 106, Schedule 5 and Clauses 107 to 116

11.25 am at 11th sitting

12th and 13th

Any new Clauses standing in the name of a Minister of the Crown and relating to functions of the Audit Commission in relation to registered social landlords; any new Clauses relating to the repeal of section 2A of the Local Government Act 1986

11.25 am at 13th sitting

14th

Remaining new Clauses standing in the name of a Minister of the Crown, remaining new Clauses, new Schedules, Clauses 117 to 121, Schedules 6 and 7, Clauses 122 and 123 and remaining proceedings on the Bill

5 pm

It is a pleasure for the Committee to meet under your chairmanship, Mr. Griffiths. I have not yet served on a Committee of which you were Chairman, and look forward to the experience of the next few weeks with a great deal of enthusiasm and anticipation. You will be pleased to know that the Bill has a Welsh dimension. That is why the Under-Secretary of State for Wales is with me, as well as the Under-Secretary of State, Office of the Deputy Prime Minister, my hon. Friend the Member for Shipley (Mr. Leslie). We will

be touching on matters of interest to Wales throughout our discussions on the Bill.

This is a Bill of considerable importance. It incorporates key elements of the Government's proposals for implementing the White Paper that we published just over a year ago. It gives new freedoms and opportunities to local government and is wide-ranging. It includes a large number of measures that will be of interest to people concerned with local government and good governance generally. The Bill's spectrum spans some relatively arcane matters, which I suspect we will get on to quickly this morning, and some issues relating to local government finance. The Bill also ranges over a number of exciting and innovative new arrangements such as business improvement districts, which will encourage new partnerships and economic development opportunities.

Inevitably, some aspects of the Bill have aroused controversy, and we will undoubtedly have robust debates at various stages during our consideration of the Bill. However, I suspect that there will be broad agreement on some of the measures that will, I hope, achieve a better framework for local government finance, removing some of the extremely obscure and complex provisions that have bedevilled local government for many years and extending freedoms and opportunities to local authorities.

The Bill has already been scrutinised; it was published before its introduction in the summer, and the then Select Committee on Transport, Local Government and the regions was able to consider it. We have been able to respond to a number of the Select Committee's suggestions, and have made one major change: we removed provisions relating to our previous intention of combining the national non-domestic rate with the proceeds of council tax. That was largely welcomed. I believe that sufficient time is available to us under the programme motion. The 14 sittings will give us plenty of opportunity to consider the full range of issues, which, as I have said, have already been subject to detailed pre-legislative scrutiny.

The Bill will make important changes to local government, and it is important that it reaches the statute book in time to allow implementation of the new prudential system by 1 April 2004, if possible. That is what local government anticipates, so I hope that we will not have too many synthetic expressions of unhappiness from the Opposition about the lack of time. That would, essentially, be a cover for delaying tactics to try to prevent the Bill reaching the statute book—a Bill that is eagerly awaited by local government, which will extend important new freedoms to it.

The number of knives has been limited to ensure that the Committee can devote as much time as possible to the areas that it considers most important, while allowing reasonable flexibility to organise our proceedings in the most efficient way. The motion is sensible and I commend it to the Committee.

Philip Hammond (Conservative, Runnymede and Weybridge)

I, too, wish to express my pleasure at having the

opportunity to serve in Committee under the joint chairmanship of you, Mr. Griffiths, and Mr. Conway, and my pleasure at once again facing the Minister. It is one of the peculiarities of this place that, whereas the previous Committee on which we both served was small but conducted its business in the cavernous expanses of Committee Room 14, the powers that be have decreed that this large Committee of 29 Members should be squeezed into one of the smaller Committee Rooms. I am sure that, 20 years down the line, I will still be trying to work out how such things are decided.

I am delighted that the Minister is in his place with his customary expression of happiness and enjoyment in his work—especially as he has at least two Bills and a fire strike to deal with, which I imagine is quite a management exercise. I hope that there will be a measure of consensus in our consideration of this Bill. However, if the Minister thinks that Opposition Members will accept that the Government's timetable allows adequate time to consider a large and complex Bill, I shall have to disappoint him.

Parts of the Bill are welcome—welcome on this side of the House and welcome in local government. However, as the Minister has acknowledged, other parts of the Bill are extremely controversial, and they are most unwelcome in local government.

The Bill is long—it contains 122 clauses and several long schedules—and we know that it will get longer. New clauses have already been tabled. One of them has Government support although, curiously, it is not in the Government's name. I refer to new clause 1, which will be very controversial and will warrant considerable debate in Committee. The Opposition will also be tabling a new clause that deals with the same area, suggesting ways in which other parts of legislation may be strengthened to ensure that the Government's intention in supporting the repeal of section 2A of the Local Government Act 1986 is achieved in practice. The issues raised will add to the time that will be required for deliberations on this Bill.

A new clause, which has yet to be tabled by the Government, will repeal section 19 of the Fire Services Act 1947. That may not be terribly controversial, but it will no doubt provoke a discussion on some of the wider issues that surround the future organisation of the fire service. Those matters will be dealt with in sittings 12, 13 and 14.

Before I move on, I want to ask the Minister about another possible new clause that I have been considering, which is not in any sense party political. I have considered tabling a new clause that would extend to local authorities outside London the powers that are enjoyed by local authorities in London to control establishments that offer cosmetic body piercing. Many hon. Members will be concerned by this issue and will be aware of the recent tragic death of a young man in Sheffield as a result of septicaemia contracted following a body piercing in an unlicensed establishment.

When the hon. Member for Pontefract and Castleford (Yvette Cooper) was a Health Minister, in reply to a written question she said:

''The Government believe there should be primary legislation introduced to give local authorities outside London powers to regulate the hygiene and cleanliness of cosmetic body piercing businesses, when parliamentary time allows.''—[Official Report, 10 January 2000; Vol. 342, c. 53W.]

The Bill gives us an opportunity to do that. I have had a stab at drafting a new clause but the relevant section of the London Local Authorities Act 1991 runs to nine pages, so the issue is complex.

Would the Minister be predisposed to cross-party work to draft a new clause that could be moved in Committee or on Report to achieve something that the Government have said should be done when the opportunity presents itself? In view of the recent tragedy in Sheffield, I suspect that hon. Members of all parties would feel that the issue is ripe to be addressed. If the Minister can help us with that, it will represent yet another new clause, and I believe that further new clauses relating to registered social landlords are yet to be tabled by the Government.

The net result is that we will have just 11 sittings—27 and a half hours—before we reach clause 116. In the previous Committee on which the Minister and I served, we discussed the use of grammar and the English language, subsequent to which I wrote to the Minister for School Standards to see whether he agrees with the Minister for Local Government and the Regions about certain aspects of grammar and how they should be taught in our schools. Perhaps we can now move on to mathematics. If my mathematics serves me well, we have a fraction over 14 minutes to scrutinise, debate and decide on each of the first 116 clauses. The Minister is wrong if he thinks that those who will be affected by the Bill will consider that to be adequate time for parliamentary scrutiny of such an important and complex Bill.

In fact, the situation is worse than that because, according to the knives that have been inserted, we must reach clause 73 by 5 pm next Thursday, which, by my calculations, gives us just over 12 minutes to consider each of the first 73 clauses. That does not allow for these introductory discussions and any Divisions that might interrupt our deliberations. That is frankly a scandal.

The Government's only defence, which the Minister predictably gave, is that the Bill was published in draft and has been considered by a Select Committee. The Minister is right; the draft Bill was considered by a Select Committee. The Committee said:

''The Government promised to redress the imbalance between central and local government. This Bill fails to achieve that. It makes some small steps in the right direction but at the same time increases the power of the Secretary of State. Central Government seems to be terrified of trusting local authorities and allowing them their independence.''

It continued:

''The draft Bill is far too reliant on regulations. The Government should set out its intent on the face of the Bill, not through secondary legislation.''

The Committee concluded:

''The White Paper on which this Bill is based, raised considerable expectation about a change in the relations between central and local government. On the whole the draft Bill appears to be far from a radical overhaul and in many cases gives more powers to the Secretary of State. The way in which it is drafted could enmesh local

authorities in more regulation. We are furthermore concerned that aspects of the Bill centralise powers unnecessarily. We strongly believe that if local government is going to regain the public respect and authority it once enjoyed, the Government must be prepared to trust it much more''.

In other words, although the fact that a Select Committee has deliberated on the draft Bill is used as a reason why we have less time for scrutiny, the Committee's conclusions create a strong imperative for more time being given to scrutinise what it identified as a weak and inappropriate Bill.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I agree with everything that the hon. Gentleman says, but the situation is even worse that he alleges. On Second Reading, the Chairman of the Transport, Local Government and the Regions Committee told the House that the Committee had had only a week to examine the draft Bill and make its considerations. Therefore, it is outrageous that this Committee has been allowed so little time to scrutinise the Bill.

Philip Hammond (Conservative, Runnymede and Weybridge)

I agree entirely. This is a big, important and complicated Bill. This is an early test of the pre-legislative scrutiny system. If the Government are simply going to use the fact that there has been pre-legislative scrutiny as an excuse to curtail proper scrutiny during the passage of this substantive Bill, that system falls at the first hurdle.

The Labour-dominated Transport, Local Government and the Regions Committee has exposed the Government as spinning the exact opposite of what the Bill actually does. The Select Committee rejected many key issues in the Bill and it falls to us to deal with those weaknesses, notwithstanding the guillotines put in place by the Government.

We will do our best—I know that the hon. Member for Kingston and Surbiton (Mr. Davey) will do the same for the Liberal Democrats—to scrutinise the Bill carefully. Not all clauses will require the full 12 minutes of time allocated, but many clauses will require much longer. Frankly, I doubt that all of the clauses will receive scrutiny or debate in this Committee. Therefore, on a practical level, I appeal to the Minister to do his bit in trying to ensure that we have a reasonable chance of scrutinising the principal clauses by not chewing up the Committee's time reading out what he described in the context of another Bill as ''a load of guff'' from his brief. He should limit his responses to answering the questions of Committee members. If he can do that, hopefully we will be able to scrutinise the maximum possible number of clauses in the Bill.

It is bad enough that the Bill has been guillotined, which allows us a hopelessly inadequate allocation of time. It would be intolerable to listen to ministerial filibuster on clauses early in the Bill at the expense of an opportunity to properly scrutinise those further on. We will play our part in seeking to ensure that debate is constructive and to the point, but we will not dance to the Government's tune by passing over matters that require debate because of the timetable. If, at the end of the Committee's deliberations or the fall of any

knives, some of the clauses have not been debated, the responsibility will be the Government's alone.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

It is a real delight to serve under your chairmanship, Mr. Griffiths, for the first time on a Standing Committee. My hon. Friends and I look forward to your guidance and that of your colleague, Mr. Conway.

In relation to previous Bills in this Session of Parliament, I have reminded the Minister of some of the marathon debates that he and I had to endure in the proceedings of the Greater London Authority Bill, which met for three months in a similar-sized Committee. The proceedings were fraught and went late into the night. We will not have that pleasure in proceedings for this Bill, especially with the motion before us.

I agree with much of what the hon. Member for Runnymede and Weybridge (Mr. Hammond) said, but it was unfair of him to suggest that the Minister ever speaks ''guff''. Unlike some of his colleagues—not, I emphasise, his colleague in Committee today, but some of those who served on the Standing Committee for the Greater London Authority Bill—he is often to the point, clear and helpful to the Committee in its proceedings.

It is a great privilege to serve on the Committee with my hon. Friend the Member for Guildford (Sue Doughty), who is especially concerned about how provisions in clause 11will affect councils in her constituency. It is also pleasing to serve with my hon. Friend the Member for Southport (Dr. Pugh), who will be joining us shortly. He is an experienced council leader as well as a member of the Select Committee that scrutinised the Bill, so he should be able to help us.

It is a particular delight to welcome the hon. Member for Shrewsbury and Atcham (Mr. Marsden), who is a recent addition to the Committee. Plaid Cymru was not willing to take up its place and, since the Government Whips were kind enough to allow us to take it, we eagerly accepted it. My hon. Friend will no doubt be of help when we scrutinise issues regarding Wales.

The Minister will know that my colleagues I and voted for the Bill on Second Reading. We welcome much of the Bill, whether on business improvement districts, the reform of council tax, or the prudential capital regime, as far as those go. Despite the many welcome aspects, the Committee has a serious job to do, because vast improvements could be made, not least to the prudential capital regime that we will debate this morning. The Bill is a step in the right direction, but many more steps are needed before it becomes something under which local government will be truly free of unnecessary and onerous intervention from central Government.

I think that the Minister is keen to hear the debate and that he comes to the Committee with an open mind. I hope that he will listen to some of the arguments with respect to winning new freedoms for local government and that he will try to take the

Treasury influence away from such matters. Some of us have detected that Treasury officials and Ministers had their sticky paws all over the Bill before the Office of the Deputy Prime Minister published it and got it to this point.

As the hon. Member for Runnymede and Weybridge said, there are a number of new clauses that have already been, or may be, tabled by the Minister. The hon. Gentleman may also be threatening us with some new clauses. That backs up the argument of both the Conservatives and Liberal Democrats that we need more time to debate the Bill. Some of us doubt whether the Government believe their own rhetoric when they say that the Bill is historic and will make sweeping changes to local government, but if that is the case, the Committee should surely debate it more closely than the 14 sittings will allow.

If the sittings motion is put to the vote, my colleagues and I will not support it—we did not support it during the Programming Sub-Committee—because we believe that the Bill is worthy of greater scrutiny. Unlike the Conservative Opposition, we came to that position from a belief that there is much of worth in the Bill upon which we want to build. Our position is different from that of the Conservatives.

Should Conservative Front-Bench Members criticise the Government for limiting the freedom of councils some of us will be impatient, because many Government and Liberal Democrat Members remember the kinds of controls and restrictions that successive Conservative Governments put on local government. There would be a degree of, and a smell of, hypocrisy were we to hear from the Conservatives this morning that they want local government to be freer of the shackles of Whitehall than the Labour Government propose.

I suppose that we should welcome sinners who have repented, but the 18 years—[Interruption.] The Conservative Whip accuses me of being a sanctimonious creep. I am not sure whether that remark is in order, but it appears that I have got up the hon. Gentleman's nose during the first sitting, so I mark that down as one-nil to us.

I hope that the Conservatives will not be hypocritical and that, should they call for greater freedom, they will preface their remarks by saying, ''We regret that we failed to do that during our 18 years.''

Nick Raynsford (Labour, Greenwich and Woolwich)

I shall respond briefly. I thank the hon. Members for Runnymede and Weybridge and for Kingston and Surbiton for their kind remarks and I look forward to renewing our acquaintance in Committee. We had a constructive engagement in the Committee that dealt with the Regional Assemblies (Preparations) Bill. We will consider that Bill on Thursday, and I must express my appreciation of the flexibility that has been afforded us, which allows us to concentrate on that Bill on Thursday instead of the present Bill.

The hon. Member for Runnymede and Weybridge rightly referred to the range of measures and the number of new clauses. He specifically asked about a

new clause relating to body piercing. We have sought legal advice on whether that would be within the scope of the Bill; we have not received an immediate answer, but I will let him know about that either verbally or in writing as soon as possible.

However, there are important new measures relating to fire, on which the hon. Gentleman commented, and to other crucial issues, particularly the universally incorrectly referred to section 28, the repeal of which we will come to. It is right that there should be space for consideration of those measures in subsequent sittings of this Committee.

There are 116 or so clauses in the Bill, but many of them are uncontroversial. The first clause, which we will come to shortly, defines the powers to borrow of local authorities, and it is significant that the Opposition have tabled no amendments to it. It is a sensible, practical, well-expressed clause that can be quickly agreed to. Therefore, the mathematical calculation that the hon. Gentleman has made might be inaccurate, because we will not require the 16 or 12 minutes—or however many minutes he has calculated that we have—to consider that clause, unless he speaks at length during the clause stand part debate, which I am sure that he will not.

Philip Hammond (Conservative, Runnymede and Weybridge)

I certainly will not speak at length in the clause stand part debate for clause 1. However, I do have questions to put to the Minister about that clause, and I would caution him not to assume that if amendments have not been tabled, that means that there are no issues to be raised. I do not know how the hon. Member for Kingston and Surbiton has approached this, but I have chosen in respect of some clauses not to table amendments but to raise particular issues during the clause stand part debates, because of the limited time that is available.

Nick Raynsford (Labour, Greenwich and Woolwich)

As we go through the Bill, the hon. Gentleman will see that a number of clauses are broadly acceptable, so that no amendments to them are required—indeed, they would look perverse. Therefore, we will be able to make rapid progress at some stages. However, I accept his point that other clauses will be more controversial, so there will be a need for greater debate. That is as it should be.

All of us have experience of Committees where, after a great fuss at the beginning by the Opposition about a lack of time, as proceedings develop it becomes clear that there is not much of substance to debate, and we end up having lengthy and not entirely productive discussions about the appearance of the word ''but'' at the start of a sentence.

Desmond Swayne (Conservative, New Forest West)

Will the Minister give way?

Nick Raynsford (Labour, Greenwich and Woolwich)

I am delighted to have stimulated the hon. Gentleman.

Desmond Swayne (Conservative, New Forest West)

The Minister will recall that during that lengthy debate, much of the time was taken up by hon. Members from his own party—and not least by himself.

Nick Raynsford (Labour, Greenwich and Woolwich)

The fact that the Opposition had to focus so much energy, attention and time on the issue of the appearance of ''but'' at the start of a sentence

was an indication that the expressions of outrage at the shortage of time that we heard at the beginning of the Committee's proceedings might not have been entirely justified.

The only other comment I wish to make in response to the remarks of the hon. Member for Runnymede and Weybridge is about the reference to a load of guff. My recollection of that—it might be incorrect—is that I had been prompted by hearing his colleague, the right hon. Member for Suffolk, Coastal (Mr. Gummer), referring in the Chamber in an interesting way to his parliamentary and ministerial legacy of the 1990s as a load of guff.

I look forward, in the same spirit as the hon. Member for Kingston and Surbiton, to hearing the current Conservative party describing its legacy from the 1990s as a load of guff. That is our view of it. This Bill is designed to sweep away a lot of that guff, and I hope that we can make rapid progress with it.

Philip Hammond (Conservative, Runnymede and Weybridge)

The guff that my right hon. Friend the Member for Suffolk, Coastal and I have referred to is the kind of stuff that comes out in reams from those neat little ring binders that Ministers tend to have.

I had not noticed that there are four Liberal Democrat Committee members. Given the way in which the Liberal Democrat Members seem to be collaborating with the Government on some of the most controversial issues that will be put before the Committee, that is telling. Now is an historic moment, because I suppose that the previous time when four Liberal Democrat Members were present in one Committee was in 1909.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Will the hon. Gentleman give way?

Philip Hammond (Conservative, Runnymede and Weybridge)

I do not have time to give way at the moment. The Minister has not dealt with the substantive issue that was raised about the Select Committee's comments on the Bill. I urge my hon. Friends to vote against the timetable motion, and I hope that Liberal Democrat Members will join us.

Question put:—

The Committee divided: Ayes 15, Noes 9.

Win Griffiths (Labour, Bridgend)

Before we proceed, I remind the Committee that there is a financial resolution and a ways and means resolution in connection with the Bill,

copies of which are available in the Room. Adequate notice should be given of amendments. As a general rule, I do not intend to call starred amendments, including those that may be reached during an afternoon sitting. I also remind members of the Committee to switch off their mobile telephones.

