§ Order for Second Reading read.
§ 4.3 p.m.
§ The Financial Secretary to the Treasury (Mr. Douglas Jay)
I beg to move, "That the Bill be now read a Second time."
This Bill is no new departure of policy affecting local loan finance; in effect, it provides merely a further annual renewal of the system of local loans which has been in force since 1945. The House will recall that recently we continued in force in the Expiring Laws Continuance Bill, Section 1 of the Local Authorities Loans Act, which compels local authorities to borrow from the Public Works Loan Board. The Bill now before us is the companion Bill which gives power to the Exchequer to make the necessary loans to local authorities.
It is by means of the powers given to us by this Bill, and the corresponding former Bills, that we are enabled to continue loans to local authorities which appear as expenditure below the line in the Budget, and which have, in fact, financed the extensive capital development programmes of local authorities throughout the country in the last five years. Much the largest part of that expenditure is, of course, on housing. There is also expenditure on education, transport, drainage, and a number of other things. We have been lending to the local authorities for expenditure by them annually a sum of something like £300 million by this means. Of that £300 million far the largest part has, of course, been used for housing.
I think it is generally agreed, and I hope that the House will agree today, that this method of finance introduced in 1945 has worked, on the whole, very smoothly and successfully, and has given local authorities the benefit of a regular supply of capital when it was wanted and at lower rates of interest than, on the whole, they had previously enjoyed.
The only real change in this Bill relates to the limit set on the figure of advances plus commitments which the Public Works Loan Board is authorised to make and incur. Under the previous Act the 216 total for advances was £500 million and the total for advances plus commitments was £680 million. "Commitments" in this connection means advances which the Public Works Loan Board has undertaken to make when requested but has not yet made. Under the present Bill the maximum for advances remains the same at £500 million, but the maximum for advances plus commitments is raised from £680 million to £850 million.
The House may be interested to know that in the present year, taking loans up to the end of last month—that is to say, during the first 46 weeks of the current Act—the total amounted to £240 million. Of that, housing accounted for £172 million, educaiton for £16,500,000, transport, water and certain other items for £32,500,000.
There are really two reasons for our proposal to increase the limit for advances plus commitments from £680 million to £850 million. That increase does not imply any sudden expansion in the rate of local authority spending within the investment programme. The total local authority investment programme is rising slightly, but it is not rising at that rate, and that is not what accounts for the increase. The increase is due, in first place, to the fact that local authorities are now being able to plan their programmes rather farther ahead, and, therefore, to submit more fully developed schemes to the Public Works Loan Board and get the commitments farther ahead than previously.
That is, I think, desirable in itself, both in the interests of individual housing or school building schemes, or whatever they may be, and in the interests of the planning of the investment programme. If schemes exist on paper for a rather longer period ahead than previously it will be easier for those at the centre and in the regions, where much of this planning is done, to ensure that the work goes forward smoothly in relation to the availability of labour and materials in each area.
The House will realise that the decision whether or not individual schemes or groups of schemes go forward at a certain date is not determined by the financial limit which we set in the Bill. The effective controlling force is the authority, which is normally the regional officials 217 of the Departments concerned, and particularly the Minister of Works, to undertake the actual physical work. They naturally take that decision in the light of the general limits on the investment programme which have been laid down at the centre for the year in question. I think that this scheme of starting dates decided in the regions has also worked pretty smoothly, and has enabled us in the last few years, while keeping building labour fully employed, to avoid local scrambles for labour and materials.
The other reason for raising the limit is that the local authorities are now preparing to put into effect a rather higher proportion of those schemes which take longer to carry out. For instance, there is a rather higher proportion of school building within the programme than there was a year or two ago; and, generally speaking, a school takes two or three years to build, whereas most housing schemes at the present time are completed sooner than that. If, since the Public Works Loan Board gave its original agreement to a given project for a school, the building of the school takes, say, three years instead of one, that naturally increases the limit of the commitments to which the Public Works Loan Board has acceded.
The Bill is, in fact, annual. What it does is to set a limit, in terms of finance such as I have described, beyond which the Public Works Loan Board cannot accept new commitments until another Act is passed. But in practice we have been passing an annual Bill, and our intention is that the present Bill should, so far as we can foresee, last for at least a year. I should remind the House that commitments which have not been implemented during the period of one Act are carried forward to the next. For instance, when the Act which is now due to expire came into operation, commitments of £230 million, or about nine months' rate of expenditure, were carried forward from the previous period. It is likely that the figure to be carried forward next month will be of the order of £360 million.
This is, of course, in any case merely an enabling Bill which enables loans to be made up to this total. It does not, of course, compel the Public Works Loan Board to make loans up to that figure unless it wishes to do so. I think, therefore, that since we are continuing a proceduring which has been found generally 218 satisfactory the House will wish to give its approval to this Bill today.
