LOCAL AUTHORITIES LOANS BILL

HC Deb 02 February 1945 vol 407 cc1741-93

Order read for resuming Adjourned Debate on Question [24th January], "That the Bill be now read a Second time."—[Sir J. Anderson.]

Question again proposed.

11.6 a.m.

Lieut.-Commander Joynson-Hicks (Chichester)

When the Debate on this Bill was adjourned last Wednesday week, I was calling attention to the necessity for enabling authorities to borrow such money as they may require in the cheapest possible market, and was submitting to the House that the provisions of this Bill do not altogether enable that to be done. As the interruption of my speech has been a little longer than usual, perhaps I may be permitted, briefly, to remind Members of the provisions which we are discussing. The object of the Bill is to provide local authorities with the means of obtaining their post-war financial requirements in an orderly fashion. I think nobody could cavil at that object. It is of the utmost importance that we should be able to ensure, as the Chancellor has said, that any scramble for money should be avoided. In moving the Second Reading of the Bill the Chancellor indicated that it was primarily designed for the benefit of local authorities, and no doubt it does, in principle, confer a substantial benefit upon them.

The situation at the moment is that where local authorities require a loan, and it has been sanctioned by the appropriate Department of the Government, and the money is available in the Public Works Loan Board, the Board themselves have not power to grant the loan for the particular purpose for which the local authority requires it. This Bill does away with that restriction, and enables the Public Works Loan Board to grant money to local authorities for loans for whatever purposes are sanctioned. To that extent the Bill conveys to them a very substantial advantage, but in granting that wider power and that advantage to local authorities, the Treasury have—I think, very unfortunately—imposed a consideration. The quid pro quo which is exacted is that local authorities shall cease, in future, to borrow money elsewhere than from the Public Works Loan Board. Hon. Members will be aware that, in the past, these authorities have been free to borrow from whatever sources, generally speaking, were available to them.

The Chancellor referred to two particular advantages which this proposal would confer upon local authorities. The first was that it would enable them to receive and obtain loans as and when they need them. In the past, I do not think there has been any great difficulty about that. The hon. Member for Ipswich (Mr. Stokes), in his speech the other day, referred to one particular and extraordinary case in which, evidently, the local authority concerned must have experienced great difficulty in financing their requirements. That must be very exceptional, and not a state of affairs which can readily be met by any form of legislation. Generally speaking, in the past, there has been no difficulty on the part of local authorities in obtaining loans, and during the limited period with which these proposals are concerned, it is hard to imagine that there will be any difficulty in local authorities obtaining loans, as and when they need them. This primary advantage, which is urged by the Chancellor, does not appear to be one of very great substance. The second advantage which my right hon. Friend urged is that it will enable local authorities to borrow money more cheaply than would otherwise be possible. That is the crux of the whole matter.

I suggest there is an alternative opinion. In actual fact, although this Measure is not yet in operation, the policy which it contains has been in operation for many months, and to my limited knowledge there are two actual cases in which local authorities, requiring to borrow money, were required to do so from the Public Works Loan Board at a rate of interest which was higher than the firm offers which had been received from the market. Therefore, the second advantage which is suggested in favour of this Bill does not at the present time hold good. The Chancellor referred to the post-war period, but, even there, I have no reason to suppose that during the limited post-war period with which we are dealing, there should be any ground for believing that local authorities will be unable to borrow as cheaply as and possibly more cheaply in the open market than from the Public Works Loan Board.

I want to refer to a statement which was made, that local authorities, generally speaking, are in favour of this Measure. There is a great deal in it of which they are in favour, but I believe that their approval is subject to certain reservations, the principal one being that to which I have just referred, namely, that they should be entitled to borrow money elsewhere than from the Public Works Loan Board, if they can obtain it on more favourable terms. I happen to be in a position which may surprise some hon. Members, in that in the area which I have the privilege to represent, there are no fewer than 10 local authorities. Members who sit for constituencies of small geographical dimensions may be somewhat surprised that the larger constituencies embrace such wide areas, and it may puzzle some Members when I mention that no fewer than six different types of local authorities are among the 10 which I have the honour to represent. Not one of those local authorities has positively expressed itself to me as approving this Measure without any reservation.

The largest authority I represent is not actually concerned, because it happens to be one which does not have any loans at all. It does not borrow money; it has not done so in the past and it looks forward to being able to meet all its necessary requirements and fulfil its programme without borrowing any money in the future. That is a happy state of affairs but one which, I realise, is not of universal application throughout the country. Of the remaining local authorities, some have expressed to me their serious disagreement with the principle of the Bill, which limits their borrowing to the Public Works Loan Board, subject to the limited exceptions referred to in the Bill. I should like to ask my right hon. Friend to deal with the question whether there is included in the exceptions, whereby local authorities may continue to borrow outside the Public Works Loan Board, the practice which has held good with a large number of substantial municipalities and which is sometimes known as "over-the-counter" or "cash-and-carry" borrowing—that is, where ratepayers and residents in the municipality come to the offices of the municipality and hand their money over the counter, and it is accepted on loan, generally in small amounts, multiples of £25. This is a form of borrowing which is elastic and flexible, and very helpful to the local authority and to local residents. It engenders and enhances local interest in the affairs of the local authority. It would be a great pity if the much wider and bigger intentions of the Bill were such as to put an end to that comparatively small but very useful system.

It has been urged in support of the Bill that the proposals, particularly those contained in Clause 1, will put an end to any possibility of a scramble for finance after the war. I doubt whether there can be a scramble. We are dealing only with a very limited period. The Chancellor of the Exchequer has given an assurance that the matter will be reviewed at the expiration of four years after the cessation of hostilities in Europe. Therefore we are dealing, generally speaking, with a five-year period. Prior to the provisions of the Bill coming into operation—they do not come into operation until the end of the war—local authorities will have ample time in which to assess in round figures, if not actually to estimate, what their requirements are likely to be in this period and they can make their arrangements well in advance. There should, therefore, be no necessity for any scramble for money at all. In addition to that, there are other brakes automatically imposed upon any possibility of a scramble, brakes such as the control of issues, which already exists and will be continued, and there is also the brake imposed by the sanctioning department of the Government, without whose consent the local authority cannot make application for a loan. For these reasons I cannot anticipate that there will be any substantial possibility of a scramble at all.

But the proposal does one thing which is a very positive danger indeed. The market available for loans may, generally speaking, be divided into three parts—the market for Government loans, the market for local authority loans and the market for industrial loans. They are carefully balanced and each influences the rates of the others. That is to say, if the rate for Government loans goes up, correspondingly that will influence the rate for loans to local authorities, and will so influence the rate for loans to industry. If you remove the central section of this system, and take it out altogether, you are going to interrupt and disrupt the balance of the money market, particularly for industry. The ability to lend money to local authorities in the market, provides a competitive element against the rate at which the market is prepared to lend money for industry and, if you remove that competitive element, it may have a very adverse effect on the rates at which industry is able to borrow money in the market. Therefore, I maintain that the Bill, while good for credit, as it will undoubtedly enable the Treasury to borrow money at a cheaper rate, is bad for industry and bad for the ratepayers. It has been said that it would be a good Bill if Clause 1 were left out. I do not go as far as that, but I believe it would be a very much better Bill if Clause 1 could be amended in principle, so as to enable local authorities to borrow from the Public Works Loan Board for all purposes, but not to the exclusion of borrowing from any other source. Let them retain the element of competition in their borrowing, which will have a steadying influence on all loans throughout the market. I am convinced that there cannot be any scramble but, as it is, ratepayers may well be asked to pay more than they otherwise would have to pay; they will not be asked to pay less than they otherwise would have to pay and therefore I urge that my right hon. Friend should consider very carefully, whether or not this principle should not be amended, so as to avoid the Bill being one whereby the Treasury is obtaining cheap money at the expense of the ratepayers.

11.23 a.m.

Mr. Benson (Chesterfield)

I do not think there will be any criticism of the principles on which this Bill is founded. Everyone recognises that control of the market after the war is essential. What is in hon. Members' minds at the moment is that the regulations which the Treasury proposes to make under the Bill, seem in many cases likely to press very harshly on the larger local authorities. Not only are very large sums of money likely to be involved but it is a very stringent limitation of the freedom hitherto exercised by these authorities in their lending powers. For that reason it is highly desirable that we should scrutinise very carefully not only what is in the Bill, but what we have already gathered of the type of regulation which the Treasury proposes to make. The Chancellor of the Exchequer said that borrowing from the Local Loans Fund was not at times altogether satisfactory. That was a very moderate statement. Perhaps a more accurate statement would have been that the financing of the Local Loans Fund was a monument of ineptitude. It probably represents the maximum of Treasury bungling that has ever happened.

