Local Government Finance Bill

HL Deb 10 February 1987 vol 484 cc569-602

6.52 p.m.

Baroness Hooper

My Lords, I beg to move that the Bill be now read a second time.

The main purpose of this Bill is to validate the practice the Department of the Environment and the Welsh Office have adopted since 1981–82 in calculating relevant and total expenditure for block grant and rate limitation purposes. The Bill further provides for the practice to continue on a proper basis for the remaining years of the present system, and sets rate and precept limits for 1987–88. It deals also with a much lesser problem in Scotland. I shall endeavour to explain the background to the problem before describing briefly the provisions of the Bill.

Although many noble Lords will be fully conversant with the procedures and technology of local government finance, it may be helpful if I begin by explaining the concepts of relevant and total expenditure. "Relevant expenditure" is essentially all the expenditure of local authorities less income such as fees and charges. The Secretary of State must take this into account in determining the total amount of grant which should go to local authorities each year. "Total expenditure" is a narrower concept. It is broadly relevant expenditure less income by way of specific and supplementary grants such as police grant and national parks supplementary grant. An authority's total expenditure, therefore, is the amount which it finances from rate support grants, rate or precept income, and balances; it is the amount which is eligible for block grant. Neither relevant nor total expenditure is a measure of gross spending.

Total expenditure is taken into account in determining grant related poundages, multipliers, and, perhaps most importantly, the individual entitlements to grant of each local authority. Total expenditure also has an important role in rate limitation. The Secretary of State selects authorities for rate limitation if their total expenditure is excessive. The expenditure levels he determines are levels of total expenditure and he calculates rate limits from these. Having clarified that point, I should also say something about local authority funds and accounts. Every local authority is required by statute to keep a general rate fund or its equivalent into which receipts are paid and from which liabilities are discharged. Each will also maintain, although in this case not so required by statute, an account of its main revenue transactions often called a rate fund revenue account. Depending on the nature of the authority, it will have a number of other named funds or accounts, some required by statute, some not—for instance, the housing revenue account. This Bill stems from the relationship of the general rate fund and what I have just referred to as the rate fund revenue account to these other named funds and accounts.

In summarising the background to the Bill I would emphasise that the central issue is whether the general rate fund for the purposes of calculating relevant and total expenditure should be interpreted in the wide sense of treating all other funds and accounts, such as special funds, the housing revenue account and accounts of trading undertakings merely as subdivisions of the rate fund, or in the narrow sense of seeing the rate fund as a separate and distinct entity from these other funds and accounts. Under the wide interpretation, expenditure falling to be defrayed from the general rate fund is the entire expenditure of the authority but does not include internal contributions between funds and accounts. Under the narrow interpretation of the rate fund, its expenditure excludes expenditure charged directly to the other funds and accounts, but includes contributions to those funds and accounts.

Since the beginning of the present grant system the Department of the Environment and the Welsh Office have adopted the narrow interpretation in line with the clearly expressed wishes of local government. What happened was as follows. From late 1979 the Local Government, Planning and Land Act 1980, which established block grant, was passing through Parliament. The Act defines relevant and total expenditure, on which block grant is paid, as expenditure, falling to be defrayed from the rate fund". The issue of how to interpret this emerged clearly when draft grant claim forms for the first block grant settlement were sent to the local authority associations: The forms made it clear that the department envisaged using the wide interpretation for calculating authorities' entitlements.

The local authority associations were very concerned about the proposal to interpret references to the rate fund in the 1980 Act in this way. They argued that the narrow view of the rate fund was an equally possible interpretation of the Act and that the wide view was not consistent with accepted and sensible accounting practices. In considering the issue, the Government had to weigh up the two differing interpretations and the disruption to local authorities' accounting practices which would have stemmed from a decision to proceed with a wide view of the rate fund. The Government therefore decided to accept the strongly argued and unanimous views of the local authority associations and adopt a narrow definition for calculating grant entitlements under the 1981–82 rate support grant settlement, thus continuing what had been existing practice for many years under earlier legislation.