Clause 1 - Power to borrow

Philip Hammond (Conservative, Runnymede and Weybridge)

As the Minister said, the clause is not highly controversial. Its intention is to restate the power of local authorities to borrow for a purpose that is relevant to any of their functions and to elaborate that they may also borrow for the purposes of prudent management of financial affairs—that is to say, to borrow in the course of normal Treasury operations.

The relevance of my question to the Minister will become clearer when we discuss clause 2 and amendment No. 26. Has it been established that there is no power at present to borrow for normal Treasury operations? By that, I mean short-term borrowing for prudent management of financial affairs. The explanatory notes do not make it clear, but it may have been established by the courts, for example, that no such power exists. I should be grateful if the right hon. Gentleman could explain why the Government have found it necessary to elaborate that specific power under the Bill.

Nick Raynsford (Labour, Greenwich and Woolwich)

The hon. Gentleman was true to his word. He was brief and to the point, and asked a pertinent question. I, in turn, shall not give the Committee a detailed explanation of the clause, but it is important to clarify the significance of the two parts of it. The major innovation under part 1 of the Bill is the introduction of what is now referred to as the prudential system for local authority borrowing. The logical starting point for that is the general power to borrow, which is the subject of the clause.

Local authorities have always been able to borrow. Clause 1(a) preserves their existing broad power to borrow

''for any purpose relevant to''

any of their statutory functions. Subsequent clauses, to which we will turn shortly, make provision for borrowing procedures and the level of borrowing. However, none of them restricts the wide-ranging purposes for which borrowing may be undertaken in accordance with clause 1(a).

Under the current legislation, which was introduced in 1990, there are technical doubts about the lawfulness of borrowing to repay existing debt—which comes to the meat of the concern raised by the hon. Member for Runnymede and Weybridge. Clause 1(b) deals with that concern. The refinancing of debt is a widespread practice and has full Government approval. Indeed, a large part of the money lent by the Public Works Loan Board to local authorities is for that very purpose. It gives local authorities flexibility over the timing of loan repayments and makes it possible to negotiate more favourable interest rates.

Many members of the public do something very similar with the mortgages on their homes. The practice is current and widespread, but current legislation does not confer an explicit power on local authorities to borrow for such a purpose.

Local authority lawyers have widely and, I suspect, wisely concluded that there is an implicit power; we see no reason to dissent from that judgment. However, that situation is not satisfactory, so, in clause 1(b), we make it clear that local authorities will have an explicit power to borrow for the prudent management of their financial affairs. That will enable them to borrow to repay existing debts, provided that they are satisfied that it is prudent to do so.

Clause 1(b) is also needed because certain other borrowing procedures may not be fully covered by clause 1(a). One issue that arises is that individual loans cannot easily be linked to particular statutory purposes of the kind referred to in clause 1(a). Authorities aggregate their borrowing requirements and a single loan may help to fund several capital projects as well as meeting temporary cash flow needs and, perhaps, refinancing old debts. The ability to relate loans to specific statutory purposes may not therefore be easy.

In addition, there is no close link between the timing of borrowing and expenditure. Borrowing for capital projects is sometimes postponed if interest rates seem likely to fall; in the meantime, expenditure is met out of temporary surplus cash. On the other hand, if interest rates seem likely to rise, loans may be taken out some months ahead and invested until spending need arises. Clause 1(b) confirms the lawfulness of such Treasury management practices—subject, in all cases, to the requirement of prudence being met.

I hope that I have answered the hon. Gentleman's question and that he is happy with my recommendation that the clause stand part of the Bill.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

That clarification was useful, as the hon. Member for Runnymede and Weybridge will, I hope, confirm.

I want to raise an issue that will overshadow all aspects of this morning's debate on the prudential capital regime. The Minister will readily admit that freedom to borrow, as laid out in clause 1, is useful only if one has the resources to back it up—to pay the interest on the debt and then, in due course, the capital. A key issue in the Select Committee's report, and in evidence that it heard from bodies such as the Chartered Institute of Public Finance and Accountancy, is that the Government have not yet made clear the regime of revenue support that they will provide for local authorities to back up the new prudential capital regime. It is all very well for us to debate and support clause 1—as we will do—and for us to say that it is great and that it clarifies the legitimacy of local authorities to borrow in those circumstances. However, the Government have not yet told the Local Government Association—or CIPFA, Parliament or anyone—what the new revenue regime will be to back up the freer capital regime. Will the Minister take this opportunity to clarify that? Many

local authority treasurers want to know what the revenue regime will be. When will the Minister tell them? He says that the new prudential regime will be in place by April 2004. To prepare for that, local authorities will need to know about the new revenue regime much earlier.

Nick Raynsford (Labour, Greenwich and Woolwich)

The hon. Gentleman raises a fair point. He will be aware that we have had lengthy and detailed discussions with the LGA and other interested parties about the appropriate basis for Government support for local authority capital investment. No decision has yet been taken, but we will, of course, decide in good time, so that local authorities can plan for the implementation of the new arrangements from April 2004. The principle is that Government support will continue on the same basis on which it has been available for the great majority of local authority capital spending. There is no intention to change that.

The additional freedoms implicit in the Bill will allow local authorities to extend their borrowing to cover unsupported projects, and the authorities will be responsible for the revenue payments. That is what would apply to any person considering their personal budgeting. If they decided to take out a new loan for some purpose for which they had no current income stream, they would obviously have to be satisfied that they had the means to repay that loan. That is a proper element of prudential planning. It is right that local authorities should have that freedom, but it would be wrong to imply that Government should provide additional support for that extra flexibility; that is not the intention. I hope that that clarifies the matter.

There are technical and complex issues involved in any change to the current revenue support framework, and we need to be satisfied that such issues are fully covered before we reach a decision. However, I give the hon. Gentleman an assurance that that will be done in good time to enable local authorities to implement the new arrangement expeditiously.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I have two points of clarification. First, will the Government make their decisions before the Committee has finished its deliberations? Clearly, the revenue regime that will support the capital regime is a rather important part of the equation. [Interruption.] I think that I have just destroyed part of the parliamentary furniture; no doubt the cost will be deducted from my pay.

On the second point, the Minister gives a fair explanation of the technical issues that his Department has to grapple with, and I hear what he says. However, is he saying that there may well be a sort of shadow credit approval system in place beneath the prudential regime? Will the Government be telling local authorities that they will support so much borrowing, but for anything above that sum, the authorities are adrift?

Nick Raynsford (Labour, Greenwich and Woolwich)

I sincerely hope that the hon. Gentleman's parliamentary salary will not be subject to deductions to meet the loan charges on the cost of replacing the furniture that he appears to be vandalising so early in the proceedings. We know that frustration in the later stages of Committee can lead to all sorts of intemperate behaviour, but in my

experience it is unusual for Opposition Members to break up the furniture in the first sitting. Be that as it may, a remedy is at hand: if the hon. Gentleman has to meet the costs, he will be able to borrow, and he will work out whether his parliamentary salary is sufficient to cover that borrowing.

We will consult later in the spring on the framework for Government support of local authority borrowing, so I am afraid that it is unlikely that the consultation will be completed before the end of the Committee's proceedings. However, I repeat that the intention is that the Government will continue to support local authority borrowing on the same basis as they do currently—that is, supported borrowing. We are giving local authorities the freedom to borrow in support of their policies without Government support. That is a perfectly reasonable freedom, but they should not expect the Government to have to produce additional support for that borrowing. I believe that the prudential regime is sensible and meets that objective.

Philip Hammond (Conservative, Runnymede and Weybridge)

I, too, would find it outrageous if the hon. Member for Kingston and Surbiton were to have his salary docked merely for destroying a piece of parliamentary furniture when, as my hon. Friend the Member for New Forest, West says, we are faced with a Government who appear intent on destroying the entire parliamentary structure, and they have not, so far as I know, had any of their salary docked.

The Minister talks about two classes of local authority borrowing: supported borrowing—in which the Government will support the cost in revenue terms—and unsupported borrowing. I do not want us to get too far ahead of ourselves, but if I understand correctly, all borrowing by a local authority is essentially in one pot. Local authorities cannot create mortgages, or dedicate revenue streams to particular forms of borrowing. Is there not a danger that we will have a situation in which local authority borrowing that is unsupported by revenue from central Government is seen as a higher risk class of borrowing carrying a higher coupon? Owing to the inability of local authorities to ring-fence parts of their borrowing, the effect might be a downgrading of overall local authority credit ratings. Has that been extrapolated by the Minister and his officials? Is he satisfied that there is no risk that unsupported local authority borrowing by some authorities will drag down the credit rating of all local authority borrowers?

Nick Raynsford (Labour, Greenwich and Woolwich)

I wholly reject the hon. Gentleman's suggestion that the Government are breaking up the parliamentary structure. He should be careful about using such analogies because many people believe that his party is in the process of breaking up what was once a great party of government. Let us not take the analogies any further.

The hon. Gentleman made a distinction between supported and unsupported borrowing. The key purpose of the reforms is to allow local authorities greater discretion to determine their borrowing. However, they are required to do that in a prudential framework, which is the safeguard against

the hon. Gentleman's fear about possible downgrading of local authority credit ratings. He will know that all local authority debt is treated comparably. There is no question of ring-fencing any debt to specific revenue flows or repayment means. That gives the security that he wants to ensure that local government credit ratings should not be undermined—providing that local authorities act prudently. That is the obverse side of the coin: we are giving greater freedom, but that is in a framework that rightly expects authorities to operate a prudential framework.

Mr. Andrew Turner (Isle of Wight) rose—

Nick Raynsford (Labour, Greenwich and Woolwich)

I give way to the hon. Gentleman.

Win Griffiths (Labour, Bridgend)

Order. This issue can be debated under a subsequent amendment, so unless the Minister wishes to conclude his remarks on clause 1 stand part, I would prefer to put the Question.

Nick Raynsford (Labour, Greenwich and Woolwich)

Under that guidance, I shall say that the framework is coherent and achieves the objectives that the hon. Member for Runnymede and Weybridge set out. I hope that he will agree that the clause should stand part of the Bill.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am grateful to the Minister for his clarification. We will need to return to several issues raised by his past few comments when we consider clause 3, although the Liberal Democrat amendment to clause 2 will provide a vehicle for that.

I do not want to take up more of the Committee's time, but may I draw the Minister's attention to the fact that we have been sensibly debating clause 1 for 18 minutes, although the clause was his example of a clause on which we would not need to spend any time. There has been no time wasting and no unnecessary debate. The debate has been valid and it clarified many issues. That underlines the real difficulty of considering the Bill under the timetable before the Committee.

Question put and agreed to.

Clause 1 ordered to stand part of the Bill.

Clause 2 - Control of borrowing

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I beg to move amendment No. 52, in

clause 2, page 1, line 13, leave out from beginning to end of line 14 and insert—

'(a) any aspect of the Prudential Code for Local Authority Capital Finance produced by the Chartered Institute of Public Finance and Accountancy under section 3; or

(b) any aspect of a regulation made by the Secretary of State under section 4.'.

Win Griffiths (Labour, Bridgend)

With this it will be convenient to discuss amendment No. 54, in

clause 3, page 2, line 8, leave out from beginning to end of line 23 and add—

'(2) The Chartered Institute of Public Finance and Accountancy or another accountancy body nominated by the Secretary of State shall prepare and issue a Prudential Code for Local Authority Capital Finance.

(3) The local authority shall perform its duty under subsection (1) by reference to the Prudential Code for Local Authority Capital Finance.'.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Having debated the borrowing powers and borrowing freedoms that local authorities will have, we will now consider three clauses about controlling those freedoms. Although Liberal Democrats accept that there should be control—prudential control and control as a backstop in the event of a macro-economic crisis—we believe that the Government's control regime in clauses 2 to 4 is too prescriptive and that the Secretary of State keeps far too many reserved powers, which could be used in circumstances far beyond prudential control or control in the event of real macro-economic crises. That is the main thrust of the debates that we are about to have.

Amendment No. 52 would make the prudential control regime the focus of the limitations. In its references to sections 3 and 4, clause (1) establishes the means by which the Secretary of State can interfere at will in local authorities' decisions about borrowing. It also establishes a way in which the Government can decide to limit local authorities' expenditure from Whitehall.

If the Government are committed to a prudential capital regime, first and foremost, they would not seek such powers. We cannot see why the Government need such broad and wide-ranging powers. The powers could be far more narrowly defined, which would give greater clarity and freedom to local authorities.

We accept that the Government are working with CIPFA. I have its draft code, to which our amendment refers. I have flicked through the code and it seems to be sensible and moves in the right direction. It shows how a code produced by a professional body can be flexible and cover all the nuances and subtleties that are inevitable in a complex capital control regime. It is best practice. To lay on top of that the Government's ability to intervene willy-nilly is unnecessary and goes against the thrust of a welcome change in the philosophy of control of local authorities' capital spending.

The case has not been made in the Bill, the Government's reply to the Select Committee or the White Paper, for the extent of powers sought by the Government to limit local authority borrowing. Amendment No. 52 would therefore help to improve the legislation.

Amendment No. 54 is linked to amendment No. 52, although it relates to clause 3. It would include the role of CIPFA in primary legislation, and local authorities would not need to rely on regulations that could be changed willy-nilly at the Minister's discretion. The amendments go well together.

The Committee should remember the controls that already exist with regard to local authority capital spending, especially under sections 32 and 33 of the Local Government Finance Act 1992. Those provisions place a duty on local authorities to calculate their budget requirements for each financial year. Annex B13 to the Government's Green Paper ''Modernising Local Government Finance'' states that the budget requirement includes calculation of

''the revenue costs, which result from the capital investment decisions of the authority. These costs include capital financing

costs (interest and loan repayment provision) and running costs. Section 33 of the Act requires the local authority to set a council tax sufficient to meet its expenditure taking into account other sources of income such as government grants and non domestic rates.''

In other words, sections 32 and 33 of the 1992 Act already give the Government significant powers to control the capital financing regime of local authorities throughout the country. Those are on top of the CIPFA code and, hopefully, more narrowly-defined reserved powers in respect of macro economic reasons.

I do not understand why the Government need to establish such an elaborate system of control when they already have those powers, which are complemented by the prudential capital regime—which we support—in the CIPFA code. The Committee should accept amendments Nos. 52 and 54 because they would implement the Government's intentions far better than the provisions in the Bill as drafted.

There is a danger that the Chancellor's love affair with prudence will be seen in towns throughout the country rather than the town halls' own prudential regime, which is what the Government promised and what they should be relying on.

Philip Hammond (Conservative, Runnymede and Weybridge)

I agree with much of what the hon. Gentleman said, but only a Liberal Democrat Member would regard the Chancellor in his present incarnation as prudent. Given the right hon. Gentleman's current tax and spend mode, most Conservative Members regard him as anything but prudent. The amendments are well intentioned and are driving in the right direction. I sympathise with the hon. Gentleman's view that a CIPFA code is infinitely preferable to specific rules being laid down by the Secretary of State. I am concerned, however, that the two amendments would reduce the discretion of local authorities. They would require local authorities to perform their duty of setting prudential limits by reference to the prudential code, not by having regard to the prudential code, which is the phrase used in the Bill.

Of more concern to me, apart from architecture to which I shall return in a moment, is that the CIPFA code and any subsequent changes to it will be brought into primary legislation without there having been parliamentary scrutiny. I am sure that the hon. Gentleman would not really want that. I am in a slightly strange position of having to say that it would be better to have the CIPFA code drawn into the matter by regulation. The draft regulations that the Government have published specifies the CIPFA code. That is fine. We all support that. However, I share the hon. Gentleman's worry that the Bill allows the Government to specify something other than the CIPFA code at some time in the future or to introduce additional regulations. That would be a cause for concern.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

May I clarify one point? There is no provision either in the clause or in the regulations for any changes to the CIPFA code automatically to be debated by the House. The hon. Gentleman's argument does not hold.

Philip Hammond (Conservative, Runnymede and Weybridge)

I guess that the hon. Gentleman is right, in that the regulations propose that, for the time

being, the CIPFA code would be the matter to which regard had to be taken. I accept his point.

My other worry about the amendments concerns architecture. The hon. Gentleman wants to place on an independent third party a duty under primary legislation. The amendment states that the Chartered Institute of Public Finance and Accountancy

''shall prepare and issue a Prudent Code''.

Will it be paid for taking such action? What will happen if it does not do that? Will it be carted off to Pentonville? What would happen if it were disbanded? There is a difficulty in the architecture of the Bill whereby it could impose a duty on an independent third party.

We must accept that the Government have published draft regulations. Incidentally, I should express the gratitude of the Committee to the Minister for letting us have sight of the draft regulations. I do not wish to sound churlish, but they were not delivered early enough to have a huge influence on the drafting of amendments that would be unstarred for today. We received them only on Thursday evening. However, it is good that we have the draft regulations, as they set out that the Government's intention, at least initially, is to use the CIPFA guidance.

The clause is not perfect because the Government have the option of doing something else in the future, but I do not believe that the hon. Gentleman's solution would work. It would not allow for parliamentary scrutiny. It would not be workable in imposing a duty on a third body. While I sympathise with his intentions, we must all swallow hard, accept the draft regulation and the Government's good intentions on this occasion.

John Pugh (Liberal Democrat, Southport)

I welcome the general thrust of the Minister's endeavours. As a former council leader, I was much persuaded a long time ago that the prudential regime was infinitely better than anything that we had then. Year after year, one had to explain to the electorate that one could not publish ventures because capital permissions given by the Government did not authorise or legitimise that.

I remind the Minister that we had such an appalling regime in the past largely because of the Thatcher Government and the need to restrain the behaviour of Derek Hatton in Liverpool—and the similar behaviour of others elsewhere. That resulted in a series of limitations being imposed on all local authorities that behave in a financially prudent matter. My fear is that the Minister might currently be obsessed with the conduct of Hackney borough, and that in order to stop the Hackneys of this world he might put more limits on perfectly well-behaved local authorities. I caution him not to do that.

As I understand the drift of the legislation, the Minister is explicitly giving local authorities the power to borrow—he is putting that into law—but he is qualifying that by introducing a sequence of reserve powers in exchange for the current series of formal restraints and permissions. Therefore, on one level, the

Minister can represent this as providing more freedom and autonomy. But I wish to ask a question: under the proposed regime, what can a local authority do in defiance of the Government that it could not do under the previous regime? If that question is asked, it becomes far more difficult for the Government to represent what they are doing as a move in the direction of freedom. To draw an analogy, teenagers have general autonomy and freedom and become young adults when they can do what their parents do not want them to do, rather than when they can do what their parents approve of anyway.

The Minister must recognise that our general line of attack on the Bill would be to suggest that he needs genuinely to curb his own powers, so that in a sense he will be reliant upon a third-party judgment as to whether an authority has behaved prudently. That is what this amendment would incorporate into the Bill.

I agree that the Minister has a legitimate defence to that; he could say that he does not want to allow local authorities under any circumstances—

Philip Hammond (Conservative, Runnymede and Weybridge)

Can the hon. Gentleman explain how these two amendments provide for a third-party judgment as to whether an authority has behaved prudently? I do not see that they do that.

John Pugh (Liberal Democrat, Southport)

One has to see the amendments that we have moved in the round, but our general attitude is that prudence should be defined externally, rather than by the Minister's whim of the moment. The CIPFA code has not emerged from nowhere; it was intensely negotiated with the local authorities and a variety of different financial institutions—it is not an off-the-peg code that was devised on an ad hoc basis. Therefore, as we go through the Bill, the Minister should carefully consider not what he will allow local authorities to do that he would approve of, but what he is prepared to allow local authorities to do that is prudent but which he might not approve of.