The Financial Secretary to the Treasury (Mr. Peake)

It was a good long time ago.

Mr. Benson

No, it was not. I hope the House will forgive me if I look at the history of this Fund, not for the purpose of raking up the past sins of the Treasury, but as a background to some of their proposed iniquities. A number of major consequences flowed from the blunders the Treasury made in financing the Fund, and they propose to perpetuate them under their regulations. As the Chancellor said, this Fund has hitherto been financed by the issue of 3 per cent. annuities, which are redeemable at par. That was a perfectly legitimate method of financing when the original Act was passed in 1875 because money was very stable. In fact, for the previous 40 years, 2½ per cents. had not varied more than 5 points either side of their mean price.

The major amount of the money borrowed under the Fund was borrowed after the last war, and the Treasury still continue to borrow on 3 per cent. annuities issued at a discount. In 1922 they actually issued 3 per cents. at a discount of 50, and borrowed £120,000,000 for the Fund at a discount of over 40. They have borrowed this money in a way which makes it practically irredeemable, because it is outside the bounds of possibility that there will ever be a profitable conversion. The Government themselves have, on some £300,000,000, a permanent interest of £4 7s. per cent. Of course, that was passed on with an additional kick to the local authorities. The hon. Member for Ipswich (Mr. Stokes) bitterly complained that Ipswich had borrowed £25,000 at 6¾ per cent. The Local Loan Commissioners have still got £45,000,000 lent to the local authorities at 6½ per cent. and another £27,000,000 at 6 per cent. These loans have still something like 30 years to run, so that 6£ and 6 per cent. are riveted on the local authorities who borrowed from the Local Loans Commissioners for another 30 years. The majority of those loans were housing loans. The results of borrowing by local authorities from the Commissioners were that, on £300,000,000 which was owing by the local authorities in 1938 they were paying an average interest of £4 19s. 2d., practically 5 per cent.

Let us compare what the Treasury have done for the local authorities in the past with what the local authorities have done for themselves. Take Manchester for example. I quote Manchester because I happen to be a Manchester man, and know its finances better than I know those of any other town. Manchester had also in the twenties to borrow at 6 per cent. but instead of borrowing permanently they borrowed on a 10 years' basis. The result is that Manchester has been able to convert, and whereas local authorities are paying to the Local Loans Commissioners 5 per cent. for their money, Manchester's debt of £47,000,000 stands at an average rate of £3 6s. 4d. I compare that with a similar figure of £45,000,000 owing to the Commissioners at 6½ per cent. I am not complaining about the original high interest charged to local authorities. Obviously, if the Government cannot borrow at less than 6 per cent. they cannot lend to the local authorities at less than 6 per cent. What I complain of is that the Government have lent on long terms to the local authorities and that, under the terms of these loans, the local authorities cannot repay without having to pay a fine, which is actuarially equal to the saving in interest that they would make. So that not only has the Local Loans Fund been loaded up with permanent 6 per cent. money, but the local authorities have been loaded up for the next 30 years with money at 6½. It is the permanence of the loans which is the main objection to the activities of the Commissioners in the past.

Mr. Molson (The High Peak)

The rates of interest have fallen during the last 15 years. Would the hon. Gentleman have suggested, if the rates had risen, that the local authorities should be called upon to pay more?

Mr. Benson

I do not suggest anything of the kind. What I am complaining about is the Treasury borrowing practically on permanent terms, when the rate of interest is 6 per cent. That is the grave blunder which the Treasury made for which the local authorities are now paying. If the Treasury had borrowed on short terms, they would have been able to convert and to pass the reduction on to the local authorities. If the Treasury borrow on long terms when money is low, nobody will complain. The Treasury has learned its lesson so far as its own borrowing is concerned. It is not going to borrow under the old 1875 Act any more. It is to nourish the Fund under general borrowing, which, in the case of high interest rates, will be on short terms. Although the Treasury is going to take advantage of its past experience and blunders for its own borrowing, it is not proposing to pass that advantage on to the local authorities.

Mr. Peake

Oh, yes.

Mr. Benson

Oh, no. The local authorities will only be able to borrow at the rate that the Government pay, but for the maximum term appropriate to the type of borrowing. That means that when local authorities borrow from the Local Loans Fund for housing purposes, they will have to borrow for 40 years. When they borrow for the purpose of purchasing land, they will have to borrow for 80 years. The Treasury is going to borrow short, in periods of high interest rates, but it is not prepared to allow the local authorities to borrow short from the Treasury. They must borrow long. That is all right while interest rates are low. No local authority will cavil at borrowing for 40 or 80 years if it can get the money from the Treasury at 3 per cent.

There is, however, no guarantee that the Treasury will be able to pin rates of interest after the war. I know that this is part of the machinery by which it is going to try, but whether it succeeds is an entirely different matter. The House is interested in interest rates. When we discussed this Bill previously a large proportion of the time was taken up by a discussion of interest rates. Hon. Members will remember that the hon. Member for West Fife (Mr. Gallacher) and the hon. Member for Gateshead (Mr. Magnay) addressed each other in the language of Old Testament prophets. The hon. Member for Ipswich put forward the theory that if Ipswich could borrow at 1 per cent. instead of 6 per cent. it would pay less interest, and he produced figures to prove it. The discussion of interest rates did not leave me convinced that either the House or the Treasury knew exactly how they were going to control interest rates in the future. We have had a low interest structure ever since the conversion of 1932, but that structure has never yet been under pressure. The great conversion of 1932 took place in the depths of a slump. Right through the thirties industry, which normally should have absorbed large sums of capital, was, instead of doing so, pouring hundreds of millions into the gilt-edged market and thus helping to maintain low rates. Then the war came, and everything was put in a strait-jacket. So far, our low interest structure has never had to stand any strain whatever.

Mr. Loftus (Lowestoft)

The strain of the war.

Mr. Benson

The war is not a strain. The war has enabled the Treasury to control interest rates even more effectively than it could have done in peace-time. The Treasury will be able to control interest rates while the Government are in a position to ration raw materials and capital goods, but that is not likely to go on for ever. It may go one for two or three years. In view of our past experience, it may seem easy to control interest rates, it may seem easy to borrow at three per cent. Let me turn the problem round and restate it in another way. To maintain low interest rates, means that we have to maintain the market value on the Stock Exchange of £20,000,000,000 worth of Government securities, because if Government securities drop, if we cannot maintain the price of these £22,000,000,000 worth of Government securities, it means that interest rates go up. That is the problem, and it is not an easy one.

Suppose a high interest period does arise. Suppose the Government fail to peg rates. Under the regulations the local authorities will be borrowing at high interest rates for periods of from 40 to 80 years. What is the justification for that? When Manchester borrowed at 6 per cent. it borrowed for ten years. The result is that Manchester is paying, on its debt, £3 6s. 2d. per cent. as against 5 per cent. paid by those local authorities who fell into the hands of the Local Loans Commissioners. Nobody has any objection to control. No local authority, so far as I know, has raised objection to control. The small local authorities must be controlled for their own sakes; the great local authorities, such as Manchester, Sheffield and Birmingham, must be controlled for the sake of the money market and general maintenance of rates.

What I object to, and what the local authorities object to, is that the Government are proposing by their regulations to rivet on the local authorities the long-term borrowing which has proved so disastrous in the past. They are putting the local authorities in a strait-jacket, although they have had the wisdom not to do that for themselves. They can control local authorities by other methods than compelling them to accept long-term loans. I am talking about large local authorities, who can borrow on as good terms as the Treasury, and sometimes better. The Government can control the borrowing of local authorities; they can retain in their own hands the last word with regard to any loan; they can regulate the maximum amount that any local authority can borrow; they can regulate the maximum interest the local authority may pay; they can regulate the timing, as they have been doing during the war. But I ask, on what grounds do they claim the right to rivet the possibility of long-term borrowing at high rates, upon the local authorities? The large local authorities have shown themselves far more perspicacious and wiser in their finance than have the Government in their financing of the smaller local authorities. I think they have earned the trust of the Government and are entitled to be consulted on this question of whether they shall borrow long or short.