A circular letter to this effect was sent to local authorities on 13th February 1981. No queries were raised and the approach taken was generally welcomed. This decision was made on the basis that for 1982–83 the issue would be reconsidered with the associations. A paper was put to the local authority associations in April 1981. Given the unanimous acceptance of the interpretation adopted for 1981–82, this proposed that the local authority approach to total expenditure should be continued for 1982–83 and suggested a study to look at the pros and cons of changing to the wider approach in the longer term.

The local authority associations continued however to press strongly the view that there should be no switch to the wide approach and that there was no need for any study to look at this alternative approach. The department agreed to put the issue on one side but indicated that it might come back to the group with proposals in future if they seemed necessary.

From then on, the Government operated the block grant system on the basis of the narrow view of the rate fund. During that period there were a number of legal challenges, brought on a variety of grounds, to the Secretary of State's decisions on rate support grant and rate limitation. But in those proceedings no legal point was taken against the narrow view. Nor did local government auditors question the practice.

The issue re-emerged last year when it was discovered that a number of returns of expenditure from local authorities did not conform to normal practice on expenditure. Several authorities had decided to show contributions to special funds, even though they appeared to have a deficit on the rate fund revenue account and there was apparently no liability for which the money was being set aside. One authority had decided that in 1984–85 transfers from a special fund should not count as income reducing expenditure, even though, in a previous year, it had counted transfers to special funds as expenditure. This was directly contrary to the approach which the Government had taken in 1981 at the request of the local authority associations.

It appeared that these devices were designed to increase block grant entitlement at the expense of other authorities. We estimate that the authorities concerned could gain a total of £38 million in grant as a result.

Although the practices had been accepted by the auditors in a number of cases, the Department of the Environment was very doubtful whether it could accept them as a basis for paying grant. If accepted it would have meant that the Government tolerated two completely opposite practices on the question of calculating total expenditure. That was clearly not on. The department has now written to the authorities concerned seeking an explanation of the figures submitted, and is in discussion with some of them.

Last September, in deciding how to respond to these cases, my right honourable friend the Secretary of State for the Environment looked closely at the definitions of relevant and total expenditure. He was concerned that the accepted practice did not correspond to the statute. He decided that it was essential to seek the Attorney-General's view. The Attorney-General supported counsel's opinion that the treatment of total expenditure which the Government had operated at the request of the local authority associations was indeed incorrect in law. Transfers between funds and accounts within the rate fund should not count as expenditure. Expenditure should only take place when an authority has liabilities in the outside world and meets these from the general rate fund. Any fund or account, whether statutory or non-statutory, which a council set up was simply a part of the rate fund earmarked for a particular purpose. My right honourable friend the Secretary of State received the advice of the Attorney-General in late October and the Government decided to take urgent action.

As I have explained, the Government had originally responded positively and constructively to the strongly held views of the local authority associations on the interpretation of expenditure, but in view of the cases which emerged last year and of the further legal advice the Government had no alternative but to legislate. Without such legislation, all past decisions which involved the concepts of total or relevant expenditure would have been in doubt. It would have been quite improper to take further decisions about rate support grant or rate limitation on the basis of accepted practice without securing the legal position. The Government came to Parliament in December as soon as they were able to present full proposals for handling the problem. It would have been quite irresponsible to come without such a solution and face local government with great uncertainty.

The Bill therefore allows the Department of the Environment and the Welsh Office to continue with the practice adopted to date in calculating relevant and total expenditure. The Bill will enable transfers to and from this account to be defined in a way which replicates current practice on expenditure; that is, that total expenditure should be the net expenditure of the rate fund revenue account.

Clause 1 of the Bill and Schedule 1 require authorities to keep a rate fund revenue account and to list any accounts which are separate from it. Clause 2 sets out the practices to be observed in compiling the account. Clause 3 defines relevant and total expenditure in relation to the rate fund revenue account. These clauses apply from the financial year 1987–88 onwards. Clause 4 validates all things done for rate support grant purposes since 1981. For 1981/82 and 1982/83 only the conclusive calculation of block grant remains to be completed before closing the books. The Bill provides that these calculations shall be done on the basis of the figures in the last supplementary reports made for those years.