Nick Raynsford (Labour, Greenwich and Woolwich)

As has been established, the overall aim of part 1 of the Bill is to give local authorities greater freedom to borrow, but that freedom must be balanced by proper safeguards. One of them is that authorities must set themselves an affordable borrowing limit, in accordance with clause 3. In addition, clause 4 empowers the Secretary of State as a last resort—I emphasise that—to set limits to prevent borrowing from becoming unsustainable at the local or national level. Clause 2(1) will ensure that when authorities borrow they may not breach the clause 3 or clause 4 limits.

Amendment No. 52 would make clause 2(1) narrower in an unacceptable way. It would remove the reference in clause 2(1)(a) to the clause 3 limit, and it would replace it with a direct reference to the CIPFA code. The hon. Member for Kingston and Surbiton approved of our intention to make regulations that require authorities to have regard to the CIPFA code when setting the prudential limit under clause 3, but the legislation as it is currently drafted gives us the option of specifying a code of our own. Alternatively, we could rely on regulations rather than a code, or employ some combination of the two approaches. We are embarking on a new and innovative system, and

for the moment we need to keep our options open. Without that flexibility, the safeguards in clause 2 are considerably weakened.

Secondly, the amendment would change clause 2(1)(b) so that it refers only to regulations setting a national limit under clause 4. That would, in effect, remove the power in clause 4(2), for the Secretary of State to impose a limit by direction on an individual authority. However, that power is a vital safeguard for local taxpayers against imprudent borrowing by one or possibly more authorities. It must be preserved.

Philip Hammond (Conservative, Runnymede and Weybridge)

Will the Minister give way?

Nick Raynsford (Labour, Greenwich and Woolwich)

I will give way in a moment, but it is important that I respond to the Liberal Democrats, who seem to be living in never-never land or nirvana where no local authority ever acts imprudently. The hon. Gentleman mentioned Liverpool city council and I do not wholly disagree with his remarks about the imprudent conduct of some members of that council in the past. However, I would also put to him the conduct of certain people in Hackney, where his own party was in charge. Unsustainable spending was allowed, leaving the council in debt. We have had to work extremely hard—together with the new Labour mayor of Hackney, who has done a marvellous job in turning the authority round—to deal with that inheritance. Most people would say that preventing such a situation occurring in the first place would have been better than having to act later to sort out the mess, as we have had to do. Incidentally, dealing with that authority's problems has cost an additional £25 million, which will be the subject of a special grant report in the near future.

I accept that such things do not happen in the overwhelming majority of local authorities. However, it would seem highly imprudent—prudence is the word that we have been using a lot this morning—not to have that long-stop power to intervene to prevent an authority from behaving irresponsibly, incurring debts that it cannot service.

Philip Hammond (Conservative, Runnymede and Weybridge)

I do not necessarily disagree with the thrust of the Minister's argument but he has a difficulty. He mentions clause 4(2) and the need to have a power to impose a limit on an individual irresponsible authority. However, under pressure from the Select Committee, he has inserted into clause 4(1) the words ''for national economic reasons''. Whatever reasons the Minister may adduce for needing to deal with an individual local authority, they will never be national economic reasons.

Nick Raynsford (Labour, Greenwich and Woolwich)

I agree with the hon. Gentleman. I may not have made it clear that we have two specific purposes for the reserve powers. One of those purposes is to deal with a situation of national economic need—where it is essential, in the national interest, to restrain overall borrowing levels. I do not expect that to occur in the foreseeable future, while the country's finances are being managed as well as they are by the Chancellor. If the hon. Gentleman believes that the Chancellor is not prudent, does he support the views of his party's shadow Chancellor, who appears to be

suggesting a 20 per cent. cut in public expenditure? If the hon. Gentleman accepts the current levels of public expenditure, he may wish to talk to other members of his party to ensure that its intentions are clearer.

As I said, we have two separate purposes. One is a national safeguard, to be used only in circumstances where the national interest requires it. The hon. Gentleman spoke rather churlishly about our being pressurised by the Select Committee to agree to a change to the Bill. We willingly made that change to clarify the intent. I would have thought that the hon. Gentleman would welcome that entirely sensible and flexible response.

The other purpose is to deal with individual authorities where there is no question of national economic stability being affected but where the behaviour of those authorities may result in a situation such as the one in the London borough of Hackney. It is right and prudent that the Government, in introducing these new arrangements, should have a safety net or a long-stop provision that will—as I have said to the Committee and the Select Committee—be used only in extreme cases. It is quite wrong for the Liberal Democrats to imply that the Government intend to use the power extensively. We have no such intention. The safeguard should be used only in the circumstances that I have described. It would be highly imprudent to have no such power at all. The hon. Member for Kingston and Surbiton asked why the Government could not simply depend on the existing powers in the 1992 Act. Those powers relate only to revenue budgets, not to borrowing, and while they may be useful, they could not be used to prevent an authority from incurring additional debt that it could not service. The provisions give us that ability.

John Pugh (Liberal Democrat, Southport)

As I understand it, the chief finance officer of most local authorities has the right to report to the entire council if the budget is running awry. Does that not provide sufficient control? If that control does not do the job, why was it introduced in the first place?

Nick Raynsford (Labour, Greenwich and Woolwich)

The hon. Gentleman's own language reveals that while the chief finance officer may have a duty to report, that is not the same thing as the authority acting on that report and curbing its borrowing. The hon. Gentleman might do some research into the conduct of Hackney council. I do not make a party political point, because Hackney council was governed by the Liberal Democrats, by Labour and, briefly, by the Conservatives. Indeed, in respect of a number of authorities that have been in difficulties recently—I am thinking of Walsall metropolitan borough council—there has been a pattern of all parties having had a period in charge; that I willingly accept. However, if the hon. Gentleman does a little research into the background during that period of time he will know that decisions were being taken on the basis of inadequate financial appraisals and without a proper understanding of the consequences for the local authority.

I think that most people in the London borough of Hackney would have welcomed Government intervention at an earlier stage to stop that authority getting into the difficulties from which it is now, I am

very pleased to say, recovering in a positive way. I pay tribute to the chief executive, the staff, the mayor and the councillors of the London borough of Hackney for their determination to turn their authority around. It would, however, have been better if it had not got into that mess in the first place.

The hon. Member for Southport asked me what a local authority could do in defiance of Government that it could not do under the previous regime. The answer is that it could certainly borrow up to the prudential limit. Local authorities are currently unable to do that; they are constrained by the level set by the Government on the approval for borrowing. An authority will be able to borrow up to the new prudential limit, irrespective of the wishes of the Government. That will not be a matter for the Government to consider, except in the extreme circumstances of national economic need. That is a significant difference.

Philip Hammond (Conservative, Runnymede and Weybridge)

Inevitably, we are dancing backwards and forwards around this part of the Bill. The Minister has referred to the provisions of clause 4(2), which refers to the power to set limits in relation to particular authorities. Will the Minister confirm that he is only talking about a situation in which the authority has not had proper regard to the CIPFA code in setting its own prudential borrowing limit? Will he therefore accept our amendment No. 29 when we reach the relevant clause?

Nick Raynsford (Labour, Greenwich and Woolwich)

No, I shall not, because there could be other circumstances. I shall cross that bridge when we come to it.

We should look briefly at amendment No. 54, to which I have not given the same attention and on which I find myself in agreement with the hon. Member for Runnymede and Weybridge. Amendment No. 54 would remove the Secretary of State's power to specify in regulations how authorities are to set their affordable borrowing limits. That amendment would impose a duty on CIPFA, or another body chosen by the Secretary of State, to prepare a prudential code to be followed by authorities. I am sure that the Committee appreciates that CIPFA and other accounting institutes are independent of the Government. It would be unacceptable, as the hon. Member for Runnymede and Weybridge rightly mentioned, to try to compel those bodies to produce codes without making any provision for payment. We could not countenance a proposal to give statutory effect to a code produced in such a way by an independent body. I hope that the hon. Member for Kingston and Surbiton will accept that while the amendment is well intentioned it is not the right way forward. The clause already provides for the effect that he intends and it gives a desirable degree of flexibility at a stage in which we are, as I have stressed, entering into new territory.

The emphasis that I placed on the need for the reserve powers does not mean that we expect to use them often. We hope that the national limit will never be needed. Indeed, provided that the Conservative party does not return to Government, it may not be

needed. However, we need to be prudent and guard against possible nightmare scenarios. The imposition of a local limit would be an exceptional matter. We would expect to use it only in cases of the sort that I have described, such as those involving an authority with a record of poor financial management. We would use the measure sparingly, but we have a duty to ensure that we can, in the last resort, protect local taxpayers from imprudent borrowing if the need arises.

Obviously, we would consider the circumstances carefully before acting, and would try to resolve matters by discussion rather than by invoking the formal power, but it would be a high-risk strategy to assume that there could never be circumstances in which such powers were necessary. I hope that the hon. Gentleman will accept that and withdraw the amendment.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The Minister does not quite understand the thrust of the amendments, perhaps because he feels that they are directed at him and his colleagues. The amendments would take the Secretary of State out of the equation. Whitehall interferes far too often in local government, and particularly in local government finance. Contrary to the criticisms made by the hon. Member for Runnymede and Weybridge, we have constructed the amendments so that they provide the flexibility for independent professional outside bodies to set up the code for borrowing. There is flexibility in amendment No. 54, as the Minister implied. Under that amendment, the Secretary of State could choose which accountancy body would draw up the code. CIPFA is the obvious choice, as the Minister readily accepts, but the amendment provides flexibility. If CIPFA decided not to draw up a code, the Secretary of State could choose another accountancy body.

I am reminded of the Government Resources and Accounts Bill Standing Committee, on which I had the privilege to serve. That Committee debated how we should draw up accounting definitions and a new set of resource accounting budgets for the Government. The then Conservative Front-Bench spokesman, the right hon. Member for West Dorset (Mr. Letwin), and I agreed that the Government relied on themselves far too often to set the definitions, and that bodies outside Government, Whitehall and the Treasury should be involved in drawing up the definitions. If the Government keep that power to themselves, they will be judge and jury in their own case.

We are discussing a slightly different issue, because under this Bill, the Government are judge and jury in respect of local authorities, not themselves. Nevertheless, the same argument applies, namely that there is a role for independent bodies. As the Conservatives and I said in Standing Committee on the Government Resources and Accounts Bill, there should be provision for such bodies in the Bill, and we should give them a statutory role. There may need to be some flexibility in case we have to change the body because it has ceased to exist.

As the hon. Member for Runnymede and Weybridge said, the body would be independent and so might fold. We would then need to appoint another body. However, as we discussed at length in

Committee on the Government Resources and Accounts Bill, such bodies exist in the accountancy world. There is, for example, the Accounting Standards Board and the Financial Reporting Council, which the Government set up with the accountancy profession. Those bodies are used to doing the sorts of jobs that we are suggesting that they could do under amendments Nos. 52 and 54. The amendment provides flexibility, and I believe that there is a precedent to the provision that the Conservatives supported.

The Minister says that the Government need the extra powers to control authorities such as Hackney. As I have said, I disagree with him because I believe that the Local Government Finance Act 1992 provides those powers. The Minister said that the 1992 Act deals only with revenue, but all borrowing has a revenue consequence. There is real worry about the Government attitude and the fact that they are divorcing capital from revenue. The reason why the Conservatives focused on revenue powers when they brought forward the 1992 Act was to include the capital consequences in the revenue calculation. There is a close inter-relationship between borrowing and the revenue control mechanism in the 1992 Act. I think that that provides the Government with the powers that they need, which they should not go beyond.

My next point is more philosophical and relates to an underlying difference between the Government and Liberal Democrats: our position on local democracy. Other countries that really devolve power allow the equivalent of local authorities to go bust.

Philip Hammond (Conservative, Runnymede and Weybridge)

Will the Minister—the hon. Gentleman—give way?

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I am grateful for the hon. Gentleman's support. He has been positive to me this morning so I shall give way.

Philip Hammond (Conservative, Runnymede and Weybridge)

The hon. Gentleman is going about wrecking the parliamentary system about as effectively as the Government, which is why I was confused.

Does the hon. Gentleman suggest that the mess into which Hackney has got itself should be dealt with at the expense of Hackney council tax payers? Would he therefore not support any special grant allocations from the Government to bail out Hackney?

Edward Davey (Liberal Democrat, Kingston and Surbiton)

We will look at the grant measures when they come before the House and we will listen to arguments on them. There might be special circumstances of which I am not aware. The council might have got into complicated arrangements with Whitehall, so I shall not prejudge the matter.

Other countries, such as the United States, Canada and many continental European countries, have no bail-out arrangements. Those federal or national Governments will not underwrite the debt of local authorities, whether they are American states or city governments in France. That forces authorities' to concentrate their minds on operating a prudential regime. The lack of a bail out forces the equivalent of council tax payers to think carefully when they go to the ballot box. That is rich local democracy and real

devolution. The reason why this place is not used to that is because we have a political culture of sorting everything out in Parliament and Downing street. While we have that culture and pass laws and financial frameworks that back it up, we will not get the true rebirth and renaissance of local democracy that some of us want.

Philip Hammond (Conservative, Runnymede and Weybridge)

What the hon. Gentleman is saying is interesting, but is it Liberal Democrat policy that local authority borrowing should always be on a stand-alone basis and that it should be clear that central Government will not bail out local authorities that cannot repay their debt? That would lead to significant changes to the local authority debt market and many Liberal Democrat-controlled authorities would find that the cost of their debt would rocket because of their financial practices.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

We would certainly like to move toward that position but it would require major changes to local authority finance and the tax regime. For example, it would require council tax to be replaced with local income tax and the genuine devolution of financial powers. That could not be done overnight. I would be keen to have a long and wide-ranging debate with the hon. Gentleman about that.

Andrew Turner (Conservative, Isle of Wight)

Will the hon. Gentleman give way?

Edward Davey (Liberal Democrat, Kingston and Surbiton)

In a moment.

The hon. Member for Runnymede and Weybridge and I might have that debate throughout our proceedings. My colleagues and I could outline the long-term reform that would produce real devolution of financial powers to local authorities, which would enable the changes to the borrowing regime that I have talked about to be implemented safely and prudently.

I see from your body language that I am in danger of teasing your patience, Mr. Griffiths.

Win Griffiths (Labour, Bridgend)

You are.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I hope that the hon. Member for Isle of Wight will not tease your patience, Mr. Griffiths, when I give way to him.

Andrew Turner (Conservative, Isle of Wight)

I hope that the hon. Gentleman enjoyed his visit to my constituency on Friday. May I advise him that Ryde is spelled with a ''y''?

Will the hon. Gentleman explain why it is necessary to change the local tax system in order to introduce the beneficent regime about which he spoke so warmly?

Win Griffiths (Labour, Bridgend)

Order. That is interesting, but I rule that beyond the scope of the amendment. Will the hon. Member for Kingston and Surbiton draw to a conclusion?

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Thank you, Mr. Griffiths. The hon. Gentleman made a good point about spelling, which shows that one should not phone one's office from the train and dictate without checking spellings. I confirm that I enjoyed my trip to Ryde. I learned that Paul McCartney meant the song ''Ticket to Ride'' to be ''Ticket to Ryde'', but that John Lennon misunderstood him in the telephone conversation. I emphasise that I do not claim to be anything like John Lennon.

I turn now to another approach to the boring regime. We could learn much from other countries. In evidence to the Select Committee, which backs up my argument about the Government's approach, an expert, Tony Travers from the London School of Economics and Political Science, said:

''There is no doubt that although the Government has set in the Bill a framework within which it would be possible to operate, its so-called prudential rules system, the same legislation would indeed allow the Government to operate a very different capital control system, one similar to or even more controlled than the present one.''

It is those fears voiced by that excellent academic to the Select Committee that lie behind our amendments.

We are worried that the Government have left the Secretary of State with huge powers that he could use. We know the Minister's approach, and we are in no doubt about his genial manner and his belief that the system will be a light touch. I, for one, would not expect him to misuse the powers. The problem is, however, that the powers will be on the statute books for use by future Ministers. The Committee must worry not about the current holder of the office, for whom we all have much respect, but future Ministers.

I heard much noise of support from Labour Members for my comments when debating the programming motion when I referred to the way in which previous Conservative Governments had misused control powers in respect of local government. Labour Members should be worried about what is before them today. Their Government, who I am sure they trust, are putting into law powers that future Secretaries of State, who may not belong to their party, could misuse. Those powers are more extensive than those that the previous Conservative Government gave to themselves. Indeed, Tony Travers implied that in his remarks.

This has been a useful debate. Some arguments may be reiterated in different forms as we proceed. Given that we shall continue to have such debates, I shall not push the amendment to a Division. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Nick Raynsford (Labour, Greenwich and Woolwich)

I beg to move amendment No. 11, in

clause 2, page 1, line 13, after 'by', insert 'or for'.

Win Griffiths (Labour, Bridgend)

With this it will be convenient to discuss Government amendments Nos. 12 to 24.

Nick Raynsford (Labour, Greenwich and Woolwich)

In the Committee that dealt with the Regional Assemblies (Preparations) Bill, I said that it was a source of satisfaction to me that I had not moved a Government amendment. My record this morning is not so good, as I have had to move a Government amendment so early in our proceedings. When I have explained why, I hope that members of the Committee will understand the wisdom of making such a changes to the Bill.

The amendments ensure that clause 3, on the affordable borrowing limit, works in the way that has always been intended. The clause is crucial to the new prudential borrowing system. It requires each

local authority to determine and keep under review how much it can afford to borrow. That decision has significant implications and sets the limit to the amount that the authority can borrow. Because the decision-making process is so vital, clause 3(3) gives the Secretary of State wide-ranging power to make regulations about the way in which it is undertaken.

One way in which to use such regulations is to require authorities to have regard to codes of practice when assessing the affordability of their borrowing. The Committee will already be aware that we intend to specify the CIPFA code for that purpose. The code will therefore lay down sensible ground rules for the affordability decision, but that safeguard can work effectively only if the decision has been taken at the right level in the authority. We have argued from the outset that only the full council should have the right to set and vary the affordable borrowing limit. That is the rule that we intend to require and I hope that that is broadly agreed by the Committee. We have been considering whether such a requirement could be left to the CIPFA code or could be brought in by regulations under the clause 3(3) power. There is some doubt about whether that would be within the regulatory power, but in any event the matter is so important that we believe that there is a strong case for stating the duty in the Bill. That is why we tabled the amendments. The objective is achieved mainly by the first part of amendment No. 21.

There is a separate and specific issue relating to the Greater London Authority, which is a body comprising the Mayor and the Assembly, and which has four separate functional bodies—Transport for London, the Metropolitan Police Authority, the London Fire and Emergency Planning Authority and the London Development Agency—all of which are themselves defined as local authorities. Aficionados of London government—I know that the hon. Member for Kingston and Surbiton is one such, as he served with me on the Committee that considered the Bill that created the GLA—will know that those functional bodies are local authorities. That explains the need—given that the GLA and functional bodies' borrowing limits are to be set by the Mayor—for the regrettably large number of amendments referring to the limits set by or for the local authority. I say that because I understand the suspicions held in some quarters, particularly among Liberal Democrat Members, that the Government might not be beneficent and that the reference to limits set for the local authority might imply some Government control freakery. That is not the case. I hope that the hon. Gentleman will acknowledge that we are recognising that although it is right that the Mayor should set the limit, because it will be set for the local authorities, as defined—the four functional bodies—the Bill therefore needs to say, ''set by or for them''. I apologise for my lengthy explanation of the rather obscure issue, but it is important that the matter should be understood.