I know there is a promise that this business shall be reviewed in four years. What does that promise mean? If the Government have any valid reason for refusing the local authorities a "break" clause in their loans, if they have any valid reason for insisting upon borrowing being for the maximum appropriate term, that promise to review after four years means nothing. Why do they refuse a "break" clause? Why do they insist upon the maximum term? Why do they object to local authorities having the right to horrow on medium terms? If they are so adamant now, on long-term borrowing, has this House and have the local authorities any guarantee that they will change their mind after four years? None whatever. There is no period in the Bill itself. We have merely a promise that the matter will be reviewed in four years, or rather that the regulations will be reviewed in four years.

Mr. Peake

The whole situation will be reviewed.

Mr. Benson

Naturally you do not review regulations, without a review of the whole situation.

Mr. Peake

Naturally.

Mr. Benson

There is no term set in the Bill itself. We have a verbal promise from the Chancellor that the whole situation will be reviewed in four years. Once again I ask why, if the Treasury are likely to change their mind in regard to a "break" clause in these loans, are they insisting on their present attitude towards a "break" clause now, when money is likely to be cheap, as it probably will be in the first two years, when the local authorities will be willing to borrow for long-term periods? At the end of four years—I do not know whether that means four years from now, or four years after the termination of hostilities—the damage may have been done. It is possible that the Government will succeed in pegging interest rates for the two or three years during which they will have to ration, not merely money for finance, but actual physical capital goods. But sooner or later there will, inevitably, be a relaxation of Government control of physical assets. Sooner or later, the pressure on our low-interest structure will develop enormously, in view of the inevitable world-wide demand for capital, and that may develop within the period of four years after which the Government promise this review. If that happens then the local authorities under the Bill, under the Regulations that the Government have already indicated, will have been tied up with long-term loans at high rates of interest.

I want to know what justification there is for that. If the Treasury are to be reasonable in four years, if the Treasury are prepared to grant "break" clauses if and when the interest rates rise, why cannot they say so now? Why cannot they relieve the local authorities of this threat that is overhanging their heads owing to the Treasury's rigid attitude in refusing a "break" clause and promising nothing more than that if and when high interest rates do come, they will consider what can be done? If there is any valid reason for compelling the local authorities to borrow long-term, let the House be told now what it is.

11.44 a.m.

Mr. Spearman (Scarborough and Whitby)

I think that I can claim to know something about the matter under discussion—not a claim I can make nearly so often in this House as I should like to—because in the past I have been responsible for advising local authorities in these matters, and, indeed, for raising, through public issues, very considerable sums for them. That method of raising money will of course be prevented in the future by the Bill. I believe the Bill will facilitate borrowing, because it will prevent that scramble of issues from which we have suffered in the past, and which has led to indigestion in the market and consequent delay in raising money at the lowest possible rate. I think it will also benefit local authorities, because it will enable them to borrow money at the same rate as Government issues, subject to two condi- tions to which I shall refer later. Also the Bill will save local authorities a certain amount of expense, as they will have to pay an even smaller commission to the Government than they used to pay to people like myself.

I hope that the Financial Secretary to the Treasury will be able to elaborate a little more the terms on which local authorities will be able to borrow. According to the Bill they will have to pay the rate current on local loans, that is, at the present about 3¼ per cent. The Chancellor in his speech last week explained that there would be certain Amendments, to enable local authorities to borrow from the Local Loans Fund at the same rate that the Government themselves can borrow for the same term. Naturally, in the open market even the very best local authorities cannot borrow, generally speaking, quite so cheaply as the Government for the same period, but they can borrow for medium-dated stock at cheaper rates than the Government can borrow for irredeemable, in certain cases. I remember once raising a public issue for a corporation, at the cost to them of £2 17s. per cent. per annum. Had they gone to the Local Loans Fund they would have had to pay about £3 4s. There is a clear anomaly there in that although Government credit is even better than the best local corporation credit, it is not necessarily better for securities of different maturities. I hope that the Financial Secretary can give us some clear assurance on that point.

The second condition to which I want to refer, is in relation to those new issues which are to be permitted. I understand that local authorities will be allowed, and in fact encouraged, to convert existing issues when they mature and to raise the money by stock issues; but that they will be limited to an appeal to existing holders. It is clear that the price at which they can issue a stock, if they are limited to existing holders, cannot be so high as if they had the whole market to appeal to. Let me give an actual instance. The London County Council have recently repaid their 4½ per cent. loan, and raised a new loan at 3 per cent., but they were only able to offer that to existing holders. Consequently they had to do it at the price of 99. I have little doubt but that under peace-time conditions, if they had been able to make a public issue to the whole country, they could have done it at a higher price, say 99½. Therefore, I suggest that if the Government are going to encourage local authorities to issue strictly to existing holders stock to replace their matured securities the Government ought to underwrite the issue, not at the price at which it could be taken up by existing holders, but at the price at which it would have been taken up, if the local authority had had the whole market on which to depend.

I would now like to refer to the point raised by the hon. Member for East Stirling (Mr. Woodburn) in his speech last week. I know that he cannot be here to-day because he has had to go to Scotland. He said that the fundamental point in his speech on the Bill was the question of the rate of interest to be paid and then he said: The question arises: Is the cost of money still too dear? There is a great deal of wastage in this country in the running of our banking system. In a small agricultural town one sees five or more banks, cheek by jowl, all doing the same type of business. That cannot be justified on the grounds of efficiency."—[OFFICIAL REPORT, 24th January, 1945; vol. 407, c. 922.] I quite agree that it is very material to the Bill, because it governs the rate of interest. I know how very exercised and concerned treasurers of local authorities are as to the price they may have to pay after the war. They remember that they had to pay as much as 7 per cent. after the last war. However, I suggest that my hon. Friend need not be concerned about the procedure adopted at the present time. He asked that the Chancellor of the Exchequer should look into the matter and make clear to the House that he is satisfied as to the cost in this connection. I would like to tell him that I do not think the present system of running the banks is adversely affecting the cost of money to the country at the present time.

The hon. Member says that it is very inefficient to have several banks in one town, but I would point out to him that in South Kensington and in other parts of London, he may find, for example, two branches of the Westminster Bank within a few yards of each other. They have been running in that situation for a great many years. That is an example to show that a well-managed bank does not consider that costs are increased materially in that way. They would say that each branch is just about the right size for one man to look after, and that any small economy achieved by taking several branches into one building would be more than offset by the cost of the new building. Though that cost is little, the cost of removing all competition might be very great indeed. If a borrower had only one bank to go to, he might very well find that he did not get satisfactory terms. It very often happens that one bank will give a loan while another will not. I suggest further that even in cases where the borrower was not credit-worthy, and could not get a loan at all, a great deal of unnecessary bitterness would be produced if he had no alternative, because he would think, no doubt wrongly, that there was some personal prejudice in the matter.

Very briefly, I would now like to go over the question of costs. I think the view of my hon. Friend would be that the increase is due to State action, in creating bank money, that is, the increase in deposits. They actually have gone up between December, 1940, and December, 1944, from £2,800,000,000 to £4,540,000,000. His contention would be that that increase of £1,740,000,000 means huge profits to the banks, and that if the profits were cut down, the country and the corporations could borrow more cheaply. I suggest to him that the vast percentage of that increased deposit, over 80 per cent., is taken up by Treasury deposit receipts. Those Treasury deposit receipts earn 1⅛ per cent. Therefore the total amount that the bank gains from it is 1⅛ per cent. on £1,350,000,000. That is to say, their gross increase of profits amounts to under £15,000,000. Out of that, they have to pay a rate of interest to depositors and a huge increase in management costs, because all this war expenditure does not create one deposit, but innumerable deposits, payments to contractors, sub-contractors, salaries and so on. They also have to allow for a very considerable diminution in the income earned by their other assets, for example the reduction in their advances. So I do not think that we have got to be concerned on this account. It was suggested that the banks had succeeded in evading Excess Profits Tax by what would amount to hoodwinking the Inland Revenue. I suggest that a much more plausible explanation is that they are not making the money.

I would like to refer for a moment to what was said by the hon. Member for Chesterfield (Mr. Benson). He was uneasy about this Bill, if I understood him rightly, because he said that we shall be forcing corporations to borrow for an indefinite period and thereby paying very much more than they would if they were able to borrow for two or three years.

Mr. Benson

I did not say that I was asking that local authorities should be able to borrow for two or three years. What I said was there is a very big difference between borrowing for 20 years, and borrowing, as local authorities have done, for 10 years, which is a medium term.