For the years 1983/84 to 1986/87 outstanding supplementary reports are still to be made. The Bill provides that these shall be made on the same basis as reports for the years 1987/88 onwards. As I mentioned earlier, authorities have in practice kept what is usually called a rate fund revenue account. Clearly it is not possible retrospectively to require authorities to keep rate fund revenue accounts. The calculations will therefore be based on the notional existence of such an account.

I now turn to rate and precept limitation. Because of the need to pass this Bill the Government were unable to proceed with rate and precept limitation to the normal Rates Act timetable. The Bill therefore provides for rate and precept limits for designated authorities to be determined in accordance with a formula for each class of authority. The formulae contain broadly the same factors as are necessary to calculate rate and precept limits in normal procedures and reflect, so far as is possible, the decisions which would have been taken under those procedures.

In setting the formulae, the Government took into account all the information they had about designated authorities, including in particular that from redetermination applications and the meetings about them. Authorities have already been informed of the limits which will result from the formulae. They will therefore be fully aware of these limits when they come to issue precepts and set rates, even if the Bill is not yet enacted.

Clause 6 of the Bill validates past decisions and actions on rate and precept limitation. Clauses 7 and 8 and Schedule 2 set out the formulae which will produce the rate and precept limits and provide for the implementation of those limits. In particular, Clause 8 provides that where an authority has fixed a rate or precept higher than its limit before the passing of the Act it must substitute a lower one. Under the normal Rates Act procedures, rates and precepts fixed above the limits set by the Secretary of State are similarly invalid.

It may assist your Lordships if I say a little more on the validation aspects of the Bill. Considerable discussion in another place centred on two issues—first, whether the validation in any sense concerned future decisions of the Secretary of State on rate support grant and rate limitation matters; and, secondly, the extent to which the past decisions were validated.

First, let me make quite clear that the Bill is not intended to validate any future decisions of the Secretary of State. When he comes to take decisions on the conclusive calculation of block grant for 1981–82 and 1983–83, on remaining supplementary reports for the years 1983–84,1984–85,1985–86 and 1986–87, and on 1987–88 and future years, all those decisions will be reviewable by the courts in the normal way. The position is exactly the same for all the future decisions on rate and precept limitation. While this Bill provides formulae in accordance with which the limits in 1987–88 are to be determined, the Secretary of State's determination of maximum limits will be reviewable by the courts so that if a limit was determined not in accordance with the appropriate formula it could be successfully challenged in the courts. Decisions on rate limitation for 1988–89 will be reviewable in the normal way and as in the past two years.

Turning to the past, Clauses 4(1) and 6(1) of the Bill validate anything done by the Secretary of State for the purposes of the relevant statutory provisions relating to rate support grant and rate and precept limitation. Clause 4(2) sets out the relevant provisions in relation to RSG. Clause 6(1) to (3) sets out the relevant provisions in relation to rate and precept limitation. Any challenge to these actions based on general principles of administration law will be of no avail.

The Opposition in another place have argued that these provisions are too wide and that the validation should be restricted to decisions relating solely to the definitions of relevant and total expenditure. The Government's sole aim in these provisions is to ensure that there is complete certainty about past decisions. The concepts of relevant and total expenditure are endemic to the rate support grant and rate limitation systems. The decisions for rate support grant purposes which the Secretary of State takes under the relevant statutory provisions depend in one way or another on relevant and total expenditure. The Government believe that it would be quite wrong to leave room for argument about whether an issue was specifically related to the definition, or whether some other aspect of total or relevant expenditure was involved. We believe therefore that the validation that the Bill provides is both right and necessary.

Perhaps I should say something about the provisions of Clauses 4(6) and 6(4). These provide that the validation shall have effect notwithstanding any decision of a court (whether before or after the passing of this Act) purporting to have the contrary effect. Again, the purpose is to provide absolute certainty about what is being validated and what is not. The reference to before or after the passing of this Act is simply to ensure that judgments reached on the basis of existing statute but delivered after the passing of the Act are treated on the same basis as judgments delivered before the passing of the Act.