Of course, before setting the limit, the Mayor must consult the London Assembly and, in the case of the limit for a functional body, that body itself. Amendment No. 12 and the definitions in amendment No. 22 achieve that effect. The second

part of amendment No. 21 is required to make it clear that the Mayor's normal wide powers of delegation are curtailed in that context. The other amendments are consequential, as I explained. I hope that the Committee will understand the need for the amendments and will agree that they should be incorporated in the Bill.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Minister not only preened himself during the passage of the Regional Assemblies (Preparations) Bill on not having had to table any Government amendments, but accused me of having forgotten about London when talking about England. I can say ''touché'' to him this morning on two counts, because he obviously forgot about London when he was drafting this Bill. I accept that the amendments are largely technical, but I have certain knee-jerk concerns at the thought of the Mayor deciding on borrowing limits. It is the same concern that I would have if Cadbury's suggested that my kids should run their chocolate factory, and I hope that the Minister is satisfied that the Mayor setting the prudential borrowing limits is not a contradiction in terms.

Maybe I am incredibly thick, but without having looked at the Greater London Authority Act 1999, it is not entirely clear to me what the second part of amendment No. 21 is intended to do. Can the Minister clarify that for my benefit? Could he also clarify, in relation to amendment No. 22, the status of the functional bodies when they are borrowing? From what he said, I take it that they will have separate borrowing limits. Does that mean that they are borrowing on their own security, or against the revenue streams and assets of the Greater London Authority as a whole? Whichever is the case, is it entirely satisfactory that the Mayor alone sets the limits without any involvement by the Greater London Authority? Why is the provision for London analogous to that provided in the draft regulations for other authorities rather than the assembly being the body that determines the prudential borrowing limit?

Nick Raynsford (Labour, Greenwich and Woolwich)

The hon. Gentleman did not have the pleasure of sitting with the hon. Member for Kingston and Surbiton, myself and other hon. Members for some three months in consideration of the Greater London Authority Bill. Had he done so, he may have been less chary about the time allocated for this Bill, and he would know that the problem that I described was created because the four functional bodies are defined separately as local authorities. They are separate bodies but they fall within the Greater London Authority family.

Within that structure, a large measure of delegation is available to the Mayor to delegate his authority to those functional bodies. The hon. Gentleman asked about the second part of amendment No. 21. It simply restricts the Mayor's delegation powers in respect of setting the borrowing limit, which we believe should be set by the full council in the case of a normal local authority and by the Mayor in London's case. The Mayor is the executive in London and he must consult with the assembly and the functional bodies before reaching a decision. The hon. Gentleman's concerns

about consultation are covered, but it is important that the Mayor should have overall responsibility. I have no hesitation in affirming that principle and make no comment on the character of the present incumbent of the post. It is right for the Mayor to be responsible for setting the overall limit.

Andrew Turner (Conservative, Isle of Wight)

Will the Minister give way?

Nick Raynsford (Labour, Greenwich and Woolwich)

I give way to the hon. Gentleman and wish him third time lucky in this intervention.

Andrew Turner (Conservative, Isle of Wight)

Will the Minister explain to those of us who were not privileged to sit on the Standing Committee that considered the Greater London Assembly Bill why the Mayor is the appropriate body to determine the borrowing limits in London but not in Hartlepool or North Tyneside?

Nick Raynsford (Labour, Greenwich and Woolwich)

As the hon. Gentleman will be aware, the constitution in respect of London is different from that of other authorities where a referendum has been taken and a mayoral constitution has been established. The mayor will play a key executive role in those places that have elected mayors. The position is different in London because the Mayor has been created to head the family that I described, which is comprised of bodies that are also defined as local authorities.

The amendments deal with London's unique position. They ensure that the Mayor cannot delegate the responsibility for setting the overall limit to the functional bodies—which are defined as local authorities and would otherwise have a power to set their own borrowing limits. The amendments also ensure that there is appropriate consultation with the GLA, which has a relationship not dissimilar to that of councils to mayors in the other areas to which the hon. Gentleman referred. I hope that that explains why the provisions are necessary. They are somewhat arcane and unique to the circumstances of London.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I hope that I can give my version of explanation to the hon. Member for Runnymede and Weybridge and suggest why the Minister may have forgotten about London prior to today's amendments. When we debated the Greater London Authority Bill, there was a huge debate about what form of authority it was. We challenged the Government who were approaching the Bill as though it was a usual local authority. However, the Minister insisted that it was different from a local authority, in that it was a city government. When we debated the Regional Assemblies (Preparations) Bill, the Minister almost suggested that the GLA was similar to a regional government, but withdrew his remarks just in time before they were put on the record. That is why the Minister forgot about London. The structure is odd; it is neither a local authority nor a regional assembly, but some new-fangled creation that probably will not repeated elsewhere in the United Kingdom. That was one of the reasons why we did not like the Government's approach to the GLA.

We do not have a problem with the amendments in principle. We tabled literally hundreds of amendments to the Greater London Authority Bill, but we do not need to table amendments to this Bill. Unlike the Bill, the amendments would give more powers to the GLA.

That is welcome. Under the Greater London Authority Act 1999, the mayor was circumscribed in what he or she would be able to do.

I quibble with the Minister, however, about the role of the Greater London Assembly on setting affordable borrowing limits. As some Conservative Members have implied, the assembly should have a role beyond that of consultation and be part of the decision-making process. That takes the Minister and I back to many debates when we argued endlessly that the assembly should be more involved and that all the power within the GLA should not rest on the Mayor. In case members of the Committee are not familiar with the 1999 Act, the assembly has power only in respect of one vote a year on the budget. It can veto the Mayor's budget if it can achieve a two-thirds majority among its members. It has a limited power within the finances of the GLA. We objected to that at the time and, while I shall not vote against the amendments, they would be improved if the assembly were more involved in such decisions.

The hon. Member for Runnymede and Weybridge was concerned that the Minister was giving more powers to the current incumbent. Perhaps the explanation is that the powers will not be given to the Mayor of London until April 2004. The Minister may be hoping that events directly after that time will solve the Government's problems with the current incumbent. I certainly hope that they will and that a colleague of mine will be elected, but that has yet to be decided. Unlike the hon. Gentleman, I consider that it is right to give the Mayor and the GLA more powers in that regard.

Andrew Turner (Conservative, Isle of Wight)

I am grateful to have the opportunity to press the Minister with some of my thoughts. He may not feel pressed by my thoughts, but much more explanation needs to emerge if I am to accept the amendments and their consequences elsewhere for London. The right hon. Gentleman assumes that the Mayor must set the prudential borrowing limits for each of the four bodies—the GLA and the three functional bodies.

Nick Raynsford (Labour, Greenwich and Woolwich)

There are four functional bodies.

Andrew Turner (Conservative, Isle of Wight)

I am sorry. It is thought that the Mayor is best placed to set the prudential borrowing limits because he is aggregating a debt, which would be imposed on council tax payers and other revenue sources that contribute to the running of the five functional bodies. At the beginning of the debate, I wondered why it is appropriate for the Mayor of London to take such action, not the mayor of North Tyneside, for example. However, I concluded—perhaps the Minister will correct me if I am wrong—that it is because there are five bodies in London, whereas there is only one body in North Tyneside, so the local authority, not the mayor, is given the opportunity to set the prudential borrowing limit for North Tyneside.

The Minister is not intervening, so I assume that I am right so far. Other local authorities in North Tyneside set their own prudential borrowing limit. For

example, there is a fire and civil defence authority, a police authority and, I assume, a passenger transport authority, each of which can set separate prudential borrowing limits for itself. The burden will lie on not only the ratepayers of North Tyneside, but the ratepayers of the whole Tyne and Wear conurbation. That opens up the question whether the Bill is correct in referring to a local authority borrowing more than it can afford. Would it not be better to refer to a local authority borrowing more than the ratepayers can afford?

Win Griffiths (Labour, Bridgend)

Order. I am just about to stretch myself here, but the amendments relate solely to the powers of the Mayor and the bodies in London. While the hon. Gentleman is raising a significant issue concerning the rest of the country, it is not in order to raise such matters now. They could be raised when discussing amendments to other parts of the Bill.

Andrew Turner (Conservative, Isle of Wight)

I accept your ruling, Mr. Griffiths. I am concerned about why the Minister has chosen the Mayor to be the proper authority to set the prudential borrowing limits for the five bodies in London, when he has not chosen to do so elsewhere. You are right about the other parts of my argument. They may creep outside the ambit of the amendments, in which case I am happy to sit down and let the Minister reply.

Nick Raynsford (Labour, Greenwich and Woolwich)

May I first say in response to the hon. Member for Kingston and Surbiton that, while I am delighted to know that he will support the amendments, I must disappoint him by saying that they will not substantially increase the power of the Greater London Authority. They define the responsibility between the Mayor and the four functional bodies, and require the Mayor to set the overall limit. There will be no additional freedom, because the freedom that is being extended by the Bill applies to all local authorities, which will have the ability to set a prudential limit and to operate borrowing on that basis. The GLA will be treated the same as any other authority in that respect.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I may have not fully explained myself. When we debated the 1999 Act, the Government were unwilling to give such a borrowing power to the GLA and the Mayor. That was my point. Now, they are giving them the same power as they are giving to local authorities. It is a new power and one that I welcome.

Nick Raynsford (Labour, Greenwich and Woolwich)

I am happy that the hon. Gentleman and I agree that the amendment is a desirable step forward. We are extending freedom to local government and I am delighted that Liberal Democrat Members welcome that, albeit with reservations.

The hon. Member for Isle of Wight (Mr. Turner) is showing an interesting geographic spread in his concerns from about the most southerly point in the United Kingdom to a debate about one of the more northerly metropolitan conurbations. With respect to your judgment, Mr. Griffiths, I shall not go into detail about the specific arrangements in Tyneside, but I must say that there are two fundamental differences between the Mayor and the assembly constitution in London, and the mayoral constitutions in other parts

of England that were introduced under separate, later legislation.

In London, the Mayor is defined as the executive. That is an important distinction. It is a unique constitutional arrangement and not replicated elsewhere. The Mayor, alone, has executive responsibility. He has to consult the assembly, and the hon. Member for Kingston and Surbiton highlighted the assembly's important role in relation to the budget. If he recognises the important role of the assembly in relation to the budget, the hon. Gentleman must be aware that that control over revenue is critical. He made the point in an earlier debate that, without the means to service a loan there, is no point in borrowing, so the two are inextricably linked, and I hope that he recognises that the assembly's control over the revenue budget is an important discipline that the Mayor will have to have regard to when using his powers to set the borrowing level.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I am grateful to the Minister for clarifying that point. I agree with him, and I hope that current assembly members of all parties will prevent the Mayor from imposing a very high council tax levy on the council tax payers of London.

Nick Raynsford (Labour, Greenwich and Woolwich)

I agree with the hon. Gentleman, and I expressed a similar view on all previous occasions when the Mayor proposed what appeared to be an unreasonably large precept. I hope that the assembly will act prudently this year by ensuring that the council tax payers in London are not saddled with an unreasonable demand from the Greater London Authority.

I return to the distinctions between the London Mayor and mayors elsewhere. One of them is the distinct role that gives the Mayor executive responsibility. In constitutions elsewhere, the council is a pre-existing corporate body to which the mayoral function is added; that is different from the London position, where the Mayor has a unique executive responsibility. The second difference is the one that was rightly highlighted: the Mayor in London is working with a set of existing bodies that are part of the Greater London Authority family. They have accounting lines to the Mayor, who rightly should set their overall expenditure budgets within the Greater London Authority budget, and their borrowing limit. That is why the unique functions apply in London. I crave your indulgence, Mr. Griffiths; I will not stay on this issue any longer than it takes to make the point. Elsewhere, separate police authorities and fire authorities—they can come in a number of different forms, which I do not intend to get into a discussion about, least of all this morning—are not part of the family in the same way that the Greater London Authority functional bodies are part of the GLA family. There are differences, which is why it is appropriate to have these separate provisions for London. I hope that the Committee will agree that that is the case.

Mr. Hammond rose—

Win Griffiths (Labour, Bridgend)

Mr. Hammond.

Philip Hammond (Conservative, Runnymede and Weybridge)

I was hoping to intervene on the Minister, but he is quicker off his feet than I remembered him to be, and I did not get up in time.

Given what the Minister has just said about that family, can he answer my specific question about whether these functional bodies will borrow on their own account—on the security of their own assets and revenue streams—or whether the borrowing is, in effect, secured against the Greater London Authority's total revenue streams in all capacities?

Nick Raynsford (Labour, Greenwich and Woolwich)

The hon. Gentleman raises a technical question about the Greater London Authority, which is complex, and I will not go into the details. The key point is that the Mayor has overall responsibility for the budget, including the financing and repayment of debt of all the functional bodies, even though four of them are defined as separate local authorities within the Greater London Authority family.

Amendment agreed to.

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 26, in

clause 2, page 1, line 14, at end insert

'except where such borrowing is for the purpose of refinancing existing borrowing and the local authority states that repayment of an amount of existing borrowing sufficient to eliminate any such breach is to be made within fourteen days of the date of the borrowing in question.'.

Win Griffiths (Labour, Bridgend)

With this it will be convenient to discuss the following amendments:

No. 53, in

clause 2, page 1, line 15, leave out subsection (2).

No. 5, in

clause 2, page 1, line 16, leave out 'direction' and insert 'order'.

Philip Hammond (Conservative, Runnymede and Weybridge)

Amendment No. 53 was tabled by Liberal Democrat Members, but we can deal with it in this group.

Amendment No. 26 addresses a concern that I touched on in my questions to the Minister on clause 1. We are now putting into the Bill a clear authority for local authorities to borrow for the purpose of managing their treasury operations. The Minister and the explanatory notes specifically referred to the desirability of local authorities being able to borrow in order to retire debt, and the Minister used the analogy of what many home owners have been doing over the past few years as interest rates have settled at a lower level—they have retired more expensive debt by borrowing in the markets at current market rates.

Amendment No. 26 would exclude from the limits on borrowing by local authorities short-term exceeding of limits if the purpose of the operation was to borrow new money in order to retire existing debt. For example, if a local authority had £10 million of outstanding debt on unfavourable terms that it intended to retire by repaying that debt, it would first have to raise £10 million of new debt. It might be possible to do that transaction back to back, but that would limit a local authority's range of options for raising finances. If the authority wished to issue new debt, it might have to raise new debt and pocket the money, as it were, before it could repay the old debt.

Such a consideration is readily in the grasp of anyone who has struggled with the management of ordinary household and personal debts.

It is important that a local authority that is close to the prudential limit should not be prevented from going to the market to raise new debt if the explicit purpose of that is to retire existing debt in a short time, which would mean that the overall borrowing level would fall back below the prudential limit. A mere short-term treasury operation should not take an authority's overall borrowing limits over the prudential limit that the authority had set itself.

The amendment's terminology might not be perfect, but I would be grateful if the Minister would respond to its substance. Will he reassure me that operations will not be inhibited by setting overall prudential limits that might prevent authorities from raising additional debt in order to retire debt? We suggested 14 days as the period allowed between new borrowing and the retirement of existing debt. The Minister might say that that period is far too long, but the principle is the issue.

The Liberal Democrat amendment No. 53 would delete subsection (2) and I have sympathy with the sentiment behind it. It is probably a probing amendment that is intended to encourage the Government to talk about circumstances in which subsection (2) would be used—the Minister has already talked about those circumstances.

Our approach is slightly different. Amendment No. 5 would replace the Secretary of State's ability to specify a local authority's borrowing limit by direction with the power to do that by order. Of course, an order under the Bill would be a statutory instrument that would be subject to parliamentary scrutiny. I understand that if the Government expected to specify many individual local authority limits, the process would be cumbersome and impractical. However, the Minister told us that he expects that to be a reserve power that would be used extremely rarely, and only if something went very badly wrong with a local authority. It is therefore reasonable to expect parliamentary scrutiny of a significant claw-back of the much-trumpeted freedoms that the Government claim to give local authorities in the Bill. Although I sympathise with the sentiment of the hon. Member for Kingston and Surbiton in wanting simply to strike out subsection (2), given the Government's clear intention to have the reserve powers, it is more realistic to ask them to exercise the powers by order, which will not be onerous if the procedure is exceptional and likely to be very seldom used.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

We certainly support amendments Nos. 26 and 5. They do not go nearly as far as we would like them to, but the hon. Gentleman may be right to suggest that they may tempt the Government to accept a minor improvement. I do not want to pooh-pooh the hon. Gentleman's amendments, because they raise important points. Amendment No. 26 could be very important if there were a crisis. It could ensure that limits imposed by Whitehall would

not be required. The Bill already contains some powers in clause 5 that relate to the circumstances that the hon. Gentleman probably has in mind. His ideas may fit more neatly into clause 5.

Philip Hammond (Conservative, Runnymede and Weybridge)

Clause 5 deals with borrowing for cash flow support. In amendment No. 26, I am talking specifically about borrowing for debt refinancing.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I accept that clause 5 is about temporary borrowing. I thought that the hon. Gentleman was worried about situations in which temporary measures might be needed to improve a council's debt position. I do not want to get into a theological debate about it; the hon. Gentleman's point is well made. Indeed, his point backs up what the Government have set out in clause 1(b)—the idea that local authorities should consider borrowing to improve their treasury operations.

The hon. Gentleman also has a valid point in amendment No. 5. If the Government are to use these powers only on very rare occasions, it is sensible that this House should be able to scrutinise their use.

I come now to our amendment No. 53, which seeks to strike out clause 2(2). As the hon. Member for Runnymede and Weybridge said, it is a probing amendment. We have suggested it because the Government are giving the Secretary of State powers to pick and choose between local authorities. This House should be concerned when the Government do that, especially when there are no clear criteria or objective tests for such decisions. The Secretary of State will be able to decide which local authorities he or she wishes to impose borrowing limits on. The charge of political favouritism will often be made.

The Minister may argue that the powers would give the Secretary of State a chance to intervene to help a local authority and to disapply limits that would otherwise be imposed. Perhaps we should welcome that. However, decisions should be subject to objective criteria rather than to the whim of the Secretary of State of the day. I want to probe the Minister on when he expects the powers in clause 2(2) to be used. Why do Ministers feel that they need those powers? When do they envisage using them? Can he give the Committee examples of when this pick-and-choose power would be necessary? If the Minister can reassure us on those questions, we will not press this amendment to a vote.

Robert Syms (Conservative, Poole)

I want to pursue the point about Government interventions on particular local authorities. Conceivably, that could happen because the local authority has been imprudent over a long period and has got into difficulty, but on some occasions outside factors can hit a local authority very hard. A few years ago in Scotland, Western Isles council was hit by imprudent investments. Situations have also arisen in which banks have collapsed or building societies have got into trouble. Does the Minister consider the power purely as a power of limitation, or does he think that, in certain circumstances, the Government may be in a position to expand borrowing? To make that expansion affordable, it may have to be part of a package in

which, for a period, additional revenue is given to an authority.

I can imagine situations in which an authority faces a disaster of some type. In such cases, offering a helping hand to what has generally been a prudent authority over a period of time might be a better approach than purely saying, ''There are limits on borrowing. Sorry, you must deal with your problems yourself.''