Mr. Spearman

I quite accept that correction, but my hon. Friend would, no doubt, agree that forcing local authorities to borrow for a longer period would not matter, if we were reasonably sure that there was not going to be a big difference between long-term rates of interest and short-term rates. If my hon. Friend's anxiety is that that is likely to take place after the war, I suggest to him that it is well within the power of the Treasury to keep down rates of interest after the war, as well as during the war. We remember that, at the beginning of the last war, the country was paying interest at the rate of about 3¼ per cent., and that, after borrowing vast sums, we ended up by paying 6 or 7 per cent.; while, in this war, we have borrowed something like £20,000,000,000 and are paying a smaller rate of interest now than at the beginning. I do not think that is due to chance. It is due to an entirely fresh technique of monetary control, which I am quite sure it is well within the power of the Treasury to maintain after the war. And it is most important, looking at it from the point of view of the corporations, that they should do so.

I should like to refer to what the Chancellor of the Exchequer said last week in answer to the hon. Member for South Croydon (Sir H. Williams). The right hon. Gentleman referring to the two new institutions said: They will provide additional facilities. The amount of capital available for investment is, in fact, limited."—[OFFICIAL REPORT, 23rd Jan. 1945; Vol. 407, c. 648.] I hope the right hon. Gentleman meant by that statement that, as we all know, the physical resources are limited, and the amount that can be spent is limited by the capital and labour available. I hope he did not mean to imply any limit in the amount of capital that can be created, because, it he did mean that, I should have shared some of the anxiety of my hon. Friend the Member for South Croydon. In the past, before we learned the new monetary technique, the Government thought it necessary, in order to avoid the risk of inflation, to fund a very considerable proportion of the floating debt and to limit the supply of bank money; but I suggest that these two methods are inconvenient and, indeed, entirely ineffective ways of checking inflation, and I hope that they will not be employed. I hope that the Treasury, in regard to the amount of bank money created, will be guided entirely by what they think necessary to achieve that rate of interest which they think desirable; I think this is entirely under their control, provided always that the export of capital is controlled.

12.0 noon.

Mr. R. C. Morrison (Tottenham, North)

I think the Debate on the Second Reading of the Bill has not indicated any desire on the part of hon. Members who have spoken to oppose a Measure, the general scope and idea of which have been accepted, with some important reservations, to which I shall refer. We are all agreed, I think, that the Bill is useful and necessary, but the first simple question that I want to ask is: Why was it necessary to introduce the Bill, when the Government have, apparently, for some time past, been operating its provisions? I have a letter from an urban district council dated 19th October, 1944, which says: With regard to the loan of £4,024, I regret to inform you that the Ministry of Health have given sanction to the raising of the loan, but with a condition attaching to it that the money shall be borrowed from the Public Works Loan Board. I regret that this is the case. In that case, apparently as long ago as last September, the Ministry of Health informed this council, although the council themselves were able to arrange a loan at a rate of interest of £3 2s. 6d. per cent., that they would not be allowed to accept it, but must accept a loan from the Public Works Loan Board at a rate of interest of £3 5s. per cent. I am rather curious to know whether the Ministry of Health has been acting illegally in operating this Bill, before it has had its Second Reading in the House of Commons.

My next question is with regard to the following passage in the speech of the Chancellor of the Exchequer on 24th January: It has been confirmed that the new scheme will continue in operation only for so long as it is necessary, and that it will be renewed, in consultation with the local authorities, in any event, four years after the end of hostilities in Europe The Chancellor may not be Chancellor in four years' time, and what I want to know is whether his assurance binds his successors. Will it be possible, at the end of four years, for someone to get up on these benches and ask the Chancellor, whoever he may be, about this assurance and to be told that the right hon. Gentleman's successor is not bound by it? What I wish the right hon. Gentleman to make clear is this: If he is so definite in giving that assurance that it may be necessary to review the provisions of this Bill in four years' time, why not put a definite time in the Bill? Later in his speech, the Chancellor said: Secondly, local authorities have been assured that the Treasury will always be ready to consider any representations which they wish to put forward about the working of the scheme, and that if, for that purpose, the associations of local authorities wished to appoint small standing committees, one for England and Wales and one for Scotland, to maintain contact with the Treasury, such a procedure would be acceptable. The next question which arises is that these standing committees may find that, in certain cases, local authorities would be able to borrow on cheaper terms. What then? It has been suggested in this Debate that, under this Bill, there is no question of any local authority being able to borrow more cheaply than through the Public Works Loan Board. If that is so, why not give them the chance to borrow? The right hon. Gentleman went on to say: The Treasury may, by regulation, allow exceptions from the operation of the Clause, that is, Clause 1— and regulations will in fact be made to permit of certain exceptions of a general character."—[OFFICIAL REPORT, 24th January, 1945; Vol. 407, cols. 909–910.] Would the right hon. Gentleman, when he replies on that point, answer the very simple question which has been put already this morning by at least two Members, and which was put on the last occasion? It is obviously the principal ques- tion on which the House would like to have an answer before passing the Second Reading of the Bill. Why not include in the exceptions which are going to be proposed under the regulations a simple provision providing that they can borrow on more advantageous terms than they can be offered by the Public Works Loan Board? What is the objection to giving them the opportunity?

My final point relates to the lack of understanding about this matter. From a fairly long experience of local government, this question interests me. It has been said in the Debate that local authorities may obtain the permission of the Ministry of Health. The Ministry of Health has a very tight control over local authorities now, and no local authority can borrow money without the sanction of the Ministry of Health. There has been a good deal of comment on the necessity for housing loans. As one who is a member of a local authority, with experience covering a number of years, I would say that what worries me is this. In the past, when we had come to the position at which we had all our housing plans and housing schemes ready, and all we wanted was money to enable us to proceed, we asked for tenders. We got tenders, and it has been the case not only in my local authority, but in numbers of others, that when tenders amount to £50,000 or £100,000 and even more there have been only a few pounds of difference between the lowest tender from a local firm, and the lowest tender from a firm perhaps 20 or 30 miles away. Therefore, the local authority, out of sheer local patriotism, has appealed to the Government, through the Ministry of Health, and asked to be allowed to accept the local tender, even though it is higher, on the ground that it is a local firm employing local labour and that they ought to allow an exception to be made, instead of following the usual practice of giving the contract to the firm with the lowest tender. In every case the Ministry of Health definitely said, "No, certainly not. You are to accept the lowest tender." Why then are local authorities to be told in this case, irrespective of whether they can obtain money, say from a friendly society or any other source at lower terms, that the Government insist that they should take the money at the price fixed by themselves?

12.9 p.m.

Mr. Molson (The High Peak)

My hon. and gallant Friend the Member for Chichester (Lieut.-Commander Joynson-Hicks), in his criticism of the Bill, advanced the argument that anything that was going to interfere with the free competition between borrowers and lenders was to be deprecated. In the old days of laissez faire finance, the same principles were applied to the rate of interest for borrowing money, as were applied in all matters of trade. Local borrowers at that time competed with each other, and indeed, against the Treasury also, but from 1931 onwards, from the time we went off the Gold Standard, we have moved, as my hon. Friend the Member for Scarborough (Mr. Spearman) pointed out, into a world of managed currency. That that has been very much more successful from the national point of view is shown by the fact that, whereas in the last war, the rate of interest that the Treasury had to pay rose from 3¼ per cent. to 6 or 7 per cent., here we are, in the sixth year of this war, borrowing at between 2½ per cent. and 3 per cent. I feel, therefore, that this Bill does not represent any change of policy, nor indeed any very radical advance in that technique, but does, in some degree, simplify the method of control.

There is at the present time, first, the need for the local authority which wishes to borrow money to obtain the consent on matters of policy of the appropriate Department, usually the Ministry of Health. Ever since 1931, in some degree, but especially since the war, there has been a control exercised by the Treasury to prevent a local authority going into the market in a way which would be inconvenient to other local authorities and especially to the Treasury itself. But I should have thought that it would make for simplicity and order, in the exercise of control for all borrowing by local authorities to be done through one single funding department from money which is at the disposal of the Government. It must also, in the vast majority of cases, cheapen the rate of interest at which the local authorities are able to borrow.

Last week the hon. Member for The Wrekin (Mr. Colegate) said he believed that there were cases where local authorities were able to borrow money more cheaply than from the Local Loans Fund. I had the curiosity to look up the returns upon different Government securities last week and I found that, whereas the yield upon local loans was £3 3s., that upon War Loan was £2 18s. My hon. Friend the Member for Scarborough has rightly brought out the point that, as the Local Loans Fund is now financed, the yield upon that money has been higher than upon other forms of Government security. I cannot believe—and I was interested to have my hon. Friend's confirmation of the fact—that it is the case that any single local authority can borrow more cheaply than the Treasury for a comparable period of time. If they cannot borrow more cheaply than the Government, for a comparable period of time, surely, no local authority stands to lose by this new procedure, and those whose credit has not been very high, must stand to gain by it.