§ 4.13 p.m.
§ Mr. Osbert Peake (Leeds, North)
This Bill, which comes forward sometimes once a year and sometimes more often, has never proved, I think, to be a contentious Measure, and it is not likely to do so on this occasion. Since we are agreed, I think in all quarters of the House, that it is quite essential that adequate finance should be available for local authority schemes, particularly those dealing with the housing programme, and as we on this side of the House take the view that the housing programme could and should be accelerated, we certainly should not dream of objecting to adequate finance being placed at the disposal of local authorities for that purpose.
The Financial Secretary said that this was an annual Bill; but one of my criticisms a year ago was that we had had since the war two Bills within a period of six months in 1945 and two Bills within a period of seven months in 1947, whereas in the intervening periods sometimes 18 months had elapsed between the introduction of these Bills. I am very glad that now at last we do appear to be getting back to the practice of having this Bill brought in annually at the beginning of each new Session during the autumn.
I for my part should not be disposed to quarrel with the increased limit which the Bill proposes in regard to the commitments into which the Public Works Loan Board may enter. As the hon Gentleman said, it is very necessary that local authorities schemes for expenditure should be planned well forward, and it may, therefore, be necessary for the Board to commit themselves to the grant of loans on a much larger scale in the future than has been the practice in the past.
I want to say one word about rates of interest, which the hon. Gentleman did not touch upon; and I hope that, with the leave of the House, before we part with this Bill the hon. Gentleman will say a word or two upon that most important matter. All that the hon. Gentleman did commit himself to was to say that the Local Authorities Loans Act, which canalised local authorities borrowing after the war through the Public Works Loan Board, had been a 219 success. In that I completely concur. He went on to say that it had enabled local authorities to get their loans at lower rates than they had previously enjoyed. But I must remind the House—as I did last year—once more of what the intention was so far as rates of interest were concerned.
The Chancellor of the Exchequer, Sir John Anderson in 1945, when the original Local Authorities Loans Act was passed, said that the intention was that the interest rates at which local authorities would be able to borrow should be approximately what the Treasury itself paid, or might be expected to pay, on its own borrowings. That is to say, the intention was that the local authorities should get the benefit of the gilt edged rates of interest in operation at the time when the borrowing took place.
During the lifetime of the Local Authorities Loans Act interest rates have from time to time been changed. Now, nobody would suggest that it is desirable to change those rates of interest frequently; but they must be changed, I think, to conform, over reasonably long periods, with the prevailing interest rates in the money market. From 1st August, 1945, until May, 1946, the long-term rate for a 30-year loan was 3⅛ per cent. On 1st June, 1946, that was reduced. Under the gay and giddy financial dispensation of the now Minister of Town and Country Planning that rate became 2½ per cent. It remained at 2½ per cent. for 18 months. On 2nd January, 1948, Sir Stafford Cripps increased it to 3 per cent., and at that figure it has remained ever since.
Since the devaluation crisis of September, 1949, that rate, of course, has been considerably below, and sometimes very far below, the rate at which the Government themselves could borrow had they gone into the market for long-term loans. Three-and-a-half per cent. War Loan, if I remember right, a year ago had fallen as low as 87 and was giving a return of something like 4 per cent. At the present time, I think that it has recovered to somewhere in the neighbourhood of 96, but if the Government went into the market today for a 30-year loan, they would certainly have to pay considerably in excess of 3 per cent. and probably in excess of 3½ per cent.
220 What is the effect of the Public Works Loan Board lending to local authorities at 3 per cent. at the present time? It is in effect, of course, giving an additional concealed subsidy to many services which are subsidised already. I am quite sure that we all recognise that most local authorities should and do attract subsidies, and subsidies, particularly for housing schemes at the present time, are absolutely essential; but it surely cannot be right that there should be one annual subsidy borne on the Votes of the Department and another annual subsidy concealed through the loans which enable the houses to be built, to be granted for a period of 30 years at rates of interest which bear no relation to reality at all.
It seems to me that in the interest of good accountancy, if of nothing else, the interest rates charged to local authorities should be true rates, and not much lower rates than those at which the Government itself can borrow, and, if necessary, the rates of subsidy provided through the annual Vote should be increased, if that in fact is necessary. I do not think that it can be right to have a concealed subsidy of this character. In point of fact, this concealed subsidy had a very bad effect in the autumn of last year.
If the hon. Gentleman will look at the last report of the Public Works Loan Board for 1949–50, he will see what was the effect. At the top of page 8 there is a table setting out the loans approved by the Commissioners in each year since the end of the war. The figures are as follows: In 1946–47 the loans approved were £294 million; in 1947–8, £278 million; in 1948–49, £269 million. These three years show a steady average of round about £270 million, with a tendency for the figures of loans approved to go down rather than to go up. But in the year 1949–50, when it became so tremendously advantageous to the local authorities to borrow at these absurdly low rates, the loans approved went up by more than 50 per cent., from £269 million in the previous year to no less than £393 million in 1949–50.
