DUTY TO SET CERTAIN SUMS ASIDE AS PROVISION TO MEET CREDIT LIABILITIES (Hansard, 13 June 1989)

§ Mr. Murphy
I beg to move amendment No. 181, in page 61, line 13, at end insert— '(6) The calculation of the minimum revenue provision referred to in Part IV of Schedule 3 to this Act shall permit other proper practices to be used for the redemption of debt. (7) A local authority shall determine its minimum revenue provision in accordance with proper practices and the duty to determine such provision shall be performed before the beginning of the financial year to which the provision is to relate.'. The purpose of the amendment is to permit local authorities to determine the provision to be set aside from revenue accounts to meet credit liabilities, in accordance with proper practices, as alternatives to the "reducing balance" method specified in schedule 3. In Committee the Minister implied that the reducing balance method now proposed in place of the original proposal for equal instalments of principal was generally welcomed by local authorities. That is true, but only in the sense that it was marginally less bad than the original proposal.
The clause, as drafted, means that conflict is possible. The amendment is designed to resolve that conflict by allowing codes of practice to be on an equal footing with statute. In other words, it allows local authorities to calculate the minimum sum that they have to set aside to meet credit liabilities by reference to the rules set out in the schedule or any other set of proper practices at the discretion of the individual local authority.
Local authorities have traditionally been free to manage their debt in the way they felt best and to take advantage of opportunities that arise to minimise their overall payments. A code of guidance on the average maturity of debt has been agreed between local authorities and the Treasury and has proved useful in giving local authorities flexibility and in meeting the concerns of the Treasury. The Government's proposal to force councils to repay a specified percentage of their outstanding debt each year has no standing within the accountancy profession, and the Chartered Institute of Public Finance and Accountancy has already expressed its doubts about the new scheme.
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There are well-established alternative methods of repaying debt which are preferable to the Government's proposals on economic, efficiency and practical grounds. The sinking fund method is one example and annuity payments is another. No one with any real appreciation of the problems of debt management would have dreamt of imposing this system upon local authorities. It will start a random set of changes in local authority debt repayments which have no merit in themselves and cannot be justified on proper accounting grounds.

§ Mr. Gummer
There is obviously a fundamental difference between us on this matter. There are problems with some of the mechanisms of accounting for debt. If a local authority decides on some methods, there is little immediate impact on major borrowing decisions, whereas most of us agree that it is important to have at least an initial clear impact so that people can make a realistic decision as to whether they want to spend so much money through borrowing.
852 The advantage of the reducing balance method is that, first, it looks at the totality of an authority's debt and not bits of it—that is what the Government have to do when considering any of their major economic indicators in this way.
Secondly, under the reducing balance method, the marginal effect of new borrowing is felt more sharply at the time the decision is taken to borrow. That is surely sensible and prudent, not least because local authority debt is not like personal debt. When one borrows money, one knows that it must be paid back within one's lifetime and that one is going to pay it back. A local authority is not in that position. Those who make the decision know that when the burden of paying back is faced, they will not be around to carry the cost. The danger is that the council will pass on the burden of the decision to future generations, to a new set of electors and totally different people.
Thirdly, the needs assessments on which we base our grant to local authorities have always been based on the reducing balance method. That may well continue in the new system, both on housing subsidy and for needs assessments. It seems to me that if we are paying grant on the assumption that a minimum amount of provision for debt redemption is being made, that minimum provision should be made.
It seems reasonable to say that the only way to have a sensible policy of debt redemption is to have one that, first, looks at the whole of the authority's debt; secondly, bears in some way on those who immediately initiate the debt; and, thirdly, has some reference to the way in which the needs assessment for debt and for debt redemption are made. Those three factors lead me to believe that the reducing balance method is the best one.
This method has been widely welcomed. It has not been accepted in the curmudgeonly way that the hon. Member for Torfaen (Mr. Murphy) suggested. We have moved a long way to try to meet the requirements of local authorities, and many of them have recognised that. We do not want to return to a situation in which a local authority can choose a system which means that those who make the decision and benefit from the initial spending are not the people who feel the weight of the cost of the debt or make a substantial contribution towards completion of its redemption.

§ Mr. Murphy
The Minister is right when he says that there is a major difference between himself and us which is irreconcilable. I should like to ask him a question about the proposed method of providing for the cost of capital expenditure and whether it will increase the expenditure of some local authorities. Will he give the House an assurance that grant will be adjusted to avoid any of those additional costs falling on poll tax payers next year?

§ Mr. Gummer
Community charge payers next year will pay the costs that will arise from the arrangements that we come to with local authorities. We are discussing a number of matters, including the way in which we shall account for capital expenditure and its cost, but we have not yet reached a final decision.