I was not quite able to follow the logic of the reasoning of the hon. Gentleman the Member for Chesterfield (Mr. Benson). He complained that in the days when the rate of interest upon money was high, the local authorities had been required to enter into long-term loans, and borrow through the Local Loans Fund, and he pointed out that if they had been able to borrow for a shorter period of time, they would now be able to obtain the same money more cheaply. I venture to point out that, if the rates of interest upon money in the last 20 years had risen instead of fallen, then, to borrow for a long period of time would have been to the advantage of the local authorities and not to their disadvantage. But I could not follow the logic of his argument when he went a little further and suggested there was a great danger that the rates of interest upon money after the war would rise again. In that case, I do not see why he should deprecate local authorities now borrowing for a long period of time.

Mr. Benson

I did not.

Mr. Molson

In that case I mistook the hon. Member's argument, but it seemed to be difficult to argue that it had been to their disadvantage to borrow for a long period of time, when rates of interest were falling, and then to deprecate the provisions of this Bill, although saying that after the war, there may be a considerable rise in interest rates.

Mr. Benson

I do not think the hon. Member quite realises that under the regulations the local authorities will have to borrow at high rates of interest if interest rates for long periods go up. No local authority will object to borrowing for a long period at 3 per cent., but so far, the Treasury have been adamant in refusing the requests of local authorities that if interest rates go up they shall be enabled to include in their terms a "break" clause. It is that to which I was objecting.

Mr. Molson

Obviously the "break" clause would have to apply both ways, and the local authorities would then have to be called upon to pay a higher rate of interest for the further currency of their loan. They cannot really expect to have it both ways.

Mr. Benson

I am sorry to interrupt, but this is the crux of the whole matter. The Treasury, having burnt their fingers once by borrowing long, propose in future to feed this fund by short- and medium-term borrowing, so that they will get the advantage of short-term borrowing in cases of a high interest rate but are not passing that advantage over to local authorities. That was the gist of my complaint.

Mr. Molson

If the hon. Member will refer to what the Chancellor of the Exchequer said—reported in column 194 of HANSARD last week—he will see that the right hon. Gentleman indicated that an Amendment would be moved to this Bill which would enable low rates of interest to be charged to local authorities where the loan is for a purpose for which it can properly be raised over a shorter period of time. What the hon. Member for Chesterfield was advocating was that local authorities should be allowed to borrow short for purposes like housing. He referred, for example, to a period of 40 years for housing and 80 years for roads. Surely it is a fundamental principle of good finance that if the purpose for which the money is being raised is housing or roads then the period must be the period of life of the house or the road. I should have thought it was completely against all sound principles of finance to allow local authorities to enter into financial liabilities for a shorter period than is appropriate to the purpose for which they are borrowing.

In the third place, if it be the case that by tapping special local sources, local authorities have on occasions been able to borrow money more cheaply than could the Treasury, it still appears to be desirable that those sources should be made available to the Treasury. If it be the case that by means of mortgages or sinking funds, or by means of municipal banks, to which the hon. Member for West Walthamstow (Mr. McEntee) referred, it has been possible for local authorities to obtain money on what was called, I believe, a cash-and-carry basis by one of the earlier speakers, it still appears to me to be desirable in the national interest that such sources of borrowing should become available to the Treasury for the general use of the country as a whole and not be available only to a particular local authority.

For these reasons it seems to me that this Bill is a means of bringing the financial system of the country more directly under the control of the Treasury, and on that ground I welcome it. It does not appear to be a purely machinery measure, although most of these controls do already exist and are exercised by the Treasury, but that it is a simplification of the machinery which will enable the Treasury to carry out the purpose that is indicated in the White Paper on Full Employment. In that paper special importance is attached to the borrowing programmes of local authorities in order to maintain total capital expenditure at a high and stable level for the purpose of maintaining employment at a high and stable level. Surely it must be easier to do that if the whole of the borrowing of the local authorities comes through a single conduit pipe from a single pool.

It is not only a matter of maintaining the borrowing at the right level but also a matter of timing, and in spite of what was said by the hon. and gallant Member for Chichester I should have thought it was obvious that by this means it would be possible to control the timing more accurately than in the past. The hon. Member for Scarborough, with his expert knowledge on this subject, did say there had been many cases where, in order to avoid congestion in the capital issue market, some local authorities had been kept waiting, and it has certainly happened that local authorities which have raised large sums of money which were intended to be Spent over a number of years have at the beginning had more funds available than they were immediately able to use. Therefore I believe that this Bill will improve the Treasury machinery for the control of the money market and will enable them after the war more accurately to control the level and timing of capital expenditure by local authorities, and that being so it is a definite and practical contribution to maintaining full employment.

12.24 p.m.

Mr. Arthur Jenkins (Pontypool)

Having listened to this Debate both to-day and on the previous occasion, I do not think it can be said there is a great deal of opposition to the Bill. Some hon. Members have raised the question of the taking away of certain liberties from local authorities in so far as they will not have the opportunity to continue to borrow where they wish. That point was raised in the main, perhaps, by the hon. Member for The Wrekin Division (Mr. Colegate) and also by the hon. Member for Tamworth (Sir J. Mellor). Personally I do not regard this as a taking away of the liberties of the local authorities if a way can be found of getting money at a cheaper rate. I have been a member of a county council for a number of years and for some years made it my business to try to get money as cheaply as possible, but the view was held that our security was not as good as that of certain other authorities with the result that we paid pretty heavily. Some hon. Members object to Clause 1 on the ground that certain authorities would be able to raise money a little more cheaply if they retained their liberty. I think we must look at the case of the local authorities of the country as a whole to see whether the Bill will give them an advantage generally rather than at the few exceptions among local authorities. On the whole local authorities have paid rather heavily, and I would like the House, in the midst of this more or less technical discussion on finance, to have some regard for what will be the effect of the rates of interest that will have to be paid.

There is a programme for building 4,000,000 houses in ten years. The cost of those houses will vary, I suppose, from £500 each to something approximating £1,000—nobody can say at the moment. All that money will have to be borrowed. If the houses are built at an average cost of £500 per house the total expenditure will be round. about £2,000,000,000, a very substantial sum, which will be a burden upon the local authorities and the people who occupy the houses, and we ought to have regard for that, though little mention has been made of it. We have talked of this as a purely financial problem. It is all that, but it is something very much more, a human problem as well. This interest will have to be paid for, and the rates of interest will determine what will be the rents of the houses. I have tried to work out the effect of the rates of interest upon the rents.

Before I come to that let me say that at the end of the last war we had experience of housebuilding with absolute freedom for local authorities to raise the money as they wished. Lots of them paid 6 or 7 per cent. for the money. I remember rejoicing greatly when the first two houses were completed. They cost £1,200 each and have been a burden on the people of the district ever since. We really must avoid that state of things arising in the future. As I see the end of the war period, there may be a great demand for all available finance—demands for finance for the reconstruction and development of industry, and the like. There will be need, undoubtedly, for thousands of millions. It has been said in this House that the mining industry alone needs an expenditure of £300,000,000 in order to put it on a proper basis, and there has also been talk of the needs of the cotton trade and shipping. I think the hon. Member for Scarborough (Mr. Spearman) referred to the possibilities of a scramble for money at the end of the war. If there is a shortage of money, as there may well be, there will certainly be a scramble, and if there is no control rates of interest will be very high. It will create a situation such as we had at the end of the last war. Then we sent sums of money abroad to help to build the Gdynia railway and the new port of Gdynia. We must make none of those mistakes at the end of this war.

Let me return to the housing problem. I estimate that if the houses are built at a cost of £500 each the housing programme will involve an expenditure of £2,000,000,000. What will be the effect of that upon the rates of interest and upon the people who live in those houses and upon the ratepayers who will have to subsidise them and upon the taxpayers who also will have to subsidise them? It is of very great importance that we should keep the cost of interest as low as possible, as I hope, also, that we shall control the cost of materials, in order that the houses may be built at a reasonable price and let at reasonable rents. If this housing scheme of 4,000,000 houses when it is completed works out at a cost of £500 per house, which is a very low cost, it will mean that 1 per cent.—the difference between 2 and 3 per cent.—upon that capital investment will amount to £20,000,000 a year. This will have to be raised somehow. The loan will be for 60 years, so that over the whole period that difference of 1 per cent. will amount to £1,200,000,000 sterling. When we put this financial question in that way, we see what a human problem it becomes.