I hope that I have been able to convince your Lordships that here we are not concerned with some draconian act of retrospection. We are simply seeking to give certainty to past decisions. This legislation is urgent to enable Parliament to complete the rate support grant settlement for 1987–88, to make outstanding supplementary reports from previous years and to complete the 1987–88 round of rate limitation. It is essential that we put matters right as fast as possible in order to end uncertainty about grant entitlements for 1987–88 and allow authorities to plan their budgets and rates. That is why we have asked Parliament to consider this legislation on an urgent timetable.

Supplementary provisions in Schedule 3 allow the Secretaries of State for the Environment and for Wales to announce firm intentions for the 1987–88 rate support grant settlement, and certain earlier supplementary reports, which can be laid before Parliament immediately on Royal Assent. The purpose here is to give authorities the maximum of certainty in setting their budgets and rates over the next two months. My right honourable friend the Secretary of State for Wales announced his intentions before Christmas, and the Secretary of State for the Environment did so on 13th January.

So far as concerns Scotland, Part II of the Bill deals with a considerably more limited difficulty. Clause 13 validates past actions of the Secretary of State for Scotland in relation to the imposition of grant penalties. It allows him to continue for the future to take into account movements between the general fund and any special fund or account in the process of estimating a local authority's expenditure for the purpose of imposing grant penalties. Clause 14 provides that, for the future, the Secretary of State for Scotland may similarly take account of movements between the general rate fund and any special fund or account in taking decisions about selective action against any authority.

Lord Ross of Marnock

My Lords, perhaps the noble Baroness will allow me to ask what is the reason for this? What is the basis of it? Was it a mistake, or a misinterpretation? Or is this something completely new?

Baroness Hooper

My Lords, perhaps my noble friend Lord Skelmersdale may be allowed to deal with this particular aspect of the matter when he winds up the debate. It has come to light as a result of investigations into the position in England and Wales.

To conclude this very lengthy exposition—and I apologise for the time that it has taken but it is a very complicated matter—the principal effect of the Bill is to validate the practice of the Department of the Environment and the Welsh Office in calculating relevant and total expenditure over the past six years. It confirms that practice for the future. This is a longstanding and well established practice for which local government has consistently argued. In the light of the legal advice, the Government had no option but to legislate. I commend the Bill to the House. I beg to move.

Moved, That the Bill be now read a Second time.—(Baroness Hooper.)

7.15 p. m.

Baroness David

My Lords, I should like to thank the noble Baroness for her very speedy explanation of the Bill. It was certainly a race through all the clauses. This is the 14th local government Bill that this Government have brought to the House and the sixth which deals specifically with rate support grant, and yet another is on its way. The Rate Support Grants Bill had its Second Reading in another place just last Wednesday.

It was only on 31st October that the Local Government Act 1986 received Royal Assent. It was during the passage of that Bill through another place that the Minister said: We are about to pass a Bill which will clarify the law and make it what it was thought to be in a number of important … respects in relation to rate support grant settlements".—[Official Report, Commons, 21/7/86; col 151.] On 16th December, less than two months after Royal Assent had been given, the Secretary of State made a statement that yet again we had to have a Bill to clarify the law and make it what it was thought to be.

Last Wednesday the inefficiency of some Labour authorities was made much of by a number of Tory Peers, but not many—in fact only one Back-Bencher—are speaking today on the gross incompetence of the Tory Government over their legislation on local government and the chaos and difficulties that their misdirected efforts have caused for treasurers and members of local authorities up and down the land. Councils of every political persuasion rightly object to what they have been subjected to by this Government.

I should like to know the cost of all this correcting legislation. Can the Minister tell us what that amounts to when he winds up? I reckon that it is a gross waste of public funds for which various Secretaries of State should feel responsible. That great mass of legislation (14 local government Bills), which has taken up innumerable hours of debate in both Houses, is a direct consequence of the desire of Ministers to centralise and control the activities of more than 600 local authorities in England and Wales in the belief that civil servants and politicians at Westminster know best. That determination to centralise and control local government has caused a complex edifice of law to be built up to prescribe the financial policies of authorities and regulate the payment of grant to them.

