HC Deb 12 December 1977 vol 941 cc219-32

12.25 a.m.

The Minister of State, Treasury (Mr. Denzil Davies)

I beg to move, That the draft Local Loans (Increase of Limit) (No. 2) Order 1977, which was laid before this House on 10th November, be approved. This order increases by £2,000 million the amount available to the Public Works Loan Commissioners for lending to local authorities and other eligible authorities. The amount was originally fixed at £2,000 million in the Finance Act 1975, and the same Act gave the Treasury power to increase the amount by £2,000 million at a time on three further occasions. This power is exercised by order, subject to affirmative resolution of the House. This is the third and last such order under the Act. The second order was debated on 26th April this year. We are therefore debating this last order available under existing legislation somewhat sooner than had been anticipated.

I should like to emphasise, as I have done in previous debates, that the order does not itself sanction any increase in local authority capital spending. Capital expenditure is controlled by the Government in other ways. The order does not therefore affect public expenditure. Nor does the extent to which local authorities borrow from the Commissioners rather than the market affect the size of the public sector borrowing requirement.

During the debate on the second order I indicated that, although we might expect to request the House to approve the final tranche of £2,000 million in March or April 1978, this final tranche might be required somewhat earlier if borrowing by local authorities from the Public Works Loan Board exceeded our forecasts. At that time we expected that gross local authority borrowing from the Board might total some £1,900 million in 1977 –78. However, as of now, local authorities have already borrowed about £1,870 million. These are, of course, gross figures. They represent both new lending and re-borrowing in respect of debts which have become repayable. But net borrowing figures show a similar difference between forecast and outturn. Thus, while our budget estimate for net lending from the Board was £700 million, to date local authorities' new borrowings from the Board total about £1,120 million.

This marked increase in the rate of local authority borrowing from the Public Works Loan Board is partly a result of the sharp reduction in the general level of interest rates that has occurred since last April, but it is also in response to the provision of the new voluntary code of practice on the regulation of local authority borrowing.

The House will no doubt recall that proposals for a code were under discussion with the local authority associations when we debated the previous order in April. The underlying reason for a code was the need to reduce the extent of local authorities' dependence on short-term borrowing. Since then the associations have drawn up a code of practice which is intended to lengthen the maturity of local authority debt. I should like to take this opportunity to express the Government's appreciation of the hard work and effort which the local authority associations have contributed to the formulation and introduction of the code. I am happy to say that, so far as we can see, local authorities, understanding the reason for the code, are doing their best to bring their borrowing into line with it.

For our part, we have done what we can to help by raising PWLB quotas for the current year. This has been achieved by increasing the 5 per cent. the percentage of local authorities' reckonable capital expenditure that the authorities are entitled to borrow.

Against this background we have felt it necessary to adopt a cautious approach to the question of when it might be necessary to provide the final tranche. As of today the Public Works Loan Commissioners have about £638 million available for lending. By previous standards this is a sizeable margin. None the less, the extension of the PWLB quotas to assist local authorities with the voluntary code means that the total potential entitlement under the 1977 –78 quotas is in excess of the funds presently available. Moreover, the flexible drawing arrangements available to local authorities means that the Board might be faced with demands for unexpectedly large sums of money at quite short notice. This factor has led us to the conclusion that in future it would be unwise to let the margin of unused statutorily approved funds fall below £250 million-£300 million. In view of this, and the general difficulty of forecasting the level and timing of local authority demand for PWLB money, I consider that it would be prudent to ask the House to approve this order before rather than after the Christmas Recess.

Section 55 of the 1975 Finance Act and the orders that can be passed under it are purely a mechanism to allow local authorities to borrow a proportion of their financing requirements—according to their quota entitlements—from the Public Works Loan Board if they so wish. As recent experience has shown, it is difficult to forecast accurately how long the new tranche will last, particularly as the size of next year's quotas has yet to be considered. Nevertheless I would expect that the new tranche will last well into the financial year 1978–79.

Finally, I am sure that the House will join me in expressing thanks to the Public Works Loan Commissioners for the services that they render with much skill and dedication, and on an entirely voluntary basis.

12.31 a.m.