When I raised this matter before, the hon. Gentleman said that the Government were aware of this, and had in fact devised effective ways and means of preventing the local authorities anticipating their 221 borrowing requirements, as they undoubtedly have done during the past 18 months, by going to the Public Works Loan Board and borrowing far in advance of any anticipated expediture. I should like the hon. Gentleman, if he will speak again by leave of the House, first to say a word about these interest rates generally, and why they have remained at the same figures since early in 1948, when that really cannot be justified in present circumstances; and, secondly, what steps have in fact been taken to stop the recurrence of what has happened during the past 18 months by way of anticipation by local authorities. I should like him to tell the House what these steps have been and why he is now able to assure the House that these steps are effective for their purpose. I feel sure that the House and the country would be very much interested if we could have a statement upon these matters.
§ 4.27 p.m.
§ Lieut.-Colonel Lipton (Brixton)
Before I proceed with what I really wish to say, there is one point to which the right hon. Member for Leeds, North (Mr. Peake) referred, in the course of which I think he unintentionally misled the House. He drew attention to the fact that the loans approved by the Public Works Loan Board had gone up from £269 million in 1948–49 to £393 million in 1949–50. That is quite correct so far as it goes, but I think it would have presented a truer picture to the House if the right hon. Gentleman had pointed out that the sums of loans advanced had not increased to anything like the same amount.
§ Lieut.-Colonel Lipton
It was, nevertheless, possible to ensure that, although the loans approved may have increased, the loans actually advanced were brought within a greater measure of control, because it is a fact that, at a later stage, the control exercised by the Treasury or the Public Works Loan Board began to become effective. The right hon. Gentleman has repeated more or less the same points that he tried to make about a year 222 ago, when he dealt with the subject of interest rates. If it is possible, I am sure that the House would welcome the opportunity of hearing my hon. Friend the Financial Secretary, because this point was not specifically dealt with in what, I think, was the last debate on this subject which took place in November of last year.
The point to which I should like, in a few moments, to draw attention is the extent to which the Public Works Loan Board, in its present administrative form, serves any useful purpose at all. I recall a speech by the hon. Member for Islington, East (Mr. E. Fletcher), who happens to be a Commissioner and, therefore, perhaps not quite so free to speak on this matter in the House, in which he drew attention to the very limited character of the functions that can now be exercised by the Public Works Loan Board, especially in view of the Local Authority Loans Act of 1945. It is a fact, of course, that when any local authority obtains a loan of this kind, three separate bodies intervene—the sanctioning Government Department, the Treasury and the Public Works Loan Board. So far as I am able to ascertain from speeches on the subject and from the annual report of the Public Works Loan Board, all that the Board does in considering these applications is to examine the credit of the local authority concerned.
The 75th Annual Report of the Public Works Loan Board indicates that out of 13,676 applications which had been made, loans to the extent of £393 million were approved, of which £292 million were actually advanced. In only one case did the Public Works Loan Board consider it inadvisable to grant an advance, and that was in the case of a luckless parish council which wanted to spend £1,923 on a recreation ground. In that one instance, out of the thousands of cases with which they had to deal in the year under review, they considered that no advance should be made, and then only after getting in touch with the Treasury and finding out that they did not regard the proposal as essential in the public interest. The extent, therefore, to which the Public Works Loan Board functioned in this respect during 1949–50 was to knock out one application for £1,923 out of a total of £292 million advanced.
223 The Public Works Loans Commission is quite a high-powered body. A sum of no less than £46,000 is provided in the Estimates to cover the salaries and the small incidental expenses of the department, and something like 100 people are employed. It seems to be using a sledgehammer to crack a nutshell, when we compare this considerable set-up with the extent to which the credit-worthiness of the local authorities making application is considered and examined. I should like to support very much what my hon. Friend the Member for Islington, East, said last year, that the time has come for the whole procedure very considerably to be simplified to the advantage of the taxpayer, to the advantage of the local authorities and to the advantage of everyone concerned.
§ 4.33 p.m.
§ Mr. Spearman (Scarborough and Whitby)
I was very glad that my right hon. Friend the Member for Leeds, North (Mr. Peake), brought out so clearly and forcefully the point about interest rates. I add my appeal to the Financial Secretary to give us some explanation why these rates are fixed at the present level. For many years, as we all know, there has been an entirely new technique, "revolutionary" as it was described by the late Sir Kingsley Wood, who was. I think, the first to practise it, for bringing down the rate of interest on Government borrowing. That has been most effectively and efficiently handled by the authorities, and I, for one, had been entirely in favour for a long time of their bringing down the rate as much as they can, because I thought that the inflationary effect was very much less than the great advantages to the Treasury in borrowing more cheaply.