It is, therefore, of very great importance that the Chancellor should introduce a Bill of this kind in order to control the rates of interest, to take away from the people who control our finance the liberty to invest it as they will, and at as high a rate of interest as they can. I hope that the Chancellor will endeavour to do something like we have done during the war. The hon. Member for The High Peak (Mr. Molson) said this morning, as I thought quite rightly, that we have changed our financial technique. The financial technique of the last war led us into about 5 per cent., on an average, for the money involved in fighting the war, whereas, if I read the figures accurately, during this war we have done it on an average of about 2 per cent.—a saving of 3 per cent. on £20,000,000,000 or more. The saving is enormous. That has been done by a new technique of finance. Can we apply that method to the future? Shall we apply it to the future? Is the Chancellor, or the Financial Secretary to the Treasury, in a position to-day to tell this House that he is prepared to continue the technique used during the war for the purpose of aiding local authorities to carry out this vast housing scheme?

I am always getting into difficulties in this House when I hear the financiers talk. For instance, the hon. Member for Chesterfield (Mr. Benson) led me into difficulties this morning. I am not quite sure that I agreed with much he said. But on the general question of the rate of interest on loans if the Chancellor is not ready to make a pronouncement to-day I think he should assure the House that every possible effort will be made in order to get these loans granted to the local authorities as cheaply as possible. If there is any doubt about the application of the methods we have used for the past five years, we should have an inquiry to find out whether or not it is possible. I am a bit tired of this usury that is practised on the local authorities all the time. My hon. Friend the Member for Ipswich (Mr. Stokes) said last week, if I understood him rightly, that 25 per cent. of the rate-borne expenditure of that city was used in payment of interest on loans and repayment of them. In my own county 15 per cent. of the rate-borne expenditure is used for the same purpose.

Mr. Spearman

May I interrupt my hon. Friend? Can I take it that his complaint of usury, and the high rates local authorities have to pay, applies only to the past and not to recent years?

Mr. Jenkins

It is rather better at the present time. It is true that some loans are being raised at present at 2¾ per cent., perhaps at 3 per cent., but for the nation we have raised money at 2 per cent. during the war. Can we do that in peace-time? I have already told the House that the difference between 2 and 3 per cent. on this housing scheme will amount to £20,000,000 a year. I want to save that money if I possibly can and we could. It would mean an average decrease in the rent of each house of 2s. per week, but it would also reduce the subsidy from the local authorities to that house, and the subsidy from the State. All of us would derive advantage if we pursued that policy and, therefore, I suggest to the Chancellor that this matter should be looked into very carefully indeed.

Now about the usury of local authorities. There has been a curious practice for many years in this country by which we refuse to allow local authorities to raise more rates at any given period—the year or half year—than they estimate to spend. Therefore, most of the schools that are built and the roads that are made, and various other things, have to be carried through on borrowed capital. It is an astonishing fact, and a somewhat depressing one to me, that the amount of the outstanding local authorities' loans in this county at the present time is well over £1,000,000,000, and out of the rate- payers and out of the grants we are taking £78,000,000 a year to pay for it. Surely the Chancellor realises—I am quite sure the Minister of Health does—what a clog that is, how it clutters up the activities of the local authorities. There have been instances where local authorities have actually had to increase the rates, when they raised a loan, in order to make payments upon that loan. There are some authorities who are rich enough and wise enough to carry out as much of that work as they possibly can out of revenue, but it is done more or less by a trick.

I have suggested for years that we should have a development fund account into which there should be paid the product of a 6d. rate, or whatever is the required amount in order to meet capital expenditure as required. Under the system of borrowing now operating, in the case of every school we build on borrowed money costing say £100,000 at the end of the period we have paid £200,000 for the school. That is, we pay £2 for every pound's worth of value that we get. It is bad. It clutters up local government. It prevents us progressing as rapidly as we should, and it makes it difficult for us to carry out schemes. I am not suggesting that the policy should be put into operation in a very short period; a policy of that kind should cover a long period, but it would be very helpful and it would be a saving to the State, to the local authorities and to the ratepayers. I do want this House to realise what a large effect the rate of interest will have upon house rents unless it is kept at a very low level. Since we changed our technique of finance in this war, as compared with the previous war, and saved roughly 3 per cent. by so doing, there is no reason in the world why we should not consider the application of that technique to granting loans to local authorities, thereby getting the money at the lowest possible interest. Unless we do this, we shall have great difficulty in fixing the rent of the houses. We shall go on arguing year after year about the rate of subsidy that must be paid from the local authority and from the State.

Therefore I ask the Financial Secretary to give this matter his attention. I do not expect him to make a definite pronouncement to-day, but it is so important that it should receive full consideration by the Chancellor himself. There, should be an inquiry to find out whether or not it is practicable to get these houses built on borrowed money at a very low rate of interest. There are people who say that it must be 3½ per cent. or 3¼ per cent.; other people say it can be done for 3 per cent.; others think it can be done for 2½ per cent.; but there is a strong body of opinion contending that it can be done at the present time for 2 per cent. The House should take advantage of the opportunity that is offered to us to-day to find out whether or not that 2 per cent. can be fixed and controlled for a long period. We have left behind the laissez faire days, we are now under a measure of control, and we ought to be able to control finance in order to use it as an instrument for social betterment, instead of allowing it to be used by certain people to exploit the taxpayers.

12.40 p.m.

Mr. McEntee (Walthamstow, West)

I raised a point last week about the small local savings banks. I asked the Chancellor whether they would be protected, and the Chancellor nodded his head. But when an hon. Member nods his head the fact is not recorded in print, and the Chancellor gave no assurance otherwise that these banks would be protected. Personally, I do not think there is much doubt about it, but there is some doubt and I would like the right hon. Gentleman who replies to-day to make clear whether the small local savings banks will be fully protected so that they can remain in existence—because that is what it really means.

Possibly the right hon. Gentleman knows their origin and the work they do, but as I happen to be the chairman of one of them—I am not quite sure that it is not the only one in England—I am rather concerned about it. They were started originally, I think, by the right hon. Gentleman who is now Secretary of State for Scotland (Mr. T. Johnston). The first, as far as my knowledge goes, was started in a little place called Kirkintilloch. It was a small but very successful experiment, and as a consequence many other places in Scotland followed the example of Kirkintilloch and a number of these municipal banks grew up. They had only one object, to encourage the people to save money, and they had available to them only one means of investing that money, namely, to loan it to the local authority in whose area the bank was situated. Those banks, therefore, were very circumscribed. If the only place from which a local authority can borrow money under this Bill is the Public Works Loan Board in future, it may happen, unless some guarantee is given, that these banks will no longer be able to lend money to the local authorities and therefore will go out of existence altogether.

Whenever I see a good thing in Scotland or anywhere else, being an Irishman myself, I always take advantage of it, and try to get it adopted where I happen to reside at the moment. Some years ago it happened that the borough treasurer and the clerk of the council of Walthamstow and myself spent our holidays together, and we went round those banks in Scotland to find out their experience and to apply it, if possible, with advantage to the borough in which we live. As a consequence we established one of those local banks in Walthamstow. I was made chairman, and I am still chairman of it. We started that bank with a capital of 22s.—not a very big start for a bank—in 22 1s. shares, for there were 22 members of the local authority who were prepared to subscribe a shilling each for a share. Our bank has gone ahead, and we have, in fact, lent to the local council between £50,000 and £60,000, all arising out of that 22s. subscribed a few years ago. We loan it to the local authority at a rate of interest lower than the Public Works Loan Board have been able in, I think, any case to loan it.

Incidentally, the people who deposit their money there get a somewhat higher rate of interest than they can get in the Post Office or similar places. I would like an assurance that nothing will be done by this Bill to prevent those banks in Scotland, and certainly my own bank—I call it my own bank, but I get nothing out of it; nor does anybody else associated with it get payment—from continuing. It is an advantage to the people who deposit their money, because they get a higher rate of interest, and an advantage to the local authority, because they pay a lower rate of interest than they would pay if they borrowed in the public money market or from the Public Works Loan Board.