Mr. Nigel Lawson (Blaby)

The Minister of State has told us why he is bringing forward this order rather earlier than he had expected. It might be helpful to remind the House what he said at the end of the debate on the second tranche. He said: If the House refused the order it would force local authorities into the market at higher interest rates with the effect on ratepayers of the authorities having to recoup the interest rates through higher rates or on Government in providing larger grants for public expenditure."—[Official Report, 26th April 1977; Vol. 930, c. 1190.] It seems to me that when any order comes before the House it is certainly a good question to ask what will be the effect if the House does not agree to its passage. That is one way of finding out the substance of the order. What the Minister said in April was strange, and cannot be wholly true. I should like him to comment on that. I hope that he will be able to answer the various questions that I propose to put to him when he winds up the debate, with the leave of the House.

It cannot be the case, particularly when we are under a regime in which the rate support grant is cash limited—for example, forcing the authorities to go to the market for more capital rather than going to the Public Works Loan Board—that that should automatically require higher Government grant for public expenditure. Nor, indeed, can it be automatic if they go to the market. If the cost is higher, they may go for less.

Although what the Minister said is not wholly true, and is false in an important way, it has a kernel of truth, and it shows the highly unsatisfactory nature of the parliamentary scrutiny of public expenditure. What he was really saying was that it does not matter whether we pass this order or not. He was saying that if we do not, what will happen is simply that there will be more Government expenditure in another form and that the House really has no control over the matter.

This has been shown in a number of cases recently. We have seen the lack of parliamentary control over the Crown Agents, and there are less dramatic examples. It is nonsense that the parliamentary control that we are supposed to be exercising tonight covers the funds that go to the PWLB but that we have no control over the use of these funds. The funds are used to finance capital expenditure by local authorities and these we know, are controlled by the Government, not merely by the loans sanctions scheme but, more importantly, by the various cash limit blocks on local authority expenditure. Yet we have no debate on cash limits and the Estimates are not even presented to the House of Commons in a cash limit form, either in the financial terms or in the same blocks. This re-emphasises the overriding need for an improvement in the way that Parliament attempts to scrutinise—even if control is too ambitious a word—public expenditure of all kinds.

We are debating a very large sum of money, even though it is late at night, and if The Times had not been in bed long since it might have had a table on its front page showing how relatively few hon. Members were present. The sum concerned is £2 billion, which is a relatively large sum of money even in these inflationary days. It is part of an even bigger sum—the total amount of local authority indebtedness. The interest alone on this indebtedness runs to well over £3 billion a year and accounts for one-fifth of total local authority current expenditure.

The Minister pointed out that he is now asking for the third and last tranche under the 1975 Act. What he did not say was what he is to do when this tranche runs out. I assume that there will be a clause in next spring's Finance Bill, going through the process all over again, with a certain amount of money and further tranches, just as the section in the 1975 Act repeated the section in the 1972 Act.

There was a doubling in the amount between those two Acts. In the 1972 Act the amount of each tranche was £1,000 million and in the 1975 Act it was £2,000 million. I hope that the Minister can give an assurance that he does not intend to double it up once again and provide in the coming Finance Bill that the tranches should be £4,000 million, even if the basic system is to remain unchanged.

As the Minister said, the last tranche was approved in April. He said that he expected it to last about a year. In the event, it has lasted about eight months, but he did not fully explain why this was the case. It is because of a greater recourse to the Public Works Loan Board by the local authorities. That is clear enough, but it would be helpful to have figures showing the extent to which that growth has been in quota loans and the extent to which it has been in non-quota loans, in which case the Board acts as a lender of last resort. Are any figures available of non-quota loans? I do not recall having seen any, but if they are available it would be helpful to have them.

In so far as this is due to voluntary recourse to the Board on interest rate grounds—because interest rates have fallen a little—that presumably has the curious implication that local authorities feel that interest rates are likely to rise in the future, otherwise there would be no incentive for them to borrow longer at existing rates. I suspect and fear that those local authority treasurers who are looking ahead to a likely rise in the rate of inflation and the rates of interest towards the end of the latter part of 1978 are wise to have formed that view.

The trend also developed to some extent as a result of the code to which the Minister referred. Will he say something about the progress that has been made in the implementation of the code? Will he give statistical evidence of the implementation of the code, and say what the cost to ratepayers has been? By borrowing longer instead of shorter, local authorities have obviously paid a higher cost in terms of interest rates.

Another aspect of the code is that it contains two important paragraphs. 12 and 13, with which the Minister will be familiar, dealing with the monitoring of the code. They seem to me, at any rate, to be particularly important paragraphs. It would be helpful to know what progress there has been in the implementation of paragraphs 12 and 13, concerning monitoring.