But it seems to me that the position has entirely changed during the last few years, when we have been told on many occasions from the Government Front Bench that there have to be cuts in expenditure on investment. Therefore, it seems to me to be a very strange time to force down the price of money, and thereby considerably to encourage people to spend money on capital investment, for what may be admirable purposes but which may not be so urgent as other things. I know that the Financial Secretary has a much greater liking and belief in controls than we share on this side 224 of the House, but I wonder whether he can be so confident as exactly how to control the allocation of materials and how to make quite sure that exactly the right priority is given for everything.
Surely he will agree that by making money rather dearer for those who are going to borrow, it will discourage expenditure on those things which are not so urgent. If there is a case for using money rates as an instrument to combat inflation, or in an entirely different state of circumstances the reverse, if there is a good reason for using the money rates intelligently, sometimes putting the rate up and sometimes putting it down, then still more strong to me seems to be the reason for not now having the rate of these loans fixed far below the rate at which the Government can borrow. I think it was an Irish judge who once said that he was going to hold the balance as fairly as he could between partiality and impartiality.
If the Financial Secretary is really to advocate a continuation of the rate at far below the level the Government can borrow, then he is not being neutral in these matters, but is quite definitely giving an inflationary twist. He is really giving a hidden subsidy at the cost of the taxpayer, which is most undesirable. In addition, he is giving a very definite impetus to inflation. In effect, he is saying to local authorities that they can have money at a cheaper price than the market price, and that they can spend what they can. That must be the sort of encouragement they are now getting. I ask the Financial Secretary to reconsider the rate and to put it back to the rate at which the Government can borrow, or to give some substantial reasons for this which, as yet, he has not told to the House.
§ 4.37 p.m.
§ Mr. Benson (Chesterfield)
I do not think there is any great principle involved in the question of the rate at which local authorities can borrow. The right hon. Member for Leeds, North (Mr. Peake) will remember, if he casts his mind back, that we have completely altered the whole basis on which the local loans fund is fortified, and also the methods by which local authorities can borrow. Prior to the war the local authorities had power to borrow in the open market or from the local loans fund, except in the case of certain smaller authorities. The larger authorities borrowed from this fund if 225 they thought that to be a financial advantage to them.
By an Act of Parliament, we took away the power of local authorities to borrow in the open market, with certain exceptions, and compelled them to borrow from the local loans fund. This was to enable the majority of local authorities to borrow at the least possible rate of interest. At the present moment we are lending at 3 per cent., which is probably below the rate which the Government could borrow long. But the Government's borrowing powers are very diversified. They can borrow both on short-term and long-term.
I think I am right in saying that the average rate of interest on the National Debt is now in the neighbourhood of 2 per cent. If we put the credit of the Government behind the local authorities, it is folly to say that we will give the local authorities the same rate of interest at which they themselves can borrow. The whole purpose of the Act was to enable local authorities to borrow more cheaply.
§ Mr. Spearman
I remember taking part in the debate on that Measure and explaining that I had been responsible for raising loans for a good many corporations, and saying that I welcomed it; but not because the corporations were to borrow at a cheaper rate, but because they would be saved a great deal of expense in connection with the issue.
§ Mr. Benson
Certain smaller local authorities are borrowing much more cheaply under the present arrangement. If there is borrowing for a housing estate, it means borrowing for the amortisation period.
Great local authorities like Manchester, with many millions of pounds of debt, could borrow on short-term for very favourable rates of interest, and the effect of compelling Manchester to borrow from the local loans fund on similar terms that local authorities could borrow before the war, could but do a great deal of damage to Manchester. The Government are entitled to say that the average rate is 2 per cent., that they have taken away the powers of local authorities to borrow in the open market, and that there is no reason therefore why they should not supply them with money at less than the long-term borrowing rate. As far as the rate of interest is concerned, I think it 226 is a perfectly legitimate financial transaction.
I regard to the suggestion of the hon. Member for Scarborough and Whitby (Mr. Spearman) that this lending to local authorities cheaply is inflationary, I am not sure that there is any real validity in that argument. It used to be said that the rate of interest tended to control inflation—that if the interest rates went up it tended to damp down investment—but I am not sure that there is any truth in that argument. Investigation as to the effect of fluctuations in the rates of interest for private investment have tended to be negative. The results of the investigation were that very few firms said that they controlled their rate of investment by the prevailing rate of interest. Still less does this apply with local authority.
The great bulk of their investment is on housing, and what controls their expenditure is not the rate of interest at which they can borrow the money, but the rate at which they can get raw materials and labour. It would be very difficult for the hon. Member to establish that a lower rate of interest increases the rate of expenditure of local authorities, which do not invest from the speculative point of view. Taking the two arguments, first the financial unorthodoxy of lending at a lower rate than the Government can borrow long-term, lending, in fact, at a rate which is intermediate between Government long and short-term rates; and, secondly, the argument that this is inflationary, I do-not think that either has any weight.