I am concerned also with the Small Dwellings (Acquisition) Acts. In Walthamstow, for a number of years, we have lent considerable sums to people who desire to buy their houses. We have borrowed the money from the Public Works Loan Board, and the rate of interest has, on the whole, been satisfactory. My recollection is that at one time the rate was 3¼ per cent. If there were a "break" clause, and we were able to take advantage of recent borrowings in the public money market, we could borrow at 2¾ per cent., and redeem the loan from the Board. If we are compelled to borrow from the Public Works Loan Board only, there is no guarantee that 3¼ per cent. will not be exceeded: we may be compelled to pay 3½ per cent. Then, some time after it may be possible to borrow in the public money market at 2½ per cent. Why should we be compelled to continue paying 3½ per cent. if, by having a "break" clause, we could pay off that money by borrowing at a lower rate of interest in the public money market? I am also concerned as to whether money will always be readily available if the Public Works Loan Board is the only source from which we can borrow. There have been times when the Government have prevented local authorities from borrowing at the moment when the local authorities wanted to do so. We have obtained sanction to borrow from one Department, who have said that the purpose for which we wished to borrow appeared to be a very good one, but the Treasury would not sanction the loan at that time; and long delay has occurred. Can we have a guarantee that there will not be very long delays in allowing local authorities to borrow for any good purpose, and particularly for the purposes of the Small Dwellings (Acquisition) Acts?

Housing loans have been referred to. I remember that in the last war, during part of which I was chairman of the finance committee of the local authority of which I am a member, we borrowed money for housing, and we had to pay as much as 7 per cent. interest. I was very insistent that our local authority should have a "break" clause. We were able to redeem some of those loans, which had been raised at 7 per cent., 6 per cent., and 5½ per cent., by borrowing money at a lower rate; and, in consequence, we saved considerable sums. It appears that, under this Bill, we should not be able to do that. I think that any local authority should be able, through the instrument of a "break" clause, to get money at a cheaper rate than they have been paying, if opportunity offers. On the whole, I think the Bill is a good one, and that it will operate in almost every case to the advantage of the local authorities. But one aspect of considerable importance has not yet been mentioned. If you borrow in the open market, you generally pay a considerable commission to the agent from whom you borrow. These agents apparently have such a hold on the money market that it is difficult to get money without going to them. They are middlemen in the money market, and they take considerable pickings, which do not have to be paid to the Public Works Loan Board. There are those doubts in my mind; and if the right hon. Gentleman can assure me on them, I shall have no objection to the Bill.

12.45 p.m.

The Financial Secretary to the Treasury (Mr. Peake)

In these days, when "none is for a party and all are for the State," it is more usual to hear speeches in criticism of His Majesty's Government and their proposals than speeches in their support. Therefore, on the whole, we may consider that this Bill has had a favourable reception. Certainly hon. Members have not been divided on party lines; the differences have been as much between Members of the same party as between Members of opposite parties; and hon. Members, out of their great fund of experience in this field of municipal borrowing, have made most valuable contributions, which will be examined with great care in the Treasury before the regulations are framed and these proposals assume a final form. The hon. Member for East Stirling (Mr. Woodburn), on the opening day, raised the same point as has just been raised by my hon. Friend the Member for West Walthamstow (Mr. McEntee), in regard to the position, under these proposals, of municipal banks. We have examined this matter, so far as we have been able to do, and it appears that there is more than one type of municipal bank. There is the municipal bank which is, in fact, the corporation itself, and there is another type which is a separate undertaking, in which the shareholders are very often the councillors, who hold their shares on trust. So far as the former class is concerned, I think Birmingham and possibly Motherwell are the only two of which we have definite knowledge. I am told that with that type of bank a very satisfactory arrangement has been current during the war.

With regard to the latter type, which is, I think, the sort of institution in which the hon. Member is most interested, we shall endeavour to prevent them falling within the mischief of Clause 1 of the Bill. We shall have to examine the matter a little further. We do not think it right that local authorities should borrow at short-term for long-term purposes. It would be very unsound finance to accept money at short call and to invest it in long-term schemes. But, subject to that proviso, we will try to come to some agreed arrangement with these admirable institutions, to ensure that they are not affected by Clause 1. Clause 1 contains a general power of exemption, by means of regulations, and also a particular power of exemption, reserved to the Treasury; so there are ample powers in Clause 1, which, I hope, will enable us to embody within the framework of the Bill an agreed solution of the problem of these municipal banks.

The hon. Member for East Birkenhead (Mr. Graham White), who is not in his place to-day, asked a very important question, which ought to be cleared up. He asked, "Will the rates of interest be the same for all local authorities?" The answer is, "Yes." Ipswich, for example, will be able to borrow on precisely the same terms as London or Birmingham. I think that, as the hon. Member for Pontypool (Mr. A. Jenkins) indicated, there is a good deal of advantage in that. Some of the more depressed areas—the Special Areas as we used to call them, and the Development Areas as we propose to call them in future—had to pay rather more for their money in the past than did the richer localities. I am sure it will be an advantage for all authorities, if the purpose of the loan is sanctioned by the Department concerned, to get their money on the same terms. In this respect I would like to draw attention to the fact that the Chancellor's speech was clear on this point; but, unfortunately, a misprint has crept into HANSARD, at the top of column 915. The Chancellor is reported as having said: Under the new scheme rates will vary according to the purpose of the loans."—[OFFICIAL REPORT, 24th January, 1945; Vol. 407, c. 914–5.] The Chancellor, in fact, said: .… rates will vary according to the periods of the loans"— which, hon. Members will see, is rather a different matter.

The hon. Member for North Battersea (Mr. Douglas), who is a great expert in these matters, raised a number of points. He asked whether the administrative arrangements would be as simple as possible, and the answer is "Yes ". We shall do all we can to avoid delays and complications. As Members are aware, three Departments will be concerned with these applications. There will be the sanctioning Department, usually the Ministry of Health, concerned as to whether the object is a good and desirable one, and whether it comes within the powers of the authority. There will be the Capital Issues Committee, which will be concerned with the quite different and very important question of priorities. It would not be right, for example, even although they have powers, for a local authority to build a new town hall when they were in desperate need of new houses for the working classes, and this question of priorities, which is bound up with the supply of raw materials, is, of course, one in which the Capital Issues Committee has to view the whole field.

Mr. A. Jenkins

Would that Committee determine the priority in the case which has been stated?

Mr. Peake

I should not like to give a definite answer on that point. It might well be that the sanctioning Department would say, "At this stage we cannot give you borrowing powers for an object of that character." The Capital Issues Committee has to survey the whole field of priorities, not only so far as local authorities are concerned but also as far as industry is concerned. The third authority concerned will be the Public Works Loan Board, which will be concerned with the question of security for the amount to be borrowed. The Chancellor described the machinery by which one application will go to all three authorities, who will consult together before any reply is sent from any of them to the applying local authority. I think the arrangements will work well, but should they fail in any respect to do so there will be the two standing committees, to which my right hon. Friend referred, representative of local authorities in England and Wales on the one hand, and of Scotland on the other, which will keep a watchful eye on this procedure and see that there are no unnecessary delays or red tape. The hon. Member for North Battersea also asked whether there was anything in the Bill to prevent expenditure of revenue upon capital purposes. The answer is, "No". It is true that the hon. Member for Pontypool suggested that some trickery was necessary for the local authority to spend revenue on capital purposes. It appears that the London County Council have been doing this from what the hon. Member for North Battersea said, but I myself should not care to give any expression of opinion on that question.

Mr. Jenkins

I did not call it "trickery."

Mr. Peake

If the hon. Member will read HANSARD to-morrow I think he will find that he said that it can only be done by a trick. At any rate, nothing in the Bill will prevent a local authority applying revenue to capital purposes.

Mr. Jenkins

I think it prevents capital expenditure being incurred out of revenue. The point is to accumulate sufficient revenue to carry out a scheme without borrowing.

Mr. Peake

I appreciate the hon. Member's point. The hon. Member for North Battersea also asked whether authorities would be obliged to expend all their available funds before they were given permission to borrow anything more. The answer is that they will not be so compelled, but, of course, if they have large sums of money at their disposal, which they have not spent on some purpose for which they might have had sanction before the war, that will be looked at and they will be expected to take a reasonable attitude and not to come into the market for large sums under the new scheme, so long as they have other sums of a substantial character available.

My hon. Friend the Member for Tamworth (Sir J. Mellor) and my hon. Friend the Member for The Wrekin (Mr. Colegate), respectively, raised a very important point. They said: "Why not make Clause 1 permissive; why not allow authorities, if they can, to borrow more cheaply elsewhere?" I think they had in mind that the current minimum rate chargeable by the Public Works Loan Board would continue, and would be the minimum rate for the future. But the Chancellor, in his opening speech, made it clear that the terms proposed for the new loans would be approximately those at which the Treasury itself is able to borrow.

Mr. Benson

Can the right hon. Gentleman tell us exactly what "approximately" means? The provisional spread is usually anything up to three-quarters of one per cent.