Nick Raynsford (Labour, Greenwich and Woolwich)

Amendment No. 26 relates to clause 2(1)(b) and would allow an authority to breach any national limit that was imposed by the Secretary of State if an old loan was being replaced with a new loan. That would allow the authority to take out a new loan 14 days before repaying the existing loan. Authorities often refinance loans for good reasons, as the hon. Member for Runnymede and Weybridge mentioned, and I agree that it is important that that facility should continue to be available.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Minister has interpreted the amendment as I suspected that it might be interpreted on reading the amendment paper last night. The amendment was intended to flow on from the opening phrase of subsection (1)(a), not simply from the end of subsection (1)(b), so that it referred to the limits under clause 3, as well as those under clause 4. As I understand it, the correct way in which to insert such an amendment is to do so at the end of the relevant line, because it would then refer to preceding subsections.

Nick Raynsford (Labour, Greenwich and Woolwich)

I understand what the hon. Gentleman says and I think that the main thrust of the distinction between national, rather than individual, limits will be more relevant to the next two groups of amendments, to which I will come in a moment. The points that I will make would apply even if the wider usage were applicable, as he intended.

We object to the amendments because there is no reason why loans should overlap and because it would be imprudent if they did. The present system does not allow any duplication of debt, but under current arrangements local authorities still manage to refinance without any difficulty. Indeed, new and old loans will, in virtually all cases, have come from the Public Works Loan Board, and it requires only a simple book entry to ensure that one debt is extinguished as soon as the new one is created.

There has already been some reference to clause 5 and I should add that that gives authorities valuable scope for temporary borrowing to solve genuine cash-flow problems. That relates to a different issue, but it shows that the Government are willing to put in place arrangements that enable authorities to manage their affairs without difficulty. We do not believe that the amendment is necessary. Existing arrangements do not give authorities any freedom to double up debt in the way that the amendment would allow, but they are still able to manage satisfactorily. There is no good reason to agree the amendment.

Philip Hammond (Conservative, Runnymede and Weybridge)

Does the Minister agree that the Government have, under pressure from the Select Committee, removed from the draft Bill clause 2(4)—I think—which sought to restrict the classes of person with whom a local authority could enter into borrowing arrangements? The implication of that subsection was that local authority borrowing was to be made freer. Local authorities might, perhaps, want to issue bonds to the wider market and they might wish to use innovative financing mechanisms. It is quite conceivable that in such circumstances there would be a need to raise a new debt in order to retire existing debt and there might not be the ability to back-to-back that debt as had previously been the case.

Nick Raynsford (Labour, Greenwich and Woolwich)

Once again, we have this grudging acceptance of the fact that the Government have responded to proposals from a Select Committee. We have genuinely listened to views and we have amended the Bill accordingly, and rather than getting credit for it, we are once again being attacked for having done that.

I say to the hon. Gentleman that this is all part of the process of freeing up local government. I agree that we should give greater freedom and that we should not be restrictive, but we do not want to encourage imprudent practices. I can see no good reason why a local authority could not arrange for the kind of back-to-back arrangement that we have described, whether it is taking out its loans through the Public Works Loan Board or through other lenders. The amendment would send a bad signal, because it would facilitate the doubling up of debt.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am not a financial expert and I am certainly not an expert in the raising of public sector debt. However, if the local authority wanted to offer a local savers bond, for example, to people living within its area, it is inconceivable that such an operation could be back-to-backed with the retirement of debt from the Public Works Loan Board. The money would have to be raised first, and would have to be in the bank before the existing debt could be retired. Does the Minister not want to allow local authorities to explore such innovative approaches?

Nick Raynsford (Labour, Greenwich and Woolwich)

I, like the hon. Gentleman, am not a great financial expert. To put it charitably, it is the partially sighted leading the partially sighted on this issue. However, I think that the provisions in clause 5 that give local authorities the scope for temporary borrowing in order to solve genuine cash-flow problems would cover the case that he describes.

John Pugh (Liberal Democrat, Southport)

I share some of the Minister's reservations about amendment No. 26 in so far as I recognise that there is a distinction between prudent and imprudent financing. I was going to make that point, but then I read the amendment. It is tightly drawn, and says that the local authority must state

''that repayment of an amount of existing borrowing''

will be eliminated ''within fourteen days''. That would place only a small demand on the system. Were we back in an age when borough treasurers were encouraged to show an entrepreneurial spirit and get their local authority in trouble, I would have anxieties.

However, the amendment is tightly drawn. Is the Minister saying that the sort of manoeuvre mentioned in the amendment is allowed under the Bill, and if not, what is wrong with such a manoeuvre?

Nick Raynsford (Labour, Greenwich and Woolwich)

As we have established, the system does not allow the doubling up of debt in the way that has been described. Local authorities manage their affairs in a way that avoids that, and we want that to continue. If we believed that there was a problem that could not be handled by the provisions in clause 5, to which we have referred, we would certainly want to consider the amendment, because we do not want to make unreasonable difficulties for local government. However, we do not believe that there is a problem—the current arrangements work well without the facility that the amendment would provide. I accept that such a facility would be for 14 days only, but the cost of maintaining two debts that might run into millions, if not hundreds of millions, of pounds over that time could be significant, so it is prudent to try to manage without such a facility.

John Pugh (Liberal Democrat, Southport)

There is a presumption that a local authority would not dream of using the provision unless it would make the authority a net saving. A local authority would be insane to refinance if it knew that that would cost it more.

Nick Raynsford (Labour, Greenwich and Woolwich)

I simply repeat that authorities are already faced with such issues and it is not a cause of difficulty. We have not had representations from people seeking changes. The prudential system will often allow for a cushion so that new debt can be taken out if, for example, the authority has an additional borrowing facility. As I say, clause 5 contains provisions for coping with short-term cash-flow difficulties. If the issue were a real problem, we would consider the amendment, but I do not believe that it is. I hope that the hon. Member for Runnymede and Weybridge will withdraw the amendment.

Amendments Nos. 53 and 5 deal with rather different circumstances. Amendment No. 53 would remove clause 2(2), under which the Secretary of State could allow an authority to breach the national borrowing limit. It is important to define that. To answer the issue raised by the hon. Member for Poole (Mr. Syms), the provision does not apply to authorities that may have acted imprudently. The facility applies only when a national limit is imposed for reasons of national interest, and an authority is placed by that in a difficult position, because the national limit prevents it from doing things that it is contractually committed to or that are in urgent need of doing. It must also make a sound case for the fact that, although it remains within its prudential limit, it needs the extra flexibility. To remove the Secretary of State's ability to make a change in such circumstances is not a welcome reform. I am surprised that the hon. Member for Kingston and Surbiton is suggesting that. The Local Government Association certainly would not share his view. It would want the facility, because it allows a response to individual circumstances when a local authority might be caught by the imposition of a

national limit that was set below its own prudential limit.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I want an explanation of the circumstances in which the measure would apply and practical examples, so that future Ministers' actions can be considered against objective criteria. I am in favour of having the freedoms to get round Government limits, which I do not agree with in the first place, but I am not in favour of arbitrary action by a Secretary of State with no reference to objective criteria. Is the Minister prepared to give the Committee what I have requested?

Nick Raynsford (Labour, Greenwich and Woolwich)

Of course I will, but let me preface my remarks by saying that we do not intend to use the measure commonly. On the contrary, I have said that we expect to use the national limit only in very exceptional circumstances—only if the national interest requires it as an overriding priority.

Individual local authorities could be set a limit by the national limit that was below their own prudential limit. They could have undertaken contractual commitments that would require borrowing within their own prudential limit, but that would breach the national limit. It would clearly be appropriate for that authority to make representations to Government and for Government to be able to say that they would relax the national limit in that case, not because of the imprudence of the individual authority, but because there were very strong grounds for doing so in that individual circumstance.

It is only that flexibility that we allow. I thought that the hon. Gentleman would see the logic of it and welcome it, as local government as a whole does.

Philip Hammond (Conservative, Runnymede and Weybridge)

If the Minister imposes national limits for reasons of macro-economic emergency when the Government have finally driven the economy and the fiscal situation into crisis, it cannot be right to start breaking them. They are highly onerous and should only ever be imposed in the first place if there is a real problem and a global macro-economic limit on local authority borrowing is required. If the Government then start to breach that in the case of individual authorities, with no compensating reduction for other authorities, the original purpose of the action will be undermined.

Nick Raynsford (Labour, Greenwich and Woolwich)

Given the prudent management of the economy, we envisage the power being needed only in very exceptional circumstances. As I said, it might be necessary only if, by some unforeseen misfortune at a future date, a Conservative Government are re-elected. In that situation, if a national limit was imposed because it was nationally prudent, there could be circumstances, such as those that I have outlined, in which an individual authority was placed in an impossible—

Andrew Turner (Conservative, Isle of Wight)

Will the Minister give way?

Nick Raynsford (Labour, Greenwich and Woolwich)

I am trying to respond to the previous intervention. I hope that hon. Members understand that I do give way and respond to them, but I cannot respond to two interventions simultaneously. That capacity has not yet been devised, so I am concentrating on the intervention

from the hon. Member for Runnymede and Weybridge.

There will be individual circumstances in which things might be difficult for an authority. We do not wish to say that there can be no possibility of disapplying the national limit for an individual authority if that would not have a significant impact on the overall national position. Removing that flexibility would be unwise. We believe that local government welcomes the additional flexibility. It does not welcome the power to impose a national limit, but I think that it understands why we are including it. As I have said, the power will be used only in extreme circumstances. Not having the power to make an adjustment for an individual authority would be harsh, unwise and an unduly restrictive position.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The debate is proving helpful in elucidating when the Government think that they might use the power, but let me give a counter-example. Let us imagine that the Government set the national economic limit and it hits quite a large number of local authorities whose prudential limit was above that limit. As the Minister said, they may have contractual arrangements with private sector companies that require them to borrow up to or near their own prudential limit above the national economic limit. If the Government had a range of local authorities approaching it, how would they act? The Minister is asking the Committee to agree to a Bill that would give the Government powers that the Minister could pick and choose. I would not expect an Act of Parliament or the regulations to prescribe every single circumstance, but it is reasonable for the Committee to ask for clearer guidelines and explanations from the Minister as to how he would deal with such circumstances.

Nick Raynsford (Labour, Greenwich and Woolwich)

I must beg your indulgence, Mr. Griffiths, in moving ahead to clause 4. As the hon. Gentleman will see if he examines that clause closely, where a national limit is imposed there is capacity for the headroom available to some authorities to be transferred to other authorities. We would expect that flexibility to cover most eventualities.

However, in situations in which that was not sufficient, and in which there was, for example, a direct threat to service delivery in a particular authority, it is right that the additional flexibility to disapply the national limit in the case of one authority should be available. That shows our willingness to be sensitive and responsive to a range of different circumstances, and I am surprised that the hon. Gentleman does not welcome it as giving additional flexibility to the system.

Amendment No. 5 relates to a similar power.

Andrew Turner (Conservative, Isle of Wight)

I share the concern of the hon. Member for Kingston and Surbiton about the subsection. I am particularly worried by the opportunity for unfettered discretion, because Ministers tend to exercise such discretion in ways that are sometimes difficult to describe objectively. Indeed, they set themselves such

limits precisely because it is difficult to describe objectively how they intend to exercise that discretion.

Does not clause 4(1) give the Minister the opportunity, should it be necessary, to write regulations that describe objectively the circumstances in which he would want to exercise the discretions that he has described? That would therefore make the subsection that we are discussing in clause 2 otiose.

Nick Raynsford (Labour, Greenwich and Woolwich)

No, because, as I am sure the hon. Gentleman understands, in those unlikely circumstances, the Secretary of State, in considering the use of the powers in clause 4(1), would be examining the overall national position. If that national position required the establishment of a national borrowing limit, and that limit flowed through to each individual authority, it is difficult to assume that in all circumstances the Secretary of State would be aware of all the pressures on all 400 local authorities in the country, and that that would not create difficulty for one individual authority.

Although I am flattered by the assumption that we will be so prescient and understanding of the circumstances of every local authority that we can, in framing our regulations under clause 4(1), take account of all those circumstances, in the real world it is possible that some circumstances will come to light subsequently. The power in clause 2(2) is a useful power to enable the Secretary of State to take compensating action.

As I have said all the way through, this is an extreme case. We are most unlikely ever to use the powers, and we are spending a considerable amount of time on something that will only be a long-stop to a long-stop. It is a circumstance that is most unlikely to occur in our lifetime, unless the electorate make a great mistake and re-elect a Conservative Government.

Andrew Turner (Conservative, Isle of Wight)

I do not wish to detain the Committee, but the Minister referred to a national borrowing limit. Clause 4(1) refers to limits set for national reasons, and those limits would be different for each local authority, presumably according to objective criteria.

Philip Hammond (Conservative, Runnymede and Weybridge)

No.

Andrew Turner (Conservative, Isle of Wight)

My hon. Friend says ''No.'' Will the Minister clarify the matter?

Nick Raynsford (Labour, Greenwich and Woolwich)

The hon. Gentleman makes the obvious point that because the national limit has to translate into limits for each individual authority, the plural is used.

As I have suggested, in setting that, it would be difficult for the Secretary of State to anticipate every situation that will occur in each single local authority. Therefore, the added flexibility of clause 2(2) is welcome.

Amendment No. 5 also relates to the power in clause 2(2). We would exercise that power by using a direction—by sending a letter to the authority—which is what we do when we issue a supplementary credit approval under present rules. That would allow us to respond quickly to a case of real need and we could also attach any necessary conditions and tailor those to the precise circumstances of the case. The

amendment would require us to lay an order before Parliament, which is a much less flexible and more time-consuming process that could involve unacceptable delays.

Hon. Members will have received a briefing from the Local Government Association, dated yesterday, that is possibly a response to the amendment. The association hopes that the limits in clause 4 will never have to be used. However, it will support clause 2(2) as being a valuable safety valve should the power be used and an authority finds itself in circumstances in which a breach of its borrowing limit might occur for reasons outside its control. The LGA would be concerned if an order-making power were to delay the Secretary of State's decision to disapply an authority's borrowing limit. I hope that the hon. Member for Runnymede and Weybridge will recognise that we are acting in the best interests of local government with the support of the LGA and will not press the amendment.

Philip Hammond (Conservative, Runnymede and Weybridge)

No, I cannot give the Minister any such assurance. On amendment No. 26, rather tellingly, the Minister said that he had received no representations on the need for such a provision. He clearly does not regard an amendment tabled by the official Opposition in the course of due parliamentary process as such a representation.

Nick Raynsford (Labour, Greenwich and Woolwich)

The hon. Gentleman conceded and I acknowledged that both of us are partially sighted in financial matters. I give greater weight to representations received from financial experts than amendments tabled by well-briefed and well-intended but not necessarily wholly expert hon. Members.

Philip Hammond (Conservative, Runnymede and Weybridge)

I would expect the Minister to recognise that some experts may have a vested interest in preserving the existing system. He said that the present system does not allow for ''doubling up''. It is curious that he uses that phrase, because no commercial organisation would think of going into the market to raise new cheap debt in order to retire a few days later expensive and burdensome debt as ''doubling up'' or of having some such onerous implication. They would regard it as a sensible operation to conduct and carry out.

The Minister said that local authorities manage under the present system and that he wants to see that continue. Does that mean that he wants to see what he originally provided for in his draft Bill—the ability to regulate with whom local authorities could conduct their borrowing business?

Does he want to see local authority borrowing effectively remain the exclusive preserve of the Public Works Loans Board, or does he want to encourage local authorities to use more innovative and diverse forms of finance? If the latter is the case, I suggest that a power akin to that proposed by amendment No. 26 may be necessary.

The Minister says that the Public Works Loans Board makes available a cushion—of unused facilities available at the time, for example. However, the most hard-pressed authorities may be the ones that are over-borrowed—within their prudential limits, but highly borrowed—and need to conduct such Treasury operations. Those authorities are not likely to have the headroom within existing prudential limits.

I readily admit that I am no financial expert, but if we want diversity in local authority debt instruments and the participation of the local community in financing local authority debt, we must reconsider the matter. I do not intend to press the amendment, but I will talk to experts on the subject and communicate with the Minister before Report stage.

Turning briefly to amendment No. 5, the Minister said that orders were less flexible than directions. They are: that is the price of democracy, I am afraid. I suggest that any process under subsection (2) must be transparent. If the financial markets are to be settled by the imposition of overall limits in a macroeconomic crisis, they need to know that the Government are not sliding out letter directions to local authorities right, left and centre.

It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Two o'clock.

Standing Committee A

Clause 2 - Control of borrowing

Derek Conway (Conservative, Old Bexley and Sidcup)

I remind the Committee that with this we are considering the following amendments:

No. 53, in

clause 2, page 1, line 15, leave out subsection (2).

No. 5, in

clause 2, page 1, line 16, leave out 'direction' and insert 'order'.

Philip Hammond (Conservative, Runnymede and Weybridge)

If the Government have imposed an aggregate limit on local authorities' borrowing to send signals to the market that they are addressing whatever macro-economic crises are occurring, it is important that any breaches of borrowing limits are dealt with in a transparent way. There should be an openness about the reasons for the breaches. It would be dangerous for the Government to be put in the position of issuing directions in the form of letters whizzing out from Whitehall, right, left and centre to the favoured corners of the land. There is a good macro-economic spin reason for ensuring that any arrangements are transparent.

Given the lingering suspicion about the way in which the Government distribute their largesse among local authorities, it is also important for the Opposition to see clearly the objective bases on which exceptions are established. I see no real objection to consulting Parliament about the matter. There is no reason why an order in the form of a statutory instrument should lead to inordinate delays. If it takes a Department as long to write a letter giving a direction as it often takes to write a parliamentary written answer, the delegated legislation procedure would probably be quicker.

The Minister's arguments are not persuasive. There is no obvious reason why such a significant and potentially discriminatory use of power should not be exercised by an order that is subject to parliamentary scrutiny, given that it would be a rare occurrence and that arrangements should be transparent if the limits are to have their effect for macro-economic reasons.

In the course of the Minister's remarks, he mentioned a situation in which an authority might have contractual commitments that it was in danger of breaching as a result of the imposition of Government limits. Alarm bells should be ringing in the background about that, because therein might lie a loophole in the mechanism proposed by the Government. If the measure is necessary, it must be robust. I would be worried if the Minister was suggesting that, if a local authority has entered into forward commitments—however irresponsibly—an exception could apply.

Nick Raynsford (Labour, Greenwich and Woolwich)

I hoped that I had made the distinction clear. Any imposition of a national limit, as the hon. Gentleman recognises, would be in the wider economic interests of the country. In such a situation, it is perfectly possible that the new limit, which could be below the individual local authority's own prudential limit, could cut across existing contractual relations. Such relations may have been entered into responsibly and entirely properly because the authority was satisfied that it would have the ability to repay the loan from revenues that it would receive—it may be well within its prudential limit.

In such circumstances, if the authority could make a good, strong case, it would seem churlish and unwise not to be able to make an exception. I hope that the hon. Gentleman will acknowledge that such an exception would be made only in good faith, and not to bail out an authority that had acted irresponsibly.

Philip Hammond (Conservative, Runnymede and Weybridge)

In the Minister's example, he would be able, when setting the initial limit on the authority for national economic reasons, to take into account any of the authority's forward commitments. It is therefore not clear to me why he needs the power to make an exception when everything should have been taken into account in setting the limit in the first place.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Will the hon. Gentleman speculate on whether clause 6 will be overridden by clause 2(2)? Clause 6 provides protection for lenders, who can take their local authority to court. If the Government do not exercise their power under clause 2(2), would the national economic limit imposed by the Government still be overridden by the protection offered to lenders by clause 6?