§ 4.46 p.m.
§ Mr. Maudling) (Barnet
I found it very difficult to follow the argument of the hon. Member for Chesterfield (Mr. Benson). He said that the purpose of the Act was to enable local authorities to borrow money as cheaply as possible. If they did that they would get it at no-rate of interest at all. The purpose is to enable them to borrow, not as cheaply as possible, but at gilt-edge rates. I agree that the credit-worthiness of the local authorities was the same as the credit-worthiness of the Government. It is reasonable that local authorities should be in a position to borrow at the same rate as the Government.
§ Mr. Benson
The local authorities have no power to borrow in the open 227 market now. That power has been taken from them. The rate of interest at which different local authorities could borrow varied enormously. Big authorities like Manchester could borrow at as low a rate as the Government. The smaller local authorities borrowed from the Board at 4, 5 or 6 per cent. because they could not borrow in the open market.
§ Mr. Maudling
I thank the hon. Member for his information. Like my hon. Friend the Member for Scarborough and Whitby (Mr. Spearman), before the introduction of the Act I had a certain amount to do with finding money for local authorities. They usually borrowed on the security of their rates. They borrowed very large sums on which the rates of interest did not vary very much between one authority and another. I cannot agree that the idea of the statute is to enable local authorities to borrow money at as low a rate of interest as possible because that rate of interest might be absolutely nothing. Then the Government could have the money for nothing.
If the Act had any purpose, it was to enable local authorities to borrow money at gilt-edge rates of interest. If local authorities are now borrowing money for 30-year terms, or whatever it may be, at rates lower than those which the Government would have to pay for money on similar terms, obviously the local authorities are being subsidised. The hon. Member may argue that, taking the average of local authorities as a whole, some pay lower rates and some higher rates, but in that case also the subsidy still exists though it comes not from the Government but from the local authorities who would otherwise be able to borrow at a lower rate of interest. If some local authorities get their money at a cheaper rate than the Government would get it in the open market, they are receiving a subsidy, and that comes from the Government or from other local authorities. Without arguing the merits of a subsidy of that scale to local authorities for housing purposes, if there is such a subsidy, as there is shown to be, it should be recognised and treated as a subsidy and nothing else.
The Financial Secretary said that the proportion of the local authority investment programme represented by school 228 buildings was increasing; in other words, the ratio of schools to houses is rising. Do the Government approve of that trend, and do they expect the trend to continue? Do they expect the ratio of houses to schools in local authorities programmes to continue to fall over the next few years? What discretionary powers now rest upon the Public Works Loan Board, and on what criteria do they base the use of those powers? Are they given any guidance on the lines of the memorandum guidance issued to the Capital Issues Committee?
§ 4.50 p.m.
§ Mr. Eric Fletcher (Islington, East)
Not all of my hon. Friends would agree with what has been said by the hon. Member for Barnet (Mr. Maudling) and his hon. Friends. I should have said that the object of the Public Works Loans Act was clear. It is, first, to canalise the borrowing by local authorities for capital expenditure; second, to stabilise the rates of interest at which they are able to borrow; third, to iron out inequalities between one local authority and another, which is obviously desirable; and, fourth, to avoid the uncertainty and expense which fell upon local authorities, before the Act was passed, of having to borrow in the open market.
The machinery of the Act has brought considerable advantages to local authorities and ratepayers. It is not desirable to have continuous fluctuations in rates of interest. This is not a matter for the Commissioners themselves, but for the Treasury. I should have thought that as long as the rate of interest roughly approximates to the gilt-edged figures over a fairly long period that would be acting in accordance with the spirit in which the Act was passed.
My hon. and gallant Friend the Member for Brixton (Lieut.-Colonel Lipton) and the hon. Member for Barnet have spoken about the functions of the Public Works Loans Commissioners. I believe that I am the only Member of the House at present who is a Commissioner. In view of what has been said, I want to make it clear that I do not believe that the fact that I am a Commissioner imposes upon me any restrictions on anything I feel it my duty to say in the House about the functions of the Board and that I should feel perfectly free, if I felt it necessary to do so, to criticise 229 the machinery set up by the Act. Indeed, I believe that the House has a duty to consider how the machinery of the Act works and whether any changes are required from time to time.
It is true that until comparatively recently the Commissioners had not thought it incumbent upon them to reject a single application for a lean. The exception was a rather minor application for a loan for a recreation ground by a parish council, to which reference has been made. A significant paragraph, however, appears in the Board's Annual Report for the year 1949–50. There, the Commissioners indicate, for the benefit of the House and the guidance of the country, the kind of embarrassment with which they are sometimes faced because in these days local authorities are virtually compelled to borrow from the Board or not to borrow at all.