Finally, I want to make one or two comments about the quota. First, what proportion of the quota is currently drawn? The Minister mentioned again that the Treasury had increased the quota from 30 per cent. to 35 per cent. of capital expenditure, plus, I suppose, the 31 per cent. of debt. Will he say something about the rational grounds on which these figures are based? It seems to me to be something of a mystery. Are they plucked out of the air? Why is it 35 per cent. and not 40 per cent.? How is the right figure judged? There seems to be a very arbitrary basis. There may be principles. If so, it would be helpful to know what they are.

When we had the debate on the last tranche, in April, the Minister said that the money that was lent to finance local authority capital expenditure was in blocks subject to cash limits. In 1976䀓77 the outturn of cash limits showed a great difference between these local authority blocks and central Government cash limit blocks. In central Government the underspending was about 21 ½ per cent.; in local authority blocks, there was a total underspending of 16½ per cent. It would be helpful if the Minister could explain the reason for that. He will see that those figures are correct if he looks at the out-turn of cash limits for 1976䀓77, published in the White Paper.

It would be helpful to know the reason for this and what is happening this year, because this year we have recently been presented with a very obscure deposited paper, quietly smuggled out of the Treasury and into the Library of the House the Friday before last. It shows that for the first half-year central Government cash limits were again currently being underspent by a very small amount—about 3 per cent.—but we had no figures for local authority cash limit blocks. Perhaps the Minister will use this occasion to comment on that, because it bears directly upon the purposes for which the money is borrowed from the Public Works Loan Board.

One other thing that is a puzzle in the deposited paper to which I have referred is that it seems that there was a slight overspending of the rate support grant. I cannot see how there can be an overspending of the rate support grant. It seems to me that this is the one figure in the whole cash limit fielid which should be accurate to the last penny. But perhaps the Treasury has some gremlins in it, or worse—because I notice that of 100 cash limit blocks, over 11 were overspent and one of the 11 was the Treasury itself—not, perhaps, the best of examples to set.

Also, perhaps the Minister would say something about house building. This is the biggest single item of local authority capital spending by far, which this year has been cash limited; last year it was not. How is this experiment working out? A large amount of this borrowing from the Public Works Loan Board is borrowing to finance house building.

It seems to me that in the control of local authority spending, the real problem is really not capital expenditure but current expenditure. Indeed, it is striking that it is capital expenditure which has borne the brunt of the cuts—as the 300,000 unemployed in the construction industry know to their cost. This is a Government bias that has been severely criticised by the Opposition and by Parliament itself—by the Expenditure Committee, for example. I see the hon. Member for Chester-le-Street (Mr. Radice), who is a member of that Committee, sitting on the Labour Benches tonight.

The logic of this seems to be that direct control of capital expenditure should exercise an indirect control over current expenditure. But in that case, are the Government insisting that applications for loan sanction from local authorities must be accompanied by a statement of the implications for current expenditure and, in particular, for manpower levels, and, if not, why not? They certainly should be.

If that is being done, is it being monitored, and what is the result? Of course, if it is not being monitored it is useless to put this requirement on local authorities. What is the monitoring system, and what is the result of that monitoring? Current expenditure, as I mentioned earlier, is also controlled, at least in theory, by cash limits on the rate support grant as a whole, but this is rather nonsensical, not just because it is much too big a block—the biggest cash limit block of all—but because it means that the sins of the spendthrift local authority and the virtues of the thrifty local authority will be visited on all local authorities equally, thus destroying the essential discipline of cash limits and making the whole system manifestly inequitable.

The Government should seriously consider moving to cash limits for each top-tier local authority. Although this would mean in some respects a loss of local autonomy, it could be adequately compensated for by giving local authorities greater freedom within the cash limits—perhaps a bigger locally determined sector—and also by making the loan sanction system far less detailed than it is at present.

I have asked a number of questions which, it would seem, have been greatly appreciated by those on the Benches behind me. I hope that the Minister will provide answers that we shall appreciate equally and will provide more answers than his colleague who answered the previous debate was able to provide.

12.47 a.m.

Mr. R. B. Cant (Stoke-on-Trent, Central)

Having felt the cold hand of my Whip on my shoulder, asking me the rhetorical question "You are not going to speak in this debate, are you?", I propose to be very brief. There are one or two interesting points raised by this order and I shall ask one or two general questions and not get involved in all the technicalities that exercised the mind of the hon. Member for Blaby (Mr. Lawson).