Philip Hammond (Conservative, Runnymede and Weybridge)

If I understand correctly, the intention behind clause 6 is to ensure that a lender does not have to inquire into the vires of the local authority in making the borrowing in question. The clause has nothing to do with commercial contractual relationships outside borrowing relationships, so I do not think that it applies in the case that the hon. Gentleman raises.

We have made a perfectly reasonable proposition. We are not suggesting, as the Liberal Democrats have done—although I understand why they have done it—that the power in clause 2(2) should be removed, but that if the power is to remain, it should be exercised by order subject to parliamentary scrutiny. That would be a sensible way for the Government to exercise the power. If the macro-economic considerations of

clause 4(1) are to have their proper and desired effect, the process will have to be transparent.

Although I do not intend to press the amendment to a Division, I would like to have a separate vote on amendment No. 5. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 5, in

clause 2, page 1, line 16, leave out 'direction' and insert 'order'.—[Mr. Hammond.]

Question put, That the amendment be made:—

The Committee divided: Ayes 9, Noes 13.

Andrew Turner (Conservative, Isle of Wight)

I would like to explore an issue that I wanted to discuss in some detail when we were considering one of the amendments, but your predecessor quite rightly ruled the subject to be wide of the amendment, Mr. Conway. However, it is certainly not wide of the clause, as I am sure you will agree. The issue is the aggregation of borrowing limits.

The Minister explained this morning that one reason why the Mayor of London has power to set the prudential borrowing limits for five local authorities is that he has executive power over them. However, another reason is the aggregation of borrowing that might be imposed on the ratepayers of London if those five local authorities operated independently. I explored to some extent the operation of such a rule in relation to North Tyneside, and the Minister quite reasonably explained that the council and the mayor work together there and set the prudential borrowing limit together. However, there are overlapping jurisdictions in North Tyneside, as there are in many local government areas. There is a police authority and a fire and civil defence authority that overlap the borders of North Tyneside council.

In my area, there is one all-purpose authority—or rather, it is practically all-purpose, because there is the ill-named Hampshire police authority, which operates in both Hampshire and the Isle of Wight, and it overlaps the borders of my council. All single-purpose authorities are local authorities for the purposes of the Bill. On the mainland, in Hampshire, outside the unitary authorities of Southampton and Portsmouth,

there are district councils, too. Each of those will set prudential borrowing limits independently. However, the only controls over that borrowing are, first, how much the Secretary of State considers that the authority can afford, and secondly, what income stream the local council sets for that authority.

In the Minister's response about London, he said that the Mayor's borrowing powers—or his wish and desire to borrow—would be restricted by the income stream set by the assembly; he did not say that the income stream to be set by the assembly would be driven by the obligations of the Mayor. At least in the case of London, one body borrows and another provides the income stream. In most local authorities, one body will set the prudential borrowing limit, decide whether to borrow and set the income stream on which that borrowing will depend.

It is important to ask about the direction of the influence. Is the setting of the income stream driven by the desire to borrow, or is the ability to borrow driven by an estimation of the income stream that may be available to fund that borrowing? I guess that, as is generally the case in the world, there is no tidy black and white answer, and that the influence works both ways. However, I am sure that the Minister will admit that borrowing depends on the ability of the local authority to predict an income stream that is sufficient to maintain that borrowing prudentially. I suspect that that is what is meant in clause 3 by the words,

''ensuring that the authority does not borrow more than it can afford.''

The authority can afford what its income stream will support.

If there are overlapping jurisdictions, the judgment about what can be afforded may depend on the level of the income stream that is set by other authorities. For example, the Hampshire police authority might want to borrow a hell of a lot of money to improve all the police stations and the control system throughout the Isle of Wight, and it might raise the precept accordingly to ensure that its borrowing can be met without taking account—it does not need to take account—of the income stream that the Isle of Wight council, and all the town and parish councils, might be setting for their purposes. Those purposes may be to permit those bodies to borrow as they are permitted by law.

Whether an authority can afford to borrow is one question, but whether the ratepayers can afford it is an entirely different, and I suspect a more important question with which the Bill does not wholly deal. How does the Minister propose that two, three or four authorities operating in the same area shall individually set their own prudential borrowing powers, when they would not know how much another authority may be setting, which one takes priority and what income streams might be set? The Bill does not even attempt to deal with that.

It is admirable that we are asking local authorities to set prudential borrowing limits and we all agree, more or less, that it would be excellent if the

Government did not interfere unduly with the setting of those borrowing limits. It is, however, incumbent on us to explain, as the hon. Member for Kingston and Surbiton (Mr. Davey) came close to doing in his nirvana of councils being able to go bankrupt, that the responsibility for meeting the costs of the borrowing, which may have been prudential in the eyes of one party but highly imprudent in the eyes of another, will rest with the council tax payers for many years to come. We need to trumpet that loudly, so that the council tax payers are in no doubt that they are making a choice. One of the intentions behind the Bill is that council tax payers and electors should be clearer about the choices that they are making when they vote in local elections. We should ensure that that excellent intention is carried through.

Earlier on, we talked about the hon. Gentleman having to borrow money to replace the furniture in this Room that, in his enthusiasm for clause 1, he had destroyed. You may not be aware of that, Mr. Conway, but it was an important part of our consideration of clause 1.

Derek Conway (Conservative, Old Bexley and Sidcup)

I am glad that I was not involved.

Andrew Turner (Conservative, Isle of Wight)

That would be fine for the hon. Gentleman, because he cannot walk away from his debts. However, councillors can, and all too frequently do, walk away from the decisions that they have taken on behalf of their electors. They could easily do that and not seek re-election. Sometimes, the electors are given the opportunity to elect them and choose not to. I do not entirely blame the councillors for that. I blame those councillors who set Hackney, for example, on an appalling track and decided not to seek re-election. I would be concerned about councillors who set high prudential borrowing requirements because that seemed, in their political judgment, to be the right thing to do. I do not decry their judgment, but it may differ from that of other councillors. However, I am concerned that having made such a decision and having found that the level of council tax is pushed ever higher, councillors might decide not to seek re-election and walk away from the responsibility, leaving it to other councillors, whether from the same or different parties.

John Pugh (Liberal Democrat, Southport)

Regarding financial impropriety, I do not think that a councillor's liability in legal terms would disappear if they had been advised by the finance officer to behave properly and not to act in such a way. They might be able to get out of the political flak, but if they do not seek re-election their responsibilities persist in legal terms, even in such a scenario.

Andrew Turner (Conservative, Isle of Wight)

The hon. Gentleman is right, but I am talking about financial imprudence, not financial impropriety, which may be a matter of judgment between councillors from different parties. For example, my local authority, which is Liberal Democrat-led, was advised by the chief executive that they were in grave danger of making a loss when they ran a pop concert in the middle of last year. The councillors decided that they were going to make a profit and, lo and behold, they made a loss of £380,000, which worked out at £8 per household on

the council tax. It is possible for councils to act legally and stupidly at the same time.

Patrick Hall (Labour, Bedford)

That is what elections are for.

Andrew Turner (Conservative, Isle of Wight)

It is indeed what elections are for, and they are fine for dealing with councils that act stupidly in setting the revenue stream. However, councillors may place an obligation on future councillors, who may be of a different party—a party that is more sensible than the Liberal Democrats, such as the Labour party or my party. If councillors set high borrowing levels—and do so within the law but in a manner that the hon. Gentleman and I may consider imprudent—they will require future councillors to have a high income stream to meet those debts. In other words, a burden will be placed on future generations.

I do not say that that is wrong, but I do say that it is stupid. We ought to make it clear to electors—and hon. Members may be sure that I will do so in future local government elections—that if they elect a high-spending, high-borrowing council this year, they will face a high council tax bill not only this year and for four years to come but perhaps for a generation to come.

Philip Hammond (Conservative, Runnymede and Weybridge)

This may be a good moment for a time check. So far, we have spent about 140 minutes on the first two clauses. We are rather behind our schedule: the programme resolution allows us only 12 minutes for each clause. I suspect that we will still require a few minutes to finish clause 2. However, I do not think that anybody would argue that this morning's debates have not been important. [Interruption.] Perhaps not all hon. Members were here for those debates. I accept that we have explored areas of general importance to this first part of the Bill, but I am concerned about the time that it has taken.

Let us take stock of where we are. Clause 1 puts into primary legislation a specific power to borrow for local authorities. Clause 2 then puts restrictions on that power. First, and quite properly, it refers to the self-imposed restrictions that councils will face as a result of the determinations that they make under clause 3. Secondly, and much more controversially, it refers to the externally imposed limits that councils will face as a result of Government action—Secretary of State action—under clause 4. Several hon. Members have questioned the extent to which the Government's much-vaunted granting of freedoms to local authorities is genuine. Already we see that what is granted in clause 1 is clawed back in clauses 2, 3 and 4. Perhaps more importantly, several hon. Members have stressed that, ultimately, the ability to borrow and to set a prudential borrowing limit depends on the stream of revenue funding that is available to a local authority. That remains very much in the iron grip of the Minister of State. I think that we are supposed to pretend that it is in the grip of the Deputy Prime Minister but we have all seen the firm way in which the Minister of State manages these affairs.

We have overarching concerns about this part of the Bill, but we have a specific concern about clause 2(2) and the Secretary of State's ability to exempt any

authority from any limit that is imposed on it under clause 4. We have been told that that will not involve any parliamentary scrutiny: it will simply be a determination made by the Minister, issued in the form of a letter. That causes us concern. We have seen bias in funding and we must now be concerned about bias in exceptions to borrowing restrictions.

The prohibition on borrowing in foreign currency may not seem controversial—local authorities have always been prevented from doing that. However, that is not a good enough reason for the inclusion of that prohibition in the Bill. I would like to think that the Government have reviewed afresh every restriction faced by local authorities.

Perhaps there are good reasons for such a prohibition, but many borrowers whose revenue streams are derived in sterling may consider foreign currency borrowings with suitable hedging tools in place to protect them from currency exposure. What evaluation has the Minister's Department undertaken of any benefits that might have accrued to local authorities from removing the prohibition? I do not suggest that many local authorities would wish to borrow in foreign currencies or that it would be appropriate. However, Conservative Members' starting position is that we should not restrict the powers available to local authorities unless it is essential.

The onus of proof lies with the Minister. He must show, beyond reasonable doubt or at least on the balance of probabilities, that the power to borrow in foreign currencies would be wholly a bad thing. If the Government are setting their face against foreign currencies and all that they stand for, is that a portent of decisions yet to come? Perhaps we have detected a shaft of light illuminating future intentions through a chink in the Government's armour. I await the Minister's comments with bated breath.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I welcome you to the Chair, Mr. Conway. I will not explain my earlier alleged vandalism, but I confessed to the policeman and he will rectify matters.

Although we have debated this subject exhaustively, there is one aspect that I wish to draw to the Committee's attention. It is pertinent to future debates and answers an earlier question by the hon. Member for Isle of Wight (Mr. Turner).

In a letter to you, Mr. Conway and your co-Chairman, Mr. Griffiths, dated 15 January, the Minister kindly set out the background to some of the clauses that we are debating. In the commentary, it states that there will be an opportunity for account to be taken in the code that the Chartered Institute of Public Finance and Accountancy will produce of any views expressed by the Committee and of any changes in the draft legislation. The commentary states that we are invited to comment on the code. The Government want CIPFA to take account of our discussions. We can still influence the way in which the code is developed by CIPFA and its implications for councils throughout the country.

The hon. Member for Isle of Wight may be pleased to know that in the draft code, which is work in progress, paragraph 27, on page 14 states:

''Affordability is ultimately determined by judgement about acceptable Council Tax levels and, in the case of the Housing Revenue Account, acceptable rent levels.''

Paragraph 29 lists the different matters that should be considered in respect of affordability.

I agree with some of the hon. Gentleman's comments. When it examines the code and final drafts before publication, CIPFA may wish to consider his point about council tax levels and precepts, which, taken together, might affect affordability. I do not wish to say much more than that because—we hope—the House will influence the important code in the debates that follow. We want the code, CIPFA's role and that of other accounting bodies put into the Bill. If we want control of borrowing to happen in the true prudential way, the Committee must influence CIPFA to change its current draft of its code.

Robert Syms (Conservative, Poole)

We are debating capital finance, which inevitably has a strong relationship with the revenue budgets. I have scanned through some of the documents and want to know where the private finance initiative falls into the equation. We do not count it as capital, but it is a long-term liability. I am interested in how that is accounted for in the financial indicators that must be produced by local authorities. It will have a big impact on the capital and revenue.

If local authorities felt that the Government, at some point, would intervene to control their local borrowing, they might think that it would be better to go along with the PFI and reduce their borrowing, but have higher revenue costs as a consequence. I want the Minister to put on the record the Government's view of the long-term liabilities of PFI that local authorities have and how that would relate to the financial indicators that we are expected to show, so that we decide whether money can be afforded.

Nick Raynsford (Labour, Greenwich and Woolwich)

I welcome you to the Committee, Mr. Conway. It started off in an extraordinary fashion this morning in your absence, with an act of vandalism by the hon. Member for Kingston and Surbiton. He told the Committee that he has reported the matter to the police. I sincerely hope that he will be able to attend future sittings and will not be detained.

We have been making good progress, and I am glad that we are now considering the completion of clause 2. I wish first to deal with the provisions of the clause and then the specific issues raised by the hon. Members for Isle of Wight, for Runnymede and Weybridge (Mr. Hammond), for Kingston and Surbiton and for Poole (Mr. Syms). The Bill scraps credit approvals entirely. It is a major deregulatory measure and allows local authorities to borrow without the Government's consent, provided that they can afford to service the debt. That does not mean that borrowing can ever be unlimited.

The theme of the Bill is prudent borrowing. Clause 3, which we shall discuss soon, requires each authority to work out for itself what it can afford to

borrow. Having done that, the authority is bound by clause 2(1)(a) not to borrow more than that affordable amount. It is true that clause 2, in conjunction with clause 3, results in control, but that is not control by the Government. The constraint arises from the simple, common-sense rule that authorities should not borrow more than they have decided that they can afford. That represents a genuine new freedom for local authorities.

The Bill must strike a balance between such freedom and safeguards for national and local taxpayers. That is why clause 4 contains a reserve power for the Government to intervene and set limits on borrowing. The limits can be imposed for all authorities, if that is necessary in the national economic interest. As I said earlier, we do not anticipate that that will occur in the foreseeable future while the economy is being prudently managed by the Chancellor. However, in the event of there being a misfortune in the long and distant future, it would be helpful for the Government to make such powers available. A limit can also be set for an individual authority to prevent it from borrowing imprudently. Again, we do not foresee such powers being used widely, but only as a last resort. They are a necessary safeguard against irresponsible and imprudent activity by one or more local authorities, which could result in an unfortunate consequence for their council tax payers.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Minister referred to the possibility of imposing limits on an individual authority that is proposing to borrow imprudently. Can he confirm that ''imprudently'' should be defined by reference to the CIPFA code, and not in some other arbitrary way that the Secretary of State may determine?

Nick Raynsford (Labour, Greenwich and Woolwich)

As the hon. Gentleman knows, we attach considerable importance to developing the code. We have worked closely with CIPFA and have the highest regard for it, and we are confident that the code will set out the proper considerations that should be taken by local authorities setting borrowing limits.

Of course, it is always possible that there will be circumstances that have not been anticipated. In the 1980s and early 1990s, when the hon. Gentleman's party was in power, the Government made a series of measures to control local authority expenditure. They were considerable acts of centralisation, but the Government justified the measures because local authorities were developing a series of creative accountancy devices to get around capital controls. He should recognise that the Government must have some flexibility to cope with unforeseen circumstances.

Although we certainly expect the CIPFA code to be at the core of the provision, we do not, as we have already argued, believe that it should be the only way in which control can be exercised. That is why the Bill provides for regulations to be made by the Government. I have given an idea of how we intend to keep an overview and a discipline, when that is necessary, but we expect to use the powers in very exceptional circumstances only.

If we were to set limits under clause 4, authorities would have a duty to comply with those limits under clause 2(1)(b). Clause 2(2) enables the Secretary of State to disapply a national borrowing limit, if one is in place, for an authority in the sort of circumstances that I outlined earlier. I emphasise that we envisage the power being used only in the most exceptional circumstances. The provision is a flexible response, welcomed by the Local Government Association, that will make possible the rectification of a situation that would otherwise be extremely difficult for an authority to manage. It is precisely because the power would need to be exercised quickly that we believe that that should be done by direction rather than by the more complex process of making an order.

I shall digress briefly and discuss the role of the Secretary of State—and, indeed, the term ''Secretary of State''. The hon. Member for Runnymede and Weybridge made play about that; however, the issue goes wider than he anticipated. Part 1 applies to both England and Wales, with a few minor exceptions that I shall mention in due course. References to the Secretary of State in part 1 also serve as references to the National Assembly for Wales, and I shall be using the expression in exactly that sense in my remarks on part 1. I hope that that helps to clarify the issue.

Philip Hammond (Conservative, Runnymede and Weybridge)

As a matter of interest, and to tax the depths of the Minister's study of the background to the Bill, why is the term ''appropriate person'' used in other parts of the Bill to deal with the England versus Wales issue if, in part 1, ''Secretary of State'' is used?

Nick Raynsford (Labour, Greenwich and Woolwich)

I congratulate the hon. Gentleman on his extremely sharp perception of the different language used in part 1 and the other parts. I asked the same question a little while ago, and I can tell him that the difference reflects the use of two separate parliamentary counsels in drafting the Bill. I raised the question of whether consistency was desirable, and I am assured that although it might be desirable, it is not absolutely essential, so we can proceed with those different terms. It is only right that I should make that clear to the Committee.

Clause 2(3) provides that authorities may not borrow in currencies other than sterling without Treasury consent. The Bill allows authorities considerable freedom as to the manner in which they borrow and the sources from which they obtain loans. As for very many years, authorities will be able to borrow from the Government through the Public Works Loan Board. They will also be free to borrow from private sector banks and financial institutions. In addition, authorities will be able to raise finance in the money markets by issuing bonds and other instruments. We are perfectly happy for local authorities to borrow from foreign institutions, many of which have well-established branches in the UK.

We expect authorities to base their choice of lender solely on best value grounds, but there is normally no reason for authorities to borrow other than in sterling, and to do so may be imprudent. That is simply because borrowing in foreign currencies would expose authorities to exchange rate risks.

Philip Hammond (Conservative, Runnymede and Weybridge)

Might.

Nick Raynsford (Labour, Greenwich and Woolwich)

Yes, I am not saying that it will, but that it might. If there was an adverse movement in the value of a foreign currency against the pound, an authority could find itself owing far more than it had borrowed: that is not a justified risk, given the considerable opportunities for borrowing that are already available to local authorities.

There is not any wider political implication in that provision, and if the UK were to join the euro—after a referendum—all legislative references to sterling, including this one, would have to be replaced by references to the euro. I hope that that does not cause apoplexy among Opposition Members. The issue of Europe has already come up, and we have only reached the second clause. The Liberal Democrat party, as well as Government Members, will probably soon be running a book on how long it takes in any Committee before the issue of Europe comes up, but on this occasion I will merely note when it has come up and move on.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Minister might like to know that my party's book is on when the Government will have the courage of their convictions and call the referendum that they keep delaying.