It is the duty of the Commissioners, in the first place, to consider whether the security of the local authority for the proposed loan is adequate. The Commissioners are the sole judges of the adequacy of the security. In this connection they are also entitled to have regard to the general nature of the proposal and whether there is any unnecessary extravagance. This is what the Commissioners said:The high costs of some educational building projects in comparison with others seemed to the Board to call for further examination and the Board felt it was their duty to indicate this to the Treasury. After consultation with that Department the Board agreed as regards items in the 1949 programme, although with some reluctance, to make the loans required in each case. The Board were given to understand that economies had already been planned in respect of the 1950 programme and have since learnt that the Ministry of Education have prescribed still further economies to the 1951 programme.Hon. Members will know that during the last year or so considerable reductions in the standard rates for new school buildings have been made at the instance of the Minister of Education.
It is not the responsibility of the Public Works Loans Commissioners to criticise in any detail the extent of the expenditure upon which local authorities have decided after consultation with whichever Government Department is contributing to the expenditure to be incurred. If any responsibility is sought for imposing restrictions on expenditure by 230 local authorities where the Government is a contributor, it must be the responsibility of the Government Department concerned.
I do not agree with my hon. and gallant Friend that the machinery of the Public Works Loans Commissioners is like having a sledge-hammer to crack an eggshell. The machinery is well suited to discharge the limited functions put upon it by Parliament. On the other hand, it is important that the House and the public should realise that the Commissioners ought not to be regarded as being in any sense a watch dog for checking unnecessarily high expenditure by local authorities. Constitutionally, that is the responsibility, first, of the local authorities and, second, of the Treasury and the other Government Departments concerned.
§ 4.58 p.m.
§ Mr. A. Edward Davies (Stoke-on-Trent, North)
I hope that the Opposition are not implying that the money rates for capital required by local authorities should be allowed to rise, or that the local authorities should not be permitted to continue to get money at low rates of interest. I do not believe that that was the argument of the right hon. Gentleman the Member for Leeds, North (Mr. Peake). He said that the arrangement ought to be changed on accountancy grounds alone. There may be something in what he says, but I seemed to detect in the remarks of my hon. Friend the Member for Islington, East (Mr. E. Fletcher) the view that on long-term the rate of interest should approximate to the gilt-edged rates.
When I remind myself of what happened in a earlier debate, which set up this arrangement whereby local authorities were to canalise their applications for loans, I thought the idea was to give some assistance to the very poor municipal authorities. It was always my view that there should be some central responsibility for seeing that such local authority were helped on the way. If they had to compete with the better-off authorities they might, in that event, get a fair deal.
I am glad to see that the interest rates to local authorities have been kept low, because in some of the areas from which we come, such as the industrial areas, it is vital that rates of interest should be kept down. In fact, it was a good Socialist philosophy that money should be made 231 available to the poorest of the local authorities at a nominal rate of interest if there was to be any interest at all, because the local authority had got to pay it back, and if it was a high rate and had to be passed on in terms of rents on council houses, there would result an unfortunate outcome, which we all wish to avoid.
Whatever happens in this arrangement, either an accountancy arrangement, or one included in the Department's work or whatever the term by which the Public Loans Commissioners provide the money, let us be certain that cheap money is available for all desirable projects. As my hon. Friend the Member for Chesterfield (Mr. Benson) so rightly said, the rate of production is determined not so much by £ s. d.; it is upon the physical resources that the nation calls. We might have millions of money to make available, but unless we have the manpower and material the work cannot go on. In this matter there has to be some sort of priority, and from our point of view housing should have the topmost priority. I hope the good work of making cheap money available to local authorities, which this Bill has made possible, will continue and not only on an accountancy basis but on a social and moral basis.
Finally, on Clause 3, which deals with the winding-up of old debts, there was reference to a case, far back in history, where someone, having bought an Irish railway, then discovered that it was lost. Nobody seems to have known whose railway it was and what happened to it. I should like to know whether there are any more old railways or other concerns on the books of the Treasury, about which they will be coming to us in the future. It is rather amusing to bring such things as these out of the bag and to find that the railway was opened in 1867 and that the amount to be remitted is probably £12,444 and the interest charged £49,154. If the Financial Secretary speaks again, I wish he would tell us something about this and any similar cases, about which we ought to know.
§ 5.5 p.m.
§ Mr. William Elwyn Jones (Conway)
I desire to make three very small points. The right hon. Gentleman the Member for Leeds, North (Mr. Peake), referred 232 to the considerable amount of anticipatory loans raised by local authorities. That is true. The answer is that the rate of interest which the local authorities have to pay on the loans which they raise from the Public Works Loan Board is determined for them at the time when they take up the loan, not at the time when the loan is indicated.