Our criticism of this legislation is that it is overcentralised, too complicated for all except a few gifted individuals to understand, riddled with unfairness and capable of manipulation. I should like to make the position of the Opposition on this Bill perfectly clear, as did my honourable friends in another place. We realised that if actions taken by Government and local authorities since the 1980 and 1984 Acts were illegal because of misinterpretations of those Acts, the matter had to be put straight and we should have co-operated in putting through this Bill quickly. We had expected it to happen and that there would be a Bill of three or four clauses to do just that.

To us it is inexplicable why the Government have not done that. This Bill not merely puts the law right in relation to the calculation of total and relevant expenditure, which in itself is of advantage to local authorities and ratepayers; it also gives Ministers sweeping new powers in the definition of revenue expenditure. It imposes wholly unacceptable and general prohibitions on access to the courts for ratepayers and local authorities in relation to anything done by the Secretary of State on the calculation of RSG, and it suspends the Rates Act procedures so that local authorities selected by Ministers for rate limitation are not dealt with individually in terms of their circumstances and financial position but by arbitrary and universal formulae set out in the Bill. It is also deplorable that rate-capped councils are being denied the opportunities for negotiation under the present Act.

These are considerable objections. In the present situation we believe that the duty of Parliament is to ensure that Ministers obtain the legal cover that they need but that they do not obtain excessive powers which are not justified by circumstances or have immunities from proceedings in the courts which go far beyond what is reasonable and necessary. Therefore our objective is to ensure that substantial amendments are made to this Bill, and we hope that the Government will be responsible and reasonable in accepting them.

No doubt adding all these new powers was the cause of such delay in introducing the Bill. Although the Secretary of State said on 16th December during the Statement that he had first known of the illegality toward the end of October, it appeared from Second Reading that he was first aware of it at the end of September; yet no action was taken until this Bill had its First Reading in another place on 18th December.

The noble Baroness said that the Government took urgent action. It did not seem that urgent to us. The Bill was then rushed through. There is evidence of poor and hurried drafting. The Government tabled 40 amendments and added a new schedule in Committee which was taken on the Floor of the House. The Bill was guillotined after two days. Ten clauses and three schedules were considered. Because of the operation of the guillotine, there was no Report stage. It is therefore all the more important that we should scrutinise the Bill with the utmost care.

I have said that we endorse the Government's view that putting the law right in relation to the calculation of the total and relevant expenditure was necessary. However, we are gravely concerned that Clause 2(4), as drafted, gives the Secretary of State wide powers to specify what income can be defined as revenue income to the rate fund revenue account for the purpose of reducing a council's expenditure and therefore maximising its block grant entitlement.

Many local authority treasurers are concerned about that provision. It is a new concept. There is uncertainty as to its impact on revenue income from internal funds and from outside the council. There is concern over the way in which ministerial decisions here could alter proper professional practices in relation to the treatment of capital revenue where there are different professional practices.

There has been no satisfactory explanation as to why the Government believe that they need that power. Without an acceptable explanation we believe that the provision should be deleted from the Bill. There is great concern over the provisions contained in Clause 4(6) and Clause 6(4). Clause 4(1) retrospectively validates anything done by the Secretary of State in calculating rate support grants since 1981. Clause 4(6) judge-proofs all those decisions by inserting the words: Subsection (1) above shall have effect notwithstanding any decision of a court (whether before or after the passing of this Act) purporting to have a contrary effect". There is a serious dispute between Ministers and ourselves as to the scope and breadth of that provision. The noble Baroness spoke of that tonight. We believe that the words on the face of the Bill are clear. It is that anything done by the Minister in respect of RSG is protected from judicial review by the courts, and not just the action of Ministers, on the calculation of total revenue expenditure. We have consulted counsel, who supports our interpretation of the Bill. Mr. Ridley believed, however, that his Bill means something different.