Nick Raynsford (Labour, Greenwich and Woolwich)

As the hon. Gentleman knows, we will call it when the economic tests have been considered and the circumstances are right for our country to seek to join the euro.

Once the Bill is enacted, the only effective borrowing power available to local authorities will be that in clause 1. However, clause 2(4) is a technical safeguard to ensure that the controls in the Bill apply to borrowing under any other powers that may still exist. I have now covered all the provisions, so I will address the specific points raised by hon. Members.

The hon. Member for Isle of Wight started his contribution by referring to the ill-named Hampshire police authority. I think that I understand the purpose of his argument: he is unhappy because, although that authority covers the Isle of Wight, that is not acknowledged in its name. However, his local authority made representations to me only a few days ago: it was seeking to be joined to Hampshire for the purposes of the area cost adjustment. I acknowledge that a Liberal Democrat councillor made those representations, but the hon. Gentleman rightly and properly accompanied his local authority and supported—I think—its case. It is important to recognise that sometimes it is wise to work together with wider entities.

The hon. Gentleman referred to decisions by other authorities potentially impacting through a precept. Where a precept applies, an authority will be aware of that before it sets its council tax: that is how it should organise its affairs, so that its own budget cannot be put into a parlous position by the decisions of others. The key point about the prudential limit is that it needs to be exercised by whoever sets the budget for the authority. The only exception to that is the Greater London Authority—we have discussed the specific circumstances of that authority.

Andrew Turner (Conservative, Isle of Wight)

I appreciate the Minister's answer, but I am sure that he will accept that the precepted authority is not influenced merely through the precept. It is also influenced through the prudential borrowing limit set by the precepting authority, and the consequences for that in any given year, and what may be prudent for a single-tier, all-purpose authority may be imprudent for an authority that is part of a number of authorities that levy a council tax from the same set of ratepayers.

Nick Raynsford (Labour, Greenwich and Woolwich)

I do not entirely follow the hon. Gentleman's argument, because the one impact that a separate authority can make on the individual local authority is through the precept. If it sets its borrowing limit, and that is not adequately covered, that is a problem for that authority. It comes to be a problem for the relevant local authority only when the precept is presented, and that is presented before the budget. That is an opportunity for the authority to consider that before it sets its own budget. That is why I said that I do not understand why it can be put in a position in which it cannot meet its budget because of another authority's action.

Andrew Turner (Conservative, Isle of Wight)

May I try to give an illustration? It is one thing if a single-tier authority decides that it can afford to borrow £100 million and the consequence on the precept is £5 million or £10 million a year. However, if the authority, which is single-tier for most purposes, has another authority for which it might be prudent to set a £100 million borrowing limit and if both authorities set such equally prudent borrowing limits for the individual authorities, the impact on council tax payers would be £10 million a year plus their share of that from the larger authority. That clearly has a different impact on affordability for the council tax payer. Does that not also affect the prudence of setting the borrowing limits?

Nick Raynsford (Labour, Greenwich and Woolwich)

Let us assume that we are talking about a police authority, as the hon. Gentleman raised that matter. The police authority sets its budget and must set its prudential borrowing limit as part of the process. There are precepts on the local authority, and the precept is the one interface between the two that the authority must consider. Any other consequences of borrowing decisions made by the police authority are entirely a matter for the police authority, not the local authority. Local people might rightly take a dim view of a police authority that budgeted imprudently and subsequently had to present a larger precept than might appear sensible. The main local authority's interface with the other body will be the precept—there will be no other mechanism. That is why the prudential limit will not necessarily impact on such a case.

The hon. Member for Poole raised the issue of the private finance initiative. It will be addressed in the prudential codes and will be the subject of a substantial debate that we will reach shortly. I urge him to be patient, because we will set out definitional matters that will apply to PFI in detail.

I hope that I have dealt with all the issues raised and that the Committee will agree that the clause should stand part of the Bill.

Question put and agreed to.

Clause 2, as amended, ordered to stand part of the Bill.

Clause 3 - Duty to determine affordable borrowing limit

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 27, in

clause 3, page 2, line 8, leave out from 'provision' to 'requiring' in line 21.

Derek Conway (Conservative, Old Bexley and Sidcup)

With this it will be convenient to discuss amendment No. 55, in

clause 3, page 2, line 18, leave out from beginning to end of line 20.

Philip Hammond (Conservative, Runnymede and Weybridge)

The amendment would effectively remove subsections (2) and (3). That would remove the Secretary of State's power to provide by regulations the way in which a local authority performs its duty under subsection (1) and would remove all sorts of mechanistic controls in subsection (3) on how a local authority executes the duty imposed on it by subsection (1).

We have already seen the draft regulations and, as expected, they specify that the CIPFA code shall be had regard to under subsection (4). The rest of the provisions are unnecessarily prescriptive and meddlesome and relate to things in which the Government should not be involved. Provided that the CIPFA code is properly drafted—I have no reason to suppose that it will not be—it will be sufficient that local authorities shall direct themselves with regard to the guidance in discharging their duty under the relevant subsection. It seems to us that nothing else is necessary.

The clause would substantively be reduced to subsections (1) and (4). That is adequate for the purpose and anything further would be indicative of the Government's institutional reluctance to let go. That is perhaps not surprising. Anyone who has ever dealt with a Government or any large organisation will not be surprised that there is an institutional instinct against letting go any power that might one day, perhaps in some obscure and arcane circumstance, be mildly useful or convenient.

If the Government are going to be true to their word in trying to make local authorities freer, they must start with a clean sheet. Similarly, the Minister

must justify every line of a Bill that imposes a restriction on the freedom of local authorities to act. Some restrictions are necessary, but these are not. The Bill was put out for pre-legislative scrutiny, although that process was not very lengthy. Indeed, some people have said that the Chairmen of some Select Committees are not getting any nearer to their knighthoods for saying that too loudly. The Select Committee gave a clear steer to the Government by saying that if they are to deliver anything like the aspirations that were set out in the White Paper, they need to be more hands-off. They must go through the Bill with a fine-toothed comb and remove those things that are unnecessarily prescriptive and meddlesome and are simply the residue of the institutional instinct to keep their hands on everything.

I hope that the Minister will be sympathetic to amendment No. 27. Characteristically, while he is smiling broadly, he is also shaking his head vigorously.

The Liberal Democrat amendment No. 55 has the same general thrust, but it would leave out only subsection (3)(c). It is, therefore, a subset of amendment No. 27 and I hope that the hon. Member for Kingston and Surbiton will agree with its broad thrust. We cannot disagree with the thrust of amendment No. 55 because it is contained within our amendment.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The hon. Gentleman is correct. We will support his amendment. Although I am not trying to play a game of whose amendment was best, amendment No. 54, which we have already debated, would have gone even further than amendment No. 27. Amendment No. 55 is intended to give the Government another option to try to reduce the impact of regulation and it refers to the Government's keeping to themselves the power to make regulations. I am keen to speak to the hon. Gentleman's amendment, because it is good and because I think that he is challenging the Minister.

The Minister and his colleagues recently published a paper called ''Freedoms and Flexibilities for Local Government'', in which they set out the new ideas that local authorities will have the regulatory burden removed and that they will not have to write so many strategies or reports for the Office of the Deputy Prime Minister and other Departments in Whitehall. The Bill goes in exactly the opposite direction, as it is littered with new powers for Ministers to make regulations.

The Minister must think again. If his actions are to be consistent with that recently published paper, he ought to restrict the amount of extra regulatory powers that he takes for himself. He may say in his defence that at the moment the regulations that he has given to the Committee are minimal and he is right about that.

I was pleasantly surprised when I read the regulations to see that they referred to having regard to the code produced by CIPFA and, to that extent, we cannot criticise the Minister. He has kept it as short as he possibly could. However, if he reads subsections (2) and (3), I think that he will readily agree that he is giving himself power—perhaps it is a reserve power,

nevertheless it is a power—to make detailed regulations. I cannot see the need for that.

The purpose of going down the route of a code was that it gives more flexibility. It allows the finance officers of local authorities to engage with CIPFA in an attempt to understand whether they are abiding by the code, because of the many nuances and subtleties in a capital regime. That is the best approach. All those powers need not be kept in the Bill, even on a reserve basis. Although the evidence before us is that the Minister is not intending to use the powers, it is up to us to look to what might lie ahead and to say no, we do not want those types of regulatory burden to be imposed on local authorities.

I shall speak briefly in favour of amendment No. 55, which is a little bait for the Government, if they do not accept the argument put forward by the hon. Member for Runnymede and Weybridge on amendment No. 27, which we support. Surely the Minister supports the deletion of subsection (3)(c). That measure is otiose; it goes over the top in what it would allow the Government to do and to set up in regulation. Even if we agree that the Government need a few reserve powers in regulation, which I do not, subsection (3)(c) is completely over the top. If the Minister is not prepared to accept amendment No. 27, I hope that he will at least consider amendment No. 55.

John Pugh (Liberal Democrat, Southport)

I seek clarification from the Minister about the clause. I have to go at 3.45 pm, so I will not be here to hear his clarification. However, I shall read his answers with assiduous care in Hansard.

I accept that the Bill will place local authorities under a duty to produce a borrowing limit of some kind and to state it; I am not clear whether it is a ratio or a cash limit that they need to state, none the less they will have to state a limit and keep to it. If they wish to vary it, the regulations prescribe that they should hold a council meeting. Is there not a danger that the Bill may build in bureaucratic inflexibility by producing more council meetings than are necessary? At the moment, there are not many of them and members have little to do under the new cabinet system, but we do not want them to do unnecessary work. We want them to be prudent and we want all members of the council to be aware of the risk, but it seems to me that limits can be exceeded for a variety of reasons.

If the Government mismanage wholesale the country's economy, interest rates may have to go up dramatically, which might put a council on or over the limit. Under normal circumstances, the director of finance would suggest re-phasing of the capital programme and looking at slippage and so forth at the cabinet meeting or the policy resources meeting. He would not consider it necessary to hold a full-scale council meeting to make ordinary adjustments. I am concerned not so much about that scenario but about others that I am not sure are catered for.

The Minister has sensibly reserved himself the power to disapply some of the regulations, but I am not certain whether disapplication would work in

some of the following scenarios that I shall sketch out. I am referring to councils that wish to run major schemes, such as Manchester with the Commonwealth games and Sheffield with the student games. Clearly, they must put their exposure on such issues to their local electors and to the full council, but there are circumstances during the progress of contracts for such schemes in which their capital exposure will go up temporarily and they will be a relatively good business proposition for the council. The public good may be secured thereby, but temporarily the councils will edge over the limit if they are already close to it.

Of more immediate concern is how councils are expected to react to failed schemes in which the contractor goes bust and for a short time they are contractually exposed, perhaps to a considerable extent. I shall cite an example from my own experience. The contractor Christian and Nielsen went bust while conducting a major refurbishment of Southport pier, which is now happily complete. During that period, the council was financially exposed and had to cover for capital funds that were not provided through the contractor performing in the way that was expected. The cost of the job went up substantially when the contractor left the site.

Under those circumstances, what is a local authority to do? I do not think that my local authority would have gone over its prudential limit if it increased its capital limits, but a hypothetical authority might do so in such circumstances. What should it do? Should it de-commit to a major scheme, abandon other schemes or simply walk away from the job and see what happens?

In the case of Southport pier, the council required settlement on a bond, but that bond was only sorted out two or three years after the contractor went bust. In a sense, the council behaved prudently in accepting extra capital expenditure, and it performed a noticeably good public service. Under the old scheme, they would have had to ask the Minister for special capital approval. I am not certain whether current arrangements allow for that, so I should like the Minister to comment on the question.

How would the Minister react if a local authority approaching its prudential limits were faced with a proposition whereby the capital financing of a scheme would be considerably lessened by an up-front capital commitment from the local authority? I am familiar with such schemes, under which the contractor attempts to minimise his risks. Eventually, the capital risks of the local authority and the contractor may be diminished, and the cost of the project may come down. Would that be out of order, or would an authority have to make an application to the Minister in respect of such a scheme?

The key questions are how the idea of prudence will be interpreted, and whether, with the best will in the world, there might be circumstances in which, although a prudential limit is set, the public good may be served by varying it, albeit temporarily.

Nick Raynsford (Labour, Greenwich and Woolwich)

It will not surprise the hon. Members for Runnymede and Weybridge and for

Kingston and Surbiton that I do not intend to accept their amendments. The hon. Member for Runnymede and Weybridge commented on the fact that I shook my head while smiling. I hope he does not think that, like Iago, I intend to

''smile, and smile, and be a villain''.

On the contrary, I intend to try to put in place an appropriate framework that ensures the necessary freeing-up of local government. As I shall explain to the hon. Member for Southport, that framework will give local government more responsibility and the ability to determine the outcome of problems such as the one that he identified, rather than make them dependent on ministerial decisions, as was the case in the past.

Paul Goodman (Conservative, Wycombe)

The Minister will find that he quoted Hamlet, not Iago.

Nick Raynsford (Labour, Greenwich and Woolwich)

I am absolutely mortified. The hon. Gentleman is quite right. Having spent too much time in this place, I have become less familiar than I should be with the great works of our literary heritage. I can only apologise unreservedly for the mistake.

Amendment No. 27 would narrow the Secretary of State's power under clause 3 to make regulations about the setting of the prudential limit. The amendment would allow the regulations only to specify a code of practice. Although we envisage that the regulations will, for the moment, serve only to name the CIPFA code—we all agree that that is the right way to proceed—we need to keep in reserve the power to impose some procedural requirements through regulations. I should say to the hon. Member for Runnymede and Weybridge that the provision is not a matter of excessive meddling, as I believe he described our proposals. The provisions under subsection (3) mainly relate to procedural arrangements—such as when, how and for how long an authority should make a determination—the monitoring of amounts determined under that subsection, and provision for the factors to which regard should be paid in making a determination.

On reflection, hon. Members will recognise that those are sensible, practical issues that may need to be covered in future. There may be a question mark over the length of time in which a prudential limit will apply, or questions may arise from an inquiry into what went wrong when a local authority got into difficulty. Findings from such an inquiry may lead us to the view that earlier warning signs may have helped to obviate the problem and that guidance for authorities would therefore be useful in the future. Only a curious Government would deny themselves the scope to issue regulations to cover those points.

We do not intend to exercise the powers in a heavy-handed way or to impose unnecessary burdens on local government. The Bill is an exercise in freeing-up local government. However, in doing something innovative, we want to ensure that it is a success and that we have the powers available to adjust the tiller as necessary as the process develops.

David Curry (Conservative, Skipton and Ripon)

In order to be consistent with Government policy, would the powers be a competence retained by the Secretary of State that he

could disapply in the case of local authorities qualifying for the ''excellent'' epithet in the comprehensive performance assessment?

Nick Raynsford (Labour, Greenwich and Woolwich)

The right hon. Gentleman makes an interesting suggestion. As he will know, as a result of that performance assessment, we have introduced a new framework—an innovations forum at which those authorities judged excellent by the Audit Commission will be invited to join the ODPM and other Departments to explore ways of carrying forward the Government's agenda of extending freedoms and flexibilities. The points made by the right hon. Gentleman should not be ruled off that agenda.

We see the forum as a creative arena that will find ways in which local government can make better use of freedoms. We read with interest the advice offered by the right hon. Gentleman to his local authority and others in the pages of municipal publications. I am looking forward to reading the next one, for which he has given me a trailer.

David Curry (Conservative, Skipton and Ripon)

It is the last one and I will bring a cutting to the next sitting.

Nick Raynsford (Labour, Greenwich and Woolwich)

I can only apologise for having missed it. I look forward to seeing the cutting. The right hon. Gentleman makes a fair point, and we will bear it in mind.

Philip Hammond (Conservative, Runnymede and Weybridge)

My right hon. Friend the Member for Skipton and Ripon (Mr. Curry) and the hon. Member for Southport both talked about the Minister disapplying regulations, but my reading of the clause is that the power to disapply relates only to limits made under clause 4(1) and that there is no general power to disapply. Therefore, however interesting the Minister finds my right hon. Friend's suggestion, he would not be able to go down that route even if he wanted to. Will the Minister clarify that point?

Nick Raynsford (Labour, Greenwich and Woolwich)

The hon. Gentleman is quite right to say that the disapplication under clause 2(2) applies in respect of the national limit set under clause 4(1). However, the right hon. Member for Skipton and Ripon asked whether some of the procedural regulations made under clause 3(3) might not apply to local authorities judged to be excellent. I simply said that that could be usefully discussed by the innovations forum.

The provisions are not intended to be detailed because we see them as a back-stop, although the power is necessary to enable us to guide the introduction of the new system. The point that the right hon. Gentleman made is, in principle, a valid one and we would not want to stand in its way.

Philip Hammond (Conservative, Runnymede and Weybridge)

Will the Minister confirm that, if amendment No. 27 were accepted or if the Minister made no regulations under subsections (2) and (3)—as appears to be the case—would it be open to a third party to apply to the court to determine that a local authority had not discharged its duty under subsection (1)? Could a councillor or council tax payer in that authority's area do that? Is regulation by the Secretary of State and the retention of reserved regulatory powers the only way in which we can be sure that local authorities will do what they are required to do by

statute? Can we not rely on the same methodology that we use to ensure that every other party in the country does what it is required to do by statute?

Nick Raynsford (Labour, Greenwich and Woolwich)

I hear what the hon. Gentleman says, but I am not sure that I would want to depend on the vagaries of judicial review to determine whether an authority had complied with the requirement to set a prudential limit in an appropriate way. I say that only because going to the High Court to challenge a local authority is a cumbersome process. For example, several authorities might take decisions on their prudential limits at a time when it was difficult to take account of all relevant factors, as shown by other authorities' experiences, when setting the prudential limit. In that situation, it would be better for the Government to use its regulatory framework to set a series of timetables under the provision in subsection (3)(a)(i), which deals with when an authority should make a determination, than to depend on the vagaries of whether a council tax payer or local business felt able to pursue a judicial review through the High Court.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Just for the Committee's clarification, given that the Minister says that he does not intend to use regulatory powers to deal with several of the measures, will he describe how he expects CIPFA to develop its code? CIPFA will publish the final version later this year, but presumably it can be renewed and revised when experience suggests that that should be done. Surely that is the way to tackle the problems? Rather than assume that regulation must be used to change the framework, we should look to revising the code.

Nick Raynsford (Labour, Greenwich and Woolwich)

I agree with the hon. Gentleman. We see the code as the first port of call; that is consistent with our approach. If CIPFA wishes to continue to perform the function—I have no reason to believe that it will not—and if the Government are happy with its work, as we have been so far, that could be the right way forward.

A review of the code could be held in two years time, although that is hypothetical and we have no plans to do that. The timetable for that might mean that the revised code would not be issued for several months. It might be useful for the Government to use the regulatory powers if an issue that requires a response surfaces. I do not say that that will happen, but we have useful powers that will allow the tiller to be adjusted as the new regime comes into effect to ensure that it works smoothly and without problems.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Surely if a particular issue comes up, a full revision of the whole code is not required. CIPFA could consider the issue and make a supplementary addition to the code, which would avoid the need for regulation.

Nick Raynsford (Labour, Greenwich and Woolwich)

The code will be issued under regulation, so a revision to the code would require the same procedure. I am not sure that the hon. Gentleman's proposal has more benefit than a Government regulation. We think that the

framework is the right way to introduce the new system smoothly and with safeguards.

David Curry (Conservative, Skipton and Ripon)

May I suggest that the right hon. Gentleman changes his metaphor? He is clearly not a sailor, because what one does to a tiller determines the direction in which one goes. He might prefer to trim his sails a little.

