§ I now come to the field of the local authorities. In the public sector, the investment expenditure of the local authorities is a very important element. It represents about a quarter of the total of the nation's investment. Ever since the first formulation of full employment policy in the White Paper of 1944, it has been common ground that this area of public investment is of particular significance in the task of keeping the economy on an even keel.
§ By far the largest element is subsidised housing, which represented a capital expenditure of £390 million in 1954. House building continues at a high rate; and there is no reason to doubt, in accordance with what I said in July, that the total number of houses completed in Great Britain will substantially exceed 300,000 this year, and will, if all goes as we expect, probably be somewhere near that figure in 1956. Thus, in the five years since the end of 1951, about 1½ million houses will have been built; and just under 2½ million since the end of the war. Of these, about 2 million are houses built by public authorities for letting. 213 Nevertheless, local authorities still need to build a very large number of houses, more especially for two purposes: first, to rehouse families now living in slums, and, secondly, to provide homes and industrial facilities in new and expanded towns for the excess population of the large congested cities.
§ It is against this background that the Government have been examining the problem of housing subsidies. This matter is very complicated and will take a long time to explain. My right hon. Friend the Minister of Housing and Local Government will, therefore, tomorrow be announcing the revised rates for future housing subsidies in England and Wales. It will be our policy in future to concentrate the subsidy as far as possible on the special purposes to which I have referred, namely, slum clearance and providing new homes and industrial facilities for the excess population. Our intention is to abolish the Exchequer housing subsidy for other purposes as soon as possible, and, meanwhile, to reduce it substantially. My right hon. Friend the Secretary of State for Scotland will also be making a statement tomorrow about housing in Scotland.
§ As for the other capital expenditure of local authorities, which represents well over £200 million a year, the Government have now decided to reinforce their appeal of last July by a message to all local authorities, asking them not only to observe particular restraint in their current expenditure, but also to review their capital expenditure, with the object of ensuring that, in the financial year 1956–57, it will not exceed the expenditure of the year which ended last March in England and Wales and last May in Scotland.
§ The Government are leaving it to the authorities to decide, in the light of local conditions, which of the various capital projects can be delayed with the least damage to the standards of their services. I have made arrangements for the convenience of hon. Members that a Command Paper giving the terms of these important messages, which have already been despatched, will be available in the Vote Office at the end of my speech.
§ So far, I have dealt with direct action by the Government on the capital expenditure of local authorities, but I intend to support this action further by monetary 214 measures. It would be wrong to exempt the local authorities from the pressure of interest rates, and, as the Committee knows, I have not hesitated to vary the lending rates of the Local Loans Fund in order to keep them in line with the market. But further action is needed if we are to restore financial responsibility to the local authorities and financial health to the Exchequer.
§ Hitherto, the local authorities have used the Exchequer as a source from which they can borrow as it suits them. But within their loan sanctions there has been no limit to the amount of their borrowing from the Exchequer; and they have had the benefit of rates based on Government credit.
§ This system has had two disadvantages. First, since the tap is open from which the local authorities can draw the money when their capital commitments mature, they have less incentive to consider, before they incur the commitments, how the money to meet them will be found. Their sense of financial responsibility is also weakened if they borrow at rates which reflect not their own credit but the credit of the Government. Secondly, the system is unhealthy for the Exchequer. The Budget of last April provided £320 million below the line for loans to local authorities this year. In the 29 weeks so far, demands on the Exchequer for this purpose have already amounted to £223 million, an increase of £83 million by comparison with the same period last year.
§ This drain is not due to any increase in the capital formation of local authorities. It is due to the fact that, when interest rates have been rising, the local authorities have chosen to concentrate their borrowing on the Public Works Loan Board. As a direct result, the Exchequer has been obliged to raise these large sums by increasing the Floating Debt, and this increase, by the operation of the monetary system, has diminished the pressure on the liquidity of the banks and added to the difficulties of credit control.
§ In the next eighteen months or so, however, the capital expenditure of the local authorities may be expected to fall. It is probable that the reduction in housing expenditure will continue; at the same time, if the local authorities 215 succeed, as I am sure they will, in carrying out the Government's wishes in the rest of their programmes, their other capital expenditure will be no larger than it was last year. This contraction of expenditure provides the opportunity for a change in the local authorities' arrangements for raising the capital finance.
§ I have, therefore, decided to exercise a check on the volume of Government lending to local authorities. I am not suggesting that any local authority, or class of authority, should be denied the right of access to the Public Works Loan Board. But I have asked the Board, before it grants any advances in future, to put all applicants on inquiry as to their ability to raise the finance on their own credit, either in the stock market or in the mortgage market. I intend that all authorities who can borrow on their own credit shall make full use of the capacity of both markets, with corresponding relief to the demands on the Exchequer.
§ This is a serious addition to the burden of unpaid work done by the Public Works Loan Commissioners. I am grateful to them for undertaking it, and I am sure that the Committee will join me in paying a tribute to their public spirit.
§ I know that this change implies a substantial modification in the financial practice of the local authorities. Transitional arrangements may well be needed to avoid dislocation, and to ensure that there is no risk of delay in meeting commitments which the authorities, relying on past practice, have already incurred. We are fortunate, however, in having standing machinery for consulting the local authorities about arrangements for borrowing from the Public Works Loan Board; and I intend to use this machinery in order to ensure that the transition is carried out as smoothly as possible.
§ At the same time, I propose to change the present practice whereby an authority is charged a rate based on its own credit if it borrows on the market but a rate based on Government credit if it borrows from the Public Works Loan Board. In future, an authority which makes its case for borrowing from the Board will pay a rate reflecting not Government credit, but the credit of local authorities of good standing in the market for loans of comparable periods. The local loans rates 216 now in operation are 5 per cent. on advances for periods of five years and over and 4½ per cent. on advances up to five years. Given current market levels, I consider that these rates provide at least a fair starting point for the new policy of local loans rates based on local authority credit, and for the present I do not propose to change them. But the local loans rates will be kept under close review as the new policy develops.
§ I have said before, and I say again, that day-to-day fluctuations will be avoided, but the local loans rates must not be insulated from the market and the Treasury will continue to adjust them, in either direction, as may be required to keep them in line with future changes in the level of the relevant rates in the market.