§ Mr. Elwyn Jones
That is not my information. My information is that the amount of interest is fixed at the time the loan is taken up by the local authority and not when the loan is indicated. Perhaps the Financial Secretary will deal with that point. It is important that the local authorities know precisely the amount of interest which they will have to pay during the currency of the loan at the time when they embark on the scheme and it is approved by the Department.
The second point I want to make is with reference to the comment of the hon. Member for Scarborough and Whitby (Mr. Spearman). He referred to the fact that low rates of interest have an inflationary effect. He suggested that local authorities, in view of the money available at such low rates of interest, were ready to go "on the binge."
§ Mr. Elwyn Jones
A financial "binge" I mean. That is quite incorrect. Applications for loans are made direct by the sponsoring authority. When the local authority applies for a loan and once sanction is issued, then the application is sent by the Department to the Board, I should have thought that any tendency on the part of local authorities to indulge in schemes which could not be justified at the moment would be restricted by the appropriate Department. That is a point made by my hon. Friend the Member for Islington, East (Mr. E. Fletcher), who said that the appropriate Department, the Ministry of Works or the Ministry of Health in any particular case, has to determine whether or not a scheme is necessary in the light of the capital position.
§ Mr. Spearman
What I tried to make clear was that if a scheme were taking perhaps five years to complete, and if the money could be borrowed for that scheme, say, at 1 per cent., it would be a much more profitable proposition than if the interest were higher. Therefore, if money can be borrowed very cheaply by local authorities or anyone else, it would encourage them to carry out such schemes because money was cheap, and discourage them if money were dear.
§ Mr. Elwyn Jones
I accept that in the normal market. In fact, however, schemes promoted by local authorities now must receive the consent and sanction of the appropriate Department.
It is the appropriate Government Department which determines whether or not a scheme goes forward. Whether a scheme goes forward is determined not by the cheapness of money at the moment, but by whether it is urgent in the light of the overall position. So the point which the hon. Gentleman makes, about the rate of interest encouraging local authorities to engage in schemes which otherwise they would not consider, is not true, in view of the position today, when all schemes have to be sanctioned by the appropriate Government Department.
§ 5.10 p.m.
§ Mr. Jay
The right hon. Gentleman the Member for Leeds, North (Mr. Peake) and others have asked me about rates of interest, and the right hon. Gentleman remarked that I had not made any reference specifically to that subject. I was not sure whether a full discussion on the issue of rates of interest would be in order. All I said in my initial speech was that by this system we had enabled local authorities to borrow rather more cheaply than they did before the war. I do not think that the right hon. Gentleman is disputing that. The present rate of interest on loans for periods exceeding 15 years is 3 per cent., on loans for periods of less than 15 years it is less than 3 per cent.
At the time when the hon. Member for Barnet (Mr. Maudling) and the hon. Member for Scarborough and Whitby (Mr. Spearman) were engaged in arranging loans to local authorities I was writing comments in the Press on some of the issues made. My impression was that while richer authorities like Birmingham, Manchester, and the L C.C., 234 could borrow at low rates of interest, some of the poorer areas like Sunderland, and perhaps Stoke, had to pay a rather high rate of interest. I do not think it can be disputed that we have benefited by this system of a lower structure of rates of interest.
The right hon. Gentleman advanced the argument that we were at the present moment lending at too low a rate of interest, because we were lending at a rate below that at which the Government would be able to raise money on loan for a corresponding period. As he said, Sir John Anderson's intention was that the local authorities should pay the same rate of interest as the Government have to pay. The point, which perhaps Sir John Anderson did not foresee, and which the right hon. Gentleman did not mention, was that, in fact, over the last three years at any rate, the Government have not been borrowing money to lend to local authorities. Since 1947 we have had a surplus of revenue over expenditure both above and below the line, and, therefore, when the right hon. Gentleman said that we are paying to local authorities a concealed subsidy by lending at a rate, at which, in theory, we could not borrow if we had to borrow, he is entering into an argument which is not at all simple, but perhaps somewhat metaphysical, and which might require consideration by the Irish judge whom the hon. Gentleman the Member for Scarborough and Whitby mentioned.
§ Mr. Jay
I was not expressing a view about what rate the Government could borrow at for 30 years. I was merely pointing out that, as long as the Government is covering expenditure above and below the line out of revenue, it is not true to say that the Government are paying a subsidy by borrowing money at 4 per cent. and lending it at the rates I have indicated.
§ Mr. Nigel Birch (Flint, West)
It still involves a concealed subsidy if the Government is making the money available. For instance, suppose they decided to buy up the 3½ per cent. War Loan at a considerable discount, they would be saving a considerable degree of money which they are not saving by, in fact, lending this money at 3 per cent.