Nick Raynsford (Labour, Greenwich and Woolwich)

As a former Conservative Minister, the right hon. Gentleman will know a lot about the trimming that is required. I have always understood that both sails and tiller are used to ensure that a ship remains on a proper and sensible course and is not diverted by squalls or short-term pressures from unexpected sources.

In the same way as a former Prime Minister of the right hon. Gentleman's party criticised Baroness Thatcher by likening her economic policy to playing golf with a single golf club, I hope that he will accept that we should not depend on a single provision in introducing this new arrangement, but that a number of tools should be available to us to enable us to ensure its smooth implementation.

Mr. Turner rose—

Nick Raynsford (Labour, Greenwich and Woolwich)

I appear to have provoked the entire Opposition. I give way to the hon. Gentleman.

Andrew Turner (Conservative, Isle of Wight)

Will the right hon. Gentleman accept that that criticism was directed at my noble Friend Lord Lawson rather than my noble Friend Baroness Thatcher? The Minister is wrong about sailing, wrong about Shakespeare, wrong about golf, and wrong about Baroness Thatcher.

Nick Raynsford (Labour, Greenwich and Woolwich)

I do not intend to be drawn into a discussion of how far Lord Lawson's economic policies were determined by the then Prime Minister, now Baroness Thatcher, but I think that I am right in saying that it was Sir Edward Heath who observed that the two of them were guilty of playing golf with only one club.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am sorry to bring the Committee back from the high seas and the golf course to the matter in hand, but the Minister said—I was going to say a moment ago, but it is now a while since he said it—that as the CIPFA code was introduced by regulation, it would be appropriate for any amendment to that code to be introduced by regulation. Surely, that is incorrect, because regulation 2 states that a local authority should have regard to any current prudential code for capital finance that CIPFA might issue. I understand that to mean that if CIPFA revises its code, in the absence of a regulation de-specifying it, that code will automatically be incorporated.

Nick Raynsford (Labour, Greenwich and Woolwich)

The hon. Gentleman may well be right. I will look further into the matter and give him a detailed response. However, my point was that if we wanted a change in the arrangements, that could be effected in a number of ways, and we believe that having regulatory powers to enable that to happen is the right way to go about things. That is why we are introducing under the clause regulations that do not simply allow us to use the CIPFA code. His

amendment would bind us to using that code as the only way to make changes.

Philip Hammond (Conservative, Runnymede and Weybridge)

With respect, the Minister is wrong. The amendment would leave in place subsection (4), which gives the Secretary of State the power to specify one or more codes of practice. Therefore, the amendment would not simply leave everything dependent on the CIPFA code, but it would remove the regulatory powers under subsections (2) and (3).

Nick Raynsford (Labour, Greenwich and Woolwich)

I accept that it is possible to have another code of practice as well as the CIPFA code, but there would not be the regulatory powers that are currently made available in clause 3 and that we believe are appropriate to enable adjustments to the tiller or sails—or whatever nautical metaphor the hon. Gentleman and his right hon. and hon. Friends might wish to employ—to ensure that the ship stays on course.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am not even sure that the Minister is right about that because subsection (4) states:

''Regulations under subsection (2) may include provision requiring a local authority to have regard to one or more specified codes of practice, whether issued by the Secretary of State or another.''

Would that not deal with those issues, if it were felt to be necessary to deal with them?

Nick Raynsford (Labour, Greenwich and Woolwich)

I am becoming slightly confused by the hon. Gentleman's argument. On the one hand, it appears that he is arguing that it is undesirable for Government to have regulation-making powers, but he is now arguing that it is appropriate to have a range of different means of effecting change.

The point that I have been making is that the current provision in clause 3 provides an appropriate framework that enables the Government to introduce—

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Will the Minister give way?

Nick Raynsford (Labour, Greenwich and Woolwich)

I will give way in a moment, but the hon. Gentleman must bear with me while I respond to a previous intervention.

Clause 3 allows the Government, through the regulatory regime, both to introduce the CIPFA code—and other codes that might be promulgated in the future—and to make the adjustments to which I have referred under the provisions of subsection (3). We honestly believe that that is the sensible way forward. There is no great gain in substituting one set of regulation-making powers for another. It may appear to the hon. Gentleman that the amendment would remove a regulation-making provision from the Bill, but in fact it would simply transfer it to another place. I hope that he accepts that to set up the scheme properly and sensibly we must be able to make adjustments in the light of circumstances and experience. We must ensure that the scheme and the regime can cope with unforeseen problems. The framework in clause 3 allows us to do that, and there is no great merit in removing specific powers only to rely on interpretations of other powers in the clause.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

We are getting to an interesting point. Is not there a distinction between codes and regulation? The codes, whether the CIPFA code or a code issued

by another body or the Secretary of State, give local authorities guidance so that they can determine an affordable or prudential borrowing limit, having taken into account all the considerations. That is distinctly different from the regulatory approach, which says, ''You must do this or that''. For that reason, some of us prefer the prudential route, which the Minister promotes, to retaining the regulatory powers that the Government seek to hold in reserve.

Nick Raynsford (Labour, Greenwich and Woolwich)

I believe that the hon. Gentleman has misinterpreted what I said and the provisions in the legislation. It is appropriate that certain provisions are in the Bill—for example, the requirement that the whole council should set a prudential limit—but to ensure the smooth operation of the system, procedural requirements should be specified by regulation. However, that is different from considering all the factors that need to be taken into account through the code, which we believe will be the right way of achieving that end.

The purpose of clause 3 is to allow an orderly introduction of the scheme so that authorities can make decisions in an appropriate way, taking full account of the code or codes that may be introduced under the provision, and considering any additional requirements to do with, for example, timing of decisions.

I understand the hon. Gentleman's Liberal-Democrat predisposition to believe that the Government have control-freak instincts and want to control everything. However, he acknowledged only a few moments ago that he was pleasantly surprised by how non-prescriptive the draft regulations were and that they introduced the new arrangement in the best possible way. That is how we are trying to proceed. We have no wish to impose unnecessary regulations, but we do require the power to act if that is necessary to ensure that there is no ambiguity, confusion or potential for serious problems in the operation of the new system. The purpose of the measure is to provide a sensible back-stop, as we have done elsewhere in the Bill, to ensure that we can take the necessary corrective action if, for any reason, the new system appears to be on the wrong track.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The Minister suggests that I misunderstood the clause. He says that subsections (2) and (3) are about process, whereas the code simply gives details about how the limit will be assessed. I would have expected the code to deal with process as well. There is no misunderstanding; it is just that the Liberal Democrats and, I believe, the Conservatives do not feel that the reserve regulatory powers are necessary. We want to get rid of them.

Nick Raynsford (Labour, Greenwich and Woolwich)

I can only repeat to the hon. Gentleman that the provisions are a necessary safeguard. He conceded that they were not heavy-handed and I hope that he will accept that they will free up local government in a way that ensures that corrective action can be taken if need be.

I do not want to go over ground that I have gone over already, but we were talking earlier about whether the prudential limit should be set by the whole council. Clearly, that could not be determined

by a code. We had thought that it could be done through regulations but, on reflection, we decided that it had to be done in the Bill. Borderline issues will arise, which is why the retention of the powers is necessary.

I want to respond to points raised by the hon. Member for Southport (Dr. Pugh) although, as he told us, he has had to leave. He spoke about the possibility of authorities getting into difficulty with major capital schemes, suggesting that they could be exposed to risks because of the nature of the schemes or because contractors went bankrupt. He gave the example of Southport pier—which, I am glad to say, is in a rather happier state than Brighton pier. That might have something to do with the performance of the contractor, but it is in any event a cause of relief to the good people of Southport.

In his absence, I say to the hon. Gentleman that the whole purpose of the new provisions is to ensure that local authorities take responsibility for their decisions. He described a council seeking a supplementary credit approval from the Government if it got into difficulty, but it is exactly because we want to get away from the unsatisfactory current provision that we are introducing the new prudential regime. In advance of major capital schemes, authorities will have to consider what reserves they have and how they would cope with cost overruns or contractors' bankruptcies. Rather than assume that all is for the best in the best of all possible worlds—which is a tendency of the Liberal Democrats—and then, when things go wrong, run to the Government saying, ''Please bail us out'', local authorities should act prudently and anticipate difficulties by making appropriate provisions.

I am sure that the Committee will have a useful debate about reserves, but I have no doubt that we will be accused of being unreasonable and heavy-handed by requiring authorities to make appropriate provisions for reserves. That will be another example of the distinction between those who believe in prudence and those who live in a never-never land—or the Liberal Democrats' Valhalla, as I have described it in previous sittings—where it is assumed that everything will go right and that someone else will do the bailing out when things go wrong. That is not sensible. I hope that hon. Members will acknowledge that the amendments are neither necessary nor desirable and will not press them to a Division. If they do, I hope that the Committee will reject them.

Philip Hammond (Conservative, Runnymede and Weybridge)

My hon. Friends are having a heated debate about the relative merits of the terms ''nirvana'' and ''Valhalla'' in describing the Liberal Democrats' paradise.

The Minister is not having a terribly good day. It is only a month since I had to report him to the Minister for School Standards over his grammar. I would say that golf and sailing are clearly extra-curricular activities and do not fall within the right hon. Gentleman's remit, and I shall have to consider sending another letter to the Minister for School Standards about right hon. Gentleman's Shakespeare.

Standards are slipping on the Government Front Bench, Mr. Conway. Something must be done. [Laughter.]

The Minister referred to Liberal Democrats having a conspiracy theory about the Government's desire to maintain maximum control and maximum regulatory capability. He has certainly told us about the power in the Bill to make regulations, but he has published draft regulations that do not use that power, which suggests to us that the power is unnecessary and should be removed. I do not accuse him personally of having a passion for a maximum number of regulatory powers. I know how difficult it is for a Government to deregulate: it is easy to say, but difficult to do. The main reason why it is difficult is that behind the Minister stands a vast army—a vast structure—that is partial to regulatory power. What administrator, what bureaucrat, what part of the Government machine would not rather have more regulatory power? The measure by which we must judge the Government is their courage in taking on the machine and in fighting that battle within. We are seeing some of that inevitable tension in respect of the Bill and the process that led to it.

The Government set out a bold political statement when they said that they want to free up local authorities; then, they published the White Paper. The draft Bill, however, does everything but free up local authorities. Every bit of freedom that it grants, it snatches back three or fourfold in subsequent paragraphs. After a trouncing by the Labour-dominated Select Committee, the Government conceded ground in a few areas, but it is clear that for every inch that they concede to local authorities, they are snatching a yard.

I do not feel that the Government have addressed the issues on which we are focusing in amendment No. 27 and I urge my hon. Friends and other right-thinking Committee members to support us as we press it to a Division.

Question put, That the amendment be made:—

The Committee divided: Ayes 10, Noes 12.

Philip Hammond (Conservative, Runnymede and Weybridge)

Where have we got to on clause 3? We have prudential limits being self-determined by local authorities, which is good. In subsections (2) and (3) we have the Secretary of State's powers to do that for them, which is bad. In subsection (4) we have a reference to the codes of practice and the ability to use third party codes of practice, which seems sensible. We would obviously have preferred amendment No. 27 to have been accepted, but we welcome the use of the CIPFA code of practice, which is a step in the right direction.

I want to raise two specific points with the Minister on subsection (1). The hon. Member for Southport touched on the first point and I confess that it had not occurred to me, until he mentioned it—that it is possible to interpret subsection (1) as meaning not that a specific sum of money should be specified but that another limit on borrowing, for example—a multiple of anticipated revenue—should be used. I take it that it is the Minister's intention that borrowing limits must expressed as a specific sum, but if that is not the case, perhaps he would advise the Committee. If it is, perhaps he would confirm that he has received a proper opinion that the wording of the Bill will in fact require that the limit determined under subsection (1) is always determined as a fixed sum.

My second question, which my hon. Friend the Member for Isle of Wight touched on during an intervention, is whether the word ''afford'' is the right one in subsection (1), which states:

''A local authority shall determine and keep under review how much money it can afford to borrow.''

Affordability is, of course, one of the criteria to which a local authority should have regard. No authority should borrow more than it can afford to borrow. However, it may not always be sensible to borrow all the money that one can afford to borrow. To use an analogy with personal finances, we have all seen people who borrow the maximum amount of money they can afford to borrow and regret it later. My hon. Friend the Member for Isle of Wight was probably on the right track when he used the word ''prudent'' because we are really discussing a prudential limit, being the amount of money that it is prudent to borrow. That may not be the same as the amount that the authority could afford to borrow. An authority can afford to borrow as much debt as it can service from its revenue streams, but it might not be prudent to do so.

This is an important matter and I shall be interested to hear what the Minister has to say about the way in which the concept of affordability is to be interpreted in relation to subsection (1).

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I want to comment briefly on what we have just heard from the hon. Member for Runnymede and Weybridge and to confirm our view that clause (3) is unnecessary. Had we amended clause 2 properly, we would have kept to the CIPFA prudential code and we would not then have all these unnecessary elements in clause 3.

The hon. Member for Runnymede and Weybridge referred to affordability and how it would be measured. I am not sure that I agree with him because if we define ''prudent'' we have to return to the numbers. The numbers will be central to assessing prudence or affordability and the draft code on which CIPFA is working refers primarily to numerical issues.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am grateful to the hon. Gentleman because I should have given that example. It seems to me that—the Minister will tell me if his interpretation differs—using the term ''affordability'', if the cost of borrowing goes down, the amount of borrowing that can be afforded on a given revenue stream goes up. I hardly imagine it is the Minister's intention that if the cost of borrowing to local authorities were to fall from 4 per cent. to 3 per cent. they would have an immediate 33 or 25 per cent. or some other percentage increase in debt capacity.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

As I read the draft code, it takes account of those issues. The hon. Gentleman suggests that the code paints a static picture and that a council may look at its step position, tax base, expenditure and so on and say that it can afford things that year, but it will not look at the dynamics and the ranges it needs to keep within. My understanding of the code enables such analyses to be made, which is why I support the drafts before us. Most prudent people when looking at their mortgages and borrowing look at those aspects of affordability, taking a realistic and prudent view of

what will happen to interest rates, but perhaps the hon. Gentleman does not.

Philip Hammond (Conservative, Runnymede and Weybridge)

With respect to the hon. Gentleman, we have seen precisely the opposite in people's personal borrowing. As interest rates have fallen, households have massively increased their borrowing to reflect the fact that borrowing is more affordable. The consequences are still to come home to roost, and may give rise to the kind of macroeconomic exigency about which the Minister speculates in the powers he is taking under clause 4(1).

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Mr. Conway, you will certainly rule me out of order if I am tempted to analyse the macroeconomic situation and how the low inflation climate has affected borrowing in the personal sector. I suggest that the hon. Gentleman reads the draft code and looks at some of the indicators that CIPFA suggests local authorities should consider. I do not think that such problems will arise. It is possible that in trying to follow the provisions local authorities may get it wrong; governments, local authorities and individuals can all get it wrong. The hon. Gentleman should know from looking at the Conservative record on managing public finances how badly governments can get it wrong—we saw debt double under the last Conservative Government.

I accept that mistakes can be made about what is prudent and affordable. The question is what sort of framework one puts in place. I believe that the code is the right one and to the extent that clause 3 refers to the code and ensures it will be part of the framework, I support it.

Nick Raynsford (Labour, Greenwich and Woolwich)

We had two interesting speeches from the Conservative and Liberal Democrat Opposition. If I heard correctly the view of the hon. Member for Runnymede and Weybridge, the balance sheet was to divide clause 3 as a sandwich into subsection (1), then the middle, which is subsections (2) and (3), and last, subsection (4). His verdict was: (1) good; (2) and (3) bad; and (4) good. Overall he gave a positive view, although he disliked the middle of the sandwich.

I am not getting into a mathematical assessment because the hon. Gentleman might discover that the number of words in the middle section is greater than that in the two outer sections and come to a different view.

Paul Marsden (Liberal Democrat, Shrewsbury and Atcham)

A simple question: where is the beef?

Nick Raynsford (Labour, Greenwich and Woolwich)

The hon. Gentleman anticipated my answer. As usual, the beef is to be found in the middle of the sandwich. As we established earlier, although Opposition Members do not like it, we believe that there should be a little beef in the middle just in case it is necessary. We think that the sandwich is very good in any case, based on the two outer parts.

Before I deal with the contribution from the hon. Member for Kingston and Surbiton, I shall pick up a couple of specific questions asked by the hon. Member for Runnymede and Weybridge. First, he asked

whether the borrowing limit must be determined as a sum of money. The answer is that the Bill's wording implies that, but the local authority should, in reaching its decision, take account of wider factors, such as the various ratios and indicators set out in the draft code.

Secondly, the question was asked whether the local authority was under any obligation to borrow the full amount. The inference was that once a borrowing limit had been set, an authority should borrow that amount. Of course, we do not take that view. The borrowing limit is the limit. We expect the authority to consider wider implications, not only how much it wants to borrow and the major capital schemes that it wants to pursue, but, crucially, what the risks are, what measure of reserve is necessary to take account of unforeseen circumstances and how much latitude there should be for the factors that the hon. Member for Kingston and Surbiton raised, such as potential changes in the economic scenario.

Just as any prudent home owner, when taking a decision on borrowing, would think not only about current mortgage rates, but about how they might change in future, so we expect an authority to form a view on the wider implications and not just to apply the borrowing limit mechanistically in the confident assumption that it will be able to service the debt in all circumstances. The borrowing limit is there to be interpreted by the local authority, and the interpretation should take account of other, potential circumstances.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Minister is muddling two issues. Clearly, in entering into any borrowing, a prudent local authority will have regard to a range of circumstances. However, that is different from setting a borrowing limit, which may be far above anything that the authority contemplates borrowing. My question is whether affordability—in other words, its ability to service the debt—is the only criterion that it should use in setting the borrowing limit. It seems to me that it is not, but clause 3(1) specifically says that an authority shall

''determine and keep under review how much money it can afford to borrow.''

Nick Raynsford (Labour, Greenwich and Woolwich)

The hon. Gentleman is right to say that the affordability issue determines the borrowing limit, but I was trying to deal with the question whether that would automatically lead through to borrowing up to that limit. I was making the point, which I am pleased he agrees with, that it should not. An authority should work within the limit and assess not only affordability issues, but wider issues, such as those that I mentioned.

To put this in context, we should be aware that local authority borrowing is consistently falling, in just the same way as the Government have been successful in reducing the level of overall indebtedness of the country as a whole. We are working in a relatively benign framework, in which we have prudent management and falling debt levels. We can all take a great deal of satisfaction from that.

Philip Hammond (Conservative, Runnymede and Weybridge)

Does the Minister expect local authority borrowing to carry on falling in future?

Nick Raynsford (Labour, Greenwich and Woolwich)

Here we have a wonderful paradox. The Conservative party accuses us of being the party of control and of determining what local authorities should do, but when we present local authorities with greater freedom and say, ''Over to you; it is now local government's decision,'' we are asked what we think they should do—

Andrew Turner (Conservative, Isle of Wight)

What they will do.

Nick Raynsford (Labour, Greenwich and Woolwich)

Or what they will do. I shall resist that. The decisions will be taken by individual local authorities in different parts of the country in the light of local circumstances. That is the correct way forward, subject always to the national safeguard in clause 4. The Opposition parties do not like it, but it is the necessary corollary to the greater freedom that we offer.

The rest of the debate is in Hansard.