Mr. Peake

The word "approximately" is intended to cover the small fee which will be added to the interest charged to cover the expenses of the Public Works Loan Board.

Mr. Benson

There is no differential interest?

Mr. Peake

If the hon. Member will wait a little while, I will give the precise table of the initial rates of interest which it is proposed shall be charged. I think that when hon. Members hear the figures, they will realise that, in practice, it will not be possible for local authorities to borrow for similar purposes on lower terms than those which are to be fixed.

Mr. R. C. Morrison

Why prohibit them from doing something which it is impossible for them to do?

Mr. Peake

The scale of rates will be as follows: For loans not exceeding a period of five years, 2 per cent.; not exceeding 10 years, 2½ per cent.; not exceeding 15 years, 2¾ per cent.; not exceeding 30 years, 3 per cent., and upwards of 30 years, 3⅛ per cent. Those are almost precisely the rates at which the Government borrow at the present time for a corresponding period, and those rates will assure local authorities that they are to get substantial advantages through the proposals in the Bill. The hon. Member for North Tottenham (Mr. R. C. Morrison) says that if these rates are so low that there will be substantial advantage to the local authority in adopting the procedure laid down in the Bill, why should they be stopped from going elsewhere? We do not want them to go elsewhere. There must be some advantage for the Treasury, as well as for local authorities, in this scheme. We do not want foolish and unwise borrowers to go into the market, and spoil it for everybody else, by offering something substantially in excess of these rates.

Mr. R. C. Morrison

The right hon. Gentleman's argument was that it would be quite impossible for local authorities to borrow on better terms than are to be given by the Government. Why prohibit people from doing something which it is impossible for them to do?

Mr. Peake

It will be impossible for them, in my view, to borrow more cheaply for corresponding periods, but some might care, for all sorts of reasons—such as preserving their goodwill in the market, and having an eye on the future—to borrow outside this scheme. From the point of view of the Treasury, seeking to control rates for money during this very difficult post-war period, it will be a substantial advantage to have all the borrowing canalised in this way, through a single channel, and not to have outside competition.

Mr. Spearman

If there is a substantial improvement in the price of Government stocks I take it that these rates would fall?

Mr. Peake

The rates I have stated are provisional; they are not fixed for all time; they are subject to variation from time to time. Those are the rates which we have in mind for loans when the scheme is initiated.

Mr. Jenkins

In addition to that there will be a slight charge. Can the right hon. Gentleman indicate what that will be?

Mr. Peake

I think it will be something like 4s. per cent.—not per annum—over the whole of the loan. That is intended to cover the expenses of administration. My hon. Friends the Members for Tamworth and The Wrekin asked why there is no time-limit in the Bill. If it is only a temporary Measure, why not put in a time-limit? The assurance given to the local authorities is a twofold assurance, first, that the scheme will continue only so long as it is necessary and, secondly, that there will be a review, in any event, at the end of four years from the cessation of hostilities in Europe. The local authorities themselves have never asked for a definite time-limit to be placed in the Bill, on this scheme. They asked for the assurances that we have given, and that, in my view, is the best course to adopt. It is quite impossible to forecast now what will be the period of years for which this scheme will be necessary. It may be four, five or six years, and it therefore seems best to give local authorities the assurances they have asked for; that the scheme will continue only so long as it is necessary, that there will be a review at the end of the fourth year, and that standing committees of the local authorities will be in touch with the Treasury on the working of the scheme from its commencement to its finish.

Sir John Mellor (Tamworth)

Does my right hon. Friend suggest that the assurances are binding on future Governments? If local authorities are to review the matter with the Treasury four years after the end of the war in Europe, why should not the House also review the matter at that time?

Mr. Peake

We have given local authorities what they desired to have, which were these assurances. That seemed to me to be a reasonable course. My hon. Friend asked whether the undertaking will be binding on a future Chancellor of the Exchequer. I should have thought that it would be quite out of the question for any Chancellor to dishonour a definite undertaking given to all local authorities in the country, in combination, four years previously. That seems to be a situation which it is quite impossible to contemplate. I should not envy any Chancellor, when Members on all sides are interested in local authority matters, having to stand at this Box to try to defend a complete breach of a pledge given by his predecessor to local authorities four years previously. I do not think that that is a situation which we need contemplate.

Sir J. Mellor

Why should we not have an opportunity of discussing the matter? If a limit is put on the duration of Clause 1, it would require only a one-Clause Bill to extend the duration in four or five years' time, should this House consider this appropriate.

Mr. Peake

I honestly do not think that that is a very good reason for putting a time-limit into the Bill, which has not been asked for by the parties concerned, just to give hon. Members a chance of raising the matter in the House. I have been in the House a good many years, and I have found that if there is any subject which Members desire to discuss at any time, there has never been any real difficulty in an occasion being found to discuss it.

Mr. McEntee

Could it not be raised on the Expiring Laws Continuance Bill?

Mr. Peake

This Bill has no time-limit in it and would not, therefore, come under the Expiring Laws Continuance Bill. The pledge is quite definite that the scheme will only continue as long as is necessary and it seems to me much better, as no one can forecast the period of years with any precision at all, to leave the matter open. However, that is a point that can be further discussed in Committee.

Several hon. Members have suggested that the Bill puts local authority finance into a strait-jacket. The statement of the Chancellor of the Exchequer made it clear that a considerable measure of freedom is preserved to local authorities. They can continue to borrow on mortgage, as hitherto, up to the amount outstanding at the end of the financial year 1943–4. I should like to make it clear that the date is the financial year which ended in the Spring of 1944, and not the financial year that ends very shortly. They can renew existing issues which fall due for repayment, or which they have an option to convert. I think that is a very valuable thing. Many authorities want to keep their names in the market. They want to keep the goodwill of the persons who have invested in their stocks, and it is therefore provided that, when the loans fall due for repayment, they may be renewed; and we are going to introduce an Amendment to Clause 4 which will enable the Treasury to underwrite these conversions, and will give us rather wider powers than does the Clause as at present drawn.

The hon. Member for Chesterfield (Mr. Benson) attacked the Treasury for its past sins, starting in 1875 and continuing until a fairly recent date. As far as I am aware, no Local Loans Stock has been issued, at any rate since 1935, when a new form of borrowing for the Local Loans Fund was sanctioned by Parliament. The first part of the hon. Member's speech evoked considerable sympathy in my breast. I went to the Public Works Loan Board about 1924 in order to put up working-class houses, and borrowed, not at quite such a high rate as he mentioned, but at 5 per cent.; and I have been rather gloomily discharging my debt on the annuity method ever since. I entirely agree with him that the methods proposed under the Bill are far better methods of financing this form of expenditure than those adopted after the last war. In fact, if I were not a Member of the Government, I might go even further in that matter.

The hon. Member gave us a considerable dissertation upon long and short-term borrowing. Though I am not very experienced in these financial matters, we can all agree that long-term borrowing at low rates is good, and that long-term borrowing at high rates is bad. I think we can also agree that borrowing short at low rates is a gamble, especially if you do it when you intend to spend the money for long term purposes. It is clear that under the Government's cheap money policy, the next three or four years will offer peculiarly advantageous terms, for long-term borrowing, to local authorities, and I do not think we need fear the situation the hon. Member envisaged, that high rates of interest would quickly supervene, and that local authorities might be saddled with high rates of interest for a long period of years. If anything of that kind occurred, which I think most unlikely, that would be an occasion for a review of the scheme.

Mr. Benson

No promise.

Mr. Peake

There is a definite promise that the scheme will be reviewed at the end of four years, but I cannot envisage a situation in which local authorities will be coming forward seeking to borrow money at high rates of interest. I have already announced the provisional rates for the initiation of the scheme, and I should consider it most probable that those rates will continue in operation for some time. The scheme of the Bill is, in my view, mutually advantageous to local and central financial authorities. Combined demands on the capital market will be very great in the first post-war years. As the gates are opened, there will be great pressure to get in, and we do not want an ugly scramble. It is vital that we should have cheap money for reconstruction purposes, especially for housing, and that money must be immediately available. The Bill provides that it shall be, and it provides an equal opportunity and equal rates of interest for all local authorities. I think I can claim that, as an interim Measure, it will make a substantial contribution to an orderly conversion from war to peace conditions and it may enable a large part of the essential reconstruction expenditure to be undertaken and financed, on terms which will confer a great public benefit for more than one generation.

Question put, and agreed to.

Bill accordingly read a Second time.

Bill committed to a Committee of the Whole House.—[Mr. Mathers.]

Committee upon Thursday next.