When discussing the matter in another place on 19th January Mr. Ridley said: Where a matter has nothing to do with the definition of total expenditure or with the rate support grant calculation based on it, it is judiciable, but it might be better for the court to await the passage of the Bill so that it knows the definition of total expenditure. If the court prefers not to do that, it is perfectly possible for the case to proceed, but it will do so in the light of the fact that any decision which contravenes the definition of total expenditure in this Bill will later be proved invalid. However, if the matter is totally extraneous to total expenditure and is about something totally different like multipliers, which are not affected, it will be possible for the court to continue to determine the issue, just as it is possible for a court to decide that I was not wearing a seat belt when I should have been".—[Official Report, Commons, 19/1/87; col. 643.] Our belief is that when making this comment Mr. Ridley did not understand his own legislation. We are strengthened in this view by his subsequent remarks on 21st January in which he fudged the issue and argued that as total and relevant expenditure were so interrelated with all other elements of RSG calculation, it would be difficult for a court to disentangle the validation of calculation of total and relevant expenditure in the Bill from other issues that were being challenged by an authority.

The correct position is surely for Parliament to give legitimate protection to Ministers and civil servants from legal action on the incorrect calculations of expenditure that they have admitted. But it is essential that actions can continue against all other decisions, calculations and procedures. That distinction would preserve the proper role of the courts in interpreting legislation and scrutinising the exercise of powers by Ministers and prevent the blunderbuss validation of all past acts by Ministers which is unnecessary and offensive.

We are also seriously concerned about the position of rate-capped councils. A major contributory factor leading to the imposition of expenditure levels by formulae in primary legislation has been the Government's delay in bringing forward a Bill. I have already spoken about that delay.

We object strongly to the denial of appeal against rate-capping. Schedule 2 lays down formulae for rate limitation to apply to groups of authorities and the ILEA on its own. That replaces the appeal process against rate limits which would otherwise have been possible under the Rates Act 1984. At the time that Act was discussed, the Government pledged that the appeal process in the Act would be an essential safeguard against arbitrary decision taking by the Department of the Environment. Instead here different authorities are to be subjected to a standard formula. Parliament is being asked to decide the 1987–88 rate limitation decision without even seeing the figures.

Parliament cannot be assured, as it would be under the annual rate limitation order, that the limitations have been tailored to individual needs and are open to appeal. Authorities which met Ministers in November and December were given the misleading impression that redetermination would be taken seriously. There will be no redetermination.

It is damaging for authorities not to have their precise financial positions taken into account by government when making the approved expenditure limit. The formulae contained in the Bill were published in December, a full three months before the end of the financial year, and cannot therefore reflect the real outturn of expenditure for authorities or take into account movements in balances and contingency reserves, which are not usually known until just before the setting of the rate or precept. It is damaging for local authorities not to have an opportunity to have their individual circumstances examined in detail.

We shall introduce amendments which will free the Secretary of State from the constraint of fixed formulae—constraints which deny him, as much as they do local authorities, flexibility and discretion in the precise application of rate and precept limits. We hope to combine those with amendments which will allow a right of appeal for authorities so affected and which will limit the immunity from the decisions of the court to those which derive strictly from the legal misinterpretation as to total and relevant expenditure.

The bureaucratic mess which the Bill is intended to rectify is in a sense an inevitable consequence of the Rates Act 1984 and of the procedures for calculating and distributing block grant which flow from the powers granted to Ministers under the 1980 Act. Local authorities, voluntary associations, local authority associations and many parliamentarians have always criticised the procedures under those two Acts as being an unwarranted and unjustified incursion into the internal affairs of local authorities which are responsible to their electorates for the services that they administer, finance and choose to provide. The Government are reaping the consequences of erecting an over-complex and administratively unsupportable system of financial control in an attempt to impose central determination of policy in previously autonomous and formally independent units of government.

The local authority associations are naturally worried by the Bill. I understand that the ACC has not had disclosed to it the legal advice the Secretary of State received, and has been given no opportunity to discuss it. Clauses 1, 2 and 3, it says: are of particular concern as they contain greater powers of interference and control than are necessary to achieve the objects of the Bill". It also questions the need for the wide powers contained in Clause 4.