§ Mr. Jay
I agree that it could be argued that, if the money is used in some other way, it could bring in a larger return, but this is not quite such a simple argument as it looks when account is taken of the fact that our expenditure below the line is at present covered by revenue.
The hon. Member for Scarborough and Whitby argued, as far as I understood, that we ought to allow discrimination in the investment programme to be operated through the rate of interest, and not by the direct decisions which are now taken as to which schemes are the most urgent on grounds of national need.
§ Mr. Spearman
I do not have the same confidence in the complete infallibility of the Treasury to decide what would and would not be an advantageous investment over a period of many years.
§ Mr. Jay
I should be very far from claiming that any system for taking these decisions is perfect, but the present method of taking the decision is at least better than allowing it to be taken by the rate of interest. If the hon. Member was seriously contending that we should approve this housing scheme or that, this school building scheme or that, according to whether the loan was at 3 per cent., or some other rate, that would be in accordance with the laissez faire arguments which the hon. Member puts so persuasively before the House.
I was rather surprised to find the right hon. Gentleman apparently urging us to raise the rate of interest on these local authority loans because, unlike my hon. Friend the Member for Chesterfield (Mr. Benson), I understood that he was not simply making an accountancy point, but that it was because he thought the rate of interest charged to local authorities should definitely be raised to what he regarded as the market rate. If that is his argument—
§ Mr. Peake
I think the hon. Gentleman must have missed a part of my speech in which I said that any necessary subsidies on house building, or any other 236 local authority project, must, of course, be granted and, if necessary, increased to make up for anything they might lose through the rate of interest being brought up to the proper level. I was making the point that subsidies should appear as subsidies in the annual accounts.
§ Mr. Jay
I thought perhaps the right hon. Gentleman might be saying that, but I listened as carefully as I could and it did not seem to me that he did say that. If he did say that he is asking, apparently, for an increase in general housing subsidies, which would be another example of the increases in expenditure for which the Opposition are always asking. I agree with the right hon. Gentleman that there might have been some practical objection to a policy of lending at a lower rate of interest than the Government could obtain in the market, if that policy led to a scramble—of which there were some signs a year ago.
I think my hon. and gallant Friend the Member for Brixton (Lieut.-Colonel Lipton) was right in pointing out that the figure of loans actually advanced by the Board in the relevant year was not nearly so large as the loans approved. It seemed that my hon. and gallant Friend was also right in saying that it is the figure of loans actually advanced, and not the figure of those approved, which is of consequence. On the question of borrowing at 3 per cent. to reinvest at a higher rate of interest, I would say that the local authorities could not reinvest at a higher rate of interest unless the money had been actually advanced to them.
§ Mr. Jay
As the rate of interest is the same, of course it is not of great practical importance, but I understand—speaking from memory—that it is fixed at the time the loan is advanced.
Finally, the right hon. Gentleman asked whether the measures which we took a year ago to keep this movement under control had been successful, and he asked what those measures had been. The right hon. Gentleman will recall that he asked the same question a fortnight ago when 237 we were discussing another Bill. I have made inquiries since, and I find the answer which I gave provisionally was perfectly correct. The Measures we took have kept that movement under control, and borrowings are now proceeding fairly smoothly. The arrangements were that the Departments concerned had direct consultations with the local authorities, and it was agreed that their borrowings should be kept down to current cash requirements. The exact administrative arrangements are for the Ministry of Health, or whichever Department is mainly concerned.
Our intention in this matter of interest rates is to keep down the rates charged to local authorities to as low a rate as we reasonably can. It is quite impossible to predict what that will be in varying circumstances, but, in so far as we can, in practice, keep it down and keep down the cost of housing and other development schemes, our intention will be to do so.
§ Squadron Leader A. E. Cooper (Ilford, South)
Could the hon. Gentleman put a point to the Public Works Loan Board? The great difficulty local authorities have in borrowing money from the Board is this. Assuming they have had to borrow for 100 houses, they get the loan approved for the capital sum involved and, as soon as approval is given, they have to take up the entire loan. The development of the 100 houses may take perhaps 12 months and we find most local authorities charge on their rates an additional sum of interest, say a ¼ or a ½ per cent., to cover the extra money involved in the loan charges which they are forced to take. If it could be made possible for them to take up their loan sanctions in small portions as parts of the schemes were completed, that would save a great deal of money for them.
§ Mr. Oliver Lyttelton (Aldershot)
I think the Financial Secretary said that the rate of interest was fixed when the loan was advanced and not when it was approved. If that were so, we are getting into a realm of finance unknown even in 1950. Surely he made a mistake and the actual rate of interest is fixed when the loan is approved and not when it is advanced; otherwise, the entire matter would lead to more confusion than that with which we associate the present Government.
§ Committed to a Committee of the whole House Committee Tomorrow.—[Mr. Bowden.]