I accept the fact that the Government have been for some time concerned about the very large amount of short-term borrowing that local authorities have gone in for. Last year, in a similar debate, the right hon. Member for Crosby (Mr. Page) revealed that about 75 per cent. of the borrowing of one of our most distinguished cities was of a short-term character.

I have never been quite clear why this should raise so many question marks. Ever since, in 1956, the Opposition—they were then the Government—threw local authorities on to the money markets, all our county and city treasurers have exercised an amount of ingenuity in their borrowing that should be a cause for congratulation. Once they begin to do such sophisticated things as borrow in the Eurodollar market, and that sort of thing, the Government panic and introduce orders of this kind. I do not want to pursue that point, but I am not persuaded that short-term borrowing is quite such a heinous crime—even on the scale that some authorities go in for.

Reference has been made to the question of cash limits. As someone now in his 25th year as a local councillor, I believe that the introduction of cash limits has had a more traumatic effect on local authorities than anything, in financial terms, that I can remember. I take the precaution of serving on committees which spend rather than raise money.

The thing that always interests me is that although local authorities have an excellent financial reputation, when they go into the market, when they wish to raise money, as Hugh Stephenson says in The Times today, they are always charged a penal rate. As borrowers of money they do not rank in the same category even as second-class companies, let alone first-class companies. It has always amazed me why the central Government, who have much less control over their finances than local authorities have over theirs, should always by able to raise money at a much lower rate of interest.

It seems to me that there is a tendency to think that every local authority is in the same sort of financial category as New York. That sort of image tends to stick to local authorities. But, on the whole, we should move rapidly to the point of view that local authorities should rank equally with the Government in financial status, and therefore in the rate of interest at which they can borrow money.

I was surprised that the hon. Member for Blaby did not raise a question that I know he is interested in and that is implicit in this change in borrowing by local authorities. In reducing the amount of short-term lending, the local authorities are borrowing from the PWLB, and my hon. Friend made reference to the fiscal consequences. But, as they are not necessarily borrowing a great deal more in the aggregate, they are rapidly reducing the amount of money that they are borrowing from the banking system. So I now ask a question that is really on behalf of the hon. Member for Blaby. What effect will this have on M3, or, perhaps in the new year, on M4 if we move towards that more sophistical money supply concept?

Although the effect will not be great, it seems to me that it is something which is important at the margin. My right hon. Friend the Chancellor of the Exchequer panicked recently and raised the minimum lending rate by 2 per cent., perhaps because companies abroad were remitting their revenues homeward rather more quickly than they used to, and this built up the banks' assets. Or it may be that there was a little bit of arbitrage without tax reserve certificates, which increased the money supply somewhat, and the Chancellor reacted at the margin very quickly.

Mr. Lawson

The hon. Gentleman has for some time been putting a question on my behalf. I did not put it because I understand that when we are talking about local authorities borrowing less short-term and more long-term from the PWLB, we are not talking about their reducing their borrowings from the banks. It is not their overdrafts that have changed; that does not follow. It is only to the extent that bank lending is increased or diminished that M3 would be affected.

Mr. Cant

That is a technical point, with which I may not have been wholly familiar, but the authority of which I am a member borrows, quite rightly, from the banks to a very considerable extent, and if this money is now available from the Public Works Loan Board the bank borrowing will be diminished. I merely express this sort of concern as someone who is interested, because I should hate a situation to arise in which, if M3 went down or went up, the Chancellor of the Exchequer reacted too quickly when there was really no reason to do so.

Mr. Denzil Davies

A number of points have been raised in the debate. My hon. Friend the Member for Stoke-on-Trent, Central (Mr. Cant) asked why local authorities have to pay so much more in the market than he thought was justified. I thing the answer is that this is a matter that the market has to decide in its wisdom or otherwise, but no doubt the market will take account of my hon. Friend's statement. In future it may take a different view. But this is really not a matter over which the Government have very much control.

This brings me to the point made by the hon. Member for Blaby (Mr. Lawson), who asked at the beginning—he also read out a few remarks that I had made in the last debate—what would happen if the order were not passed. As I said last time, the local authorities would have to go into the market if they wanted to maintain their capital programmes. I accept that they could withdraw from part of those programmes, but I gather that the Opposition would not wish that to happen. Assuming that local authorities wanted to maintain their capital programmes, they would have to go into the market, and that would mean that increased interest charges would have to be paid somewhere by somebody at the end of the line. That would be the effect of not accepting the order.

The hon. Member for Blaby, for a good part of his speech, asked questions about cash limits. I should be out of order if I were to discuss cash limits this evening, because the order has nothing whatsoever to do with them, as the hon. Member will recognise.

Mr. Lawson

I quite understand if the Minister was unprepared and unbriefed for this, but the money that is lent to local authorities is on capital expenditure, and local authority capital expenditure is in cash-limited blocks. I quite understand the point. Perhaps the Minister would be kind enough to write to me with the answers to my questions on cash limits.

Mr. Davies

It the hon. Gentleman tables Questions on cash limits I shall certainly answer those Questions, but this does not arise out of the debate. The debate is concerned not with cash limits or capital expenditure but with the way in which local authorities are to fund or borrow money for that capital expenditure which is, as he says, cash-limited. If the hon. Gentleman tables Questions he will get very satisfactory answers.

The hon. Gentleman asked what we shall do next. As he knows, we shall have to bring forward legislation to reactivate this mechanism to enable local authorities to borrow from the Public Works Loan Board. I cannot give him the assurance that he required in relation to the tranches. It has not been decided yet. No doubt he and the House will be informed before too long.

The hon. Gentleman asked about the growth in loans. I can tell him that all the growth has been in quota loans. There have been no applications for non-quota loans. As a comparison, in 1976 –77 aproximately 70 per cent. of the total quotas were drawn by local authorities from the board, and so far this year the figure is again 70 per cent.

The hon. Gentleman asked me about the code and the monitoring. Our estimate is that so far about £1,200 million worth of temporary loans are being replaced or have been replaced by the longer-term debt. This is not entirely as a result of the code, because interest rates are also a factor. That is the order of the switch that is taking place.

The hon. Gentleman also asked about the figures of 35 per cent. and 45 per cent. These percentages are arrived at after consultations with the local authorities in the light of what it is felt they will need to borrow from the Public Works Loan Board.

Mr. Lawson

The Minister has rather skipped over the question of monitoring. Since he is clearly not familiar with the monitoring paragraphs, perhaps I can read them out, because they are brief. Paragraph 12 says It is recommended that each local authority should make arrangements for the relevant committee of that authority to receive a report twice yearly on the pattern of borrowing and to give explanations for any variation in this pattern from that applicable under paragraph 10 of this Code. Paragraph 13 says that It is also recommended that local authorities incorporate the provisions of this Code in any Standing Orders or Financial Regulations adopted by a local authority for the purpose of financial management. I was asking to what extent these monitoring procedures have been carried out.

Mr. Davies

I have no reason to believe that local authorities are not carrying out their obligations under the voluntary code. I hope that the hon. Gentleman will appreciate that this is a voluntary code. It is not a diktat from central Government. We negotiated this code thoroughly, and I am sure that local authorities will carry out their obligations under it.

My hon. Friend the Member for Stoke-on-Trent, Central raised a very good point—I am surprised that the hon. Member for Blaby missed it—about the effect on M3. There is no effect on public expenditure or on the public sector borrowing requirement. Cash limits are irrelevant. My hon. Friend made a very good point, but it is difficult to know what would be the effect of switching borrowing from the market to the Public Works Loan Board. There would probably be a small effect on M3. If one were asked to put a figure on it, it would be less than per cent. There would be a minuscule effect on M3—not sufficient to create panic in the ranks of the monetarists, of which the hon. Member for Blaby is one.

Mr. Lawson

What about the Chancellor?

Mr. Davies

The Chancellor is not a monetarist. I believe that he is a neo-Keynesian.

Mr. Cant

We should clarify the position of the Chancellor. I referred to him as a practical monetarist and he told me that I was quite wrong and that he was a monetary pragmatist.

Mr. Davies

I am not quite sure what version of monetarism my right hon. Friend subscribes to, but as I understand it the hon. Member for Blaby is perhaps a Messianic monetarist.

I think that I have dealt with all the points that were raised—certainly those that were relevant to the debate. I again commend the order to the House.

Question put and agreed to.

Resolved, That the draft Local Loans (Increase of Limit) (No. 2) Order 1977, which was laid before this House on 10th November, be approved.