The ADC is concerned at the poor drafting. It is confused by the references in Clauses 1, 2 and 3 to "proper practices" juxtaposed with the proposed powers to enable the Secretary of State to specify types of expenditure. It says: The Bill's main focus should be on validating past actions, not introducing new areas of political conflict.". I have concentrated on the reactions of the ACC and ADC as associations that are not Labour controlled. The AMA feels just as strongly. I hope that the Government may even now have some second thoughts about bestowing such wide powers on the Secretary of State, on the lack of judicial review, on retrospection and on the denial of appeal. Rights of local authorities, rights of individuals, indeed, are being seriously undermined.

I had a letter from the chief executive of Cambridge City Council—my own district authority—asking me to do what I could to remedy some of the Bill's shortcomings. He finished: The Bill just adds to the confusion, and could well be flawed—there has not been time for the Government to get it right as is evidenced by the plethora of Government amendments to their own Bills. If you detect a note of despair in this letter you are probably right!". I suspect that that is the state to which this Government have reduced very good and dedicated local government officers, and that is a shame.

7.32 p.m.

Baroness Robson of Kiddington

My Lords, may I begin by expressing my regret that I cannot stay until the end of the debate. I shall not speak for very long. As noble Lords will realise, we did not expect the Second Reading debate to start so late and I have a long-standing previous engagement.

May I first thank the noble Baroness for introducing a very complicated piece of legislation as clearly as it is possible to do. I should also like to say that I agree with every word that the noble Baroness, Lady David, has said. I believe that this new piece of legislation on local government finance is a sign of mismanagement by the present Government in their local government legislation. We were all aware late last summer and in the early autumn that something was wrong; that the Government's legal advisers had pointed out that essential elements in the rate support grant and rate limitation systems had been calculated in a way which conflicted with existing legislation. Like the noble Baroness, Lady David, I am amazed that the Government did not come out with a Statement until 16th December—a long time after they were aware that something had to be done. As a result, in order to clear up the problem for 1987–88, a piece of legislation is being rushed through Parliament which really should be very carefully thought out.

When the local authorities received the letter from the DoE on 16th December, it said: The Secretary of State will be seeking legislation to validate retrospectively all past rate support grant decisions. It will provide for present practices to continue". Momentarily, the local authorities were not very worried. The letter indicated that the Bill would simply be legalising the practice which has taken place up until now. However, one of the disturbing aspects was that once the Bill was published on the 18th there was much more to it. It does not stop short at legalising practices—which would have been acceptable to everybody—but goes much further.

The noble Baroness, Lady David, has talked about the increased powers of intervention in a number of areas relating to the accounts of local authorities. It is of concern that the Bill contains so many greater powers of interference and control than are necessary. It contains powers for the Secretary of State to specify what income or expenditure is to be regarded as of revenue nature and to specify items of account, and the way in which those are to be subtracted or added from total expenditure. The Bill gives the Secretary of State enormous scope to interfere both now and in the future.

Why is that necessary? I cannot resist a slight feeling that this is an attempt to introduce extra powers into legislation to deal with what has been called the loony Left—those authorities which in the opinion of the Government and many of us have not been behaving themselves. We all agreed in the debate last Wednesday that this was a very small minority of authorities in the country. However outrageous some behaviour has been, it cannot be right to put extra penalising powers in the hands of the Secretary of State to control all authorities in too rigid a way.

The Chartered Institute of Public Finance and Accountancy has laid down codes of practice on local authority accounting. The Controller of Audit at the Audit Commission has said in many reports that local authorities have on the whole been correct in the accounting principles they have applied to their finances. In other words, bodies of that type have not criticised local authorities. I therefore believe that it cannot be right to over-restrict the freedom of all local authorities in order perhaps to control the few.

The noble Baroness, Lady David, has already referred to what we consider the most disturbing clause in the Bill, Clause 4(6), which effectively overrides any decision of a court. I know that the noble Baroness, Lady Hooper, tried to explain that as it stands the legislation is not as overriding as we on this side believe it to be. But it is highly necessary that this House examines in great detail the meaning of the wording of Clause 4(6). We are decidedly of the opinion that it is too powerful and that it sets the Government above the law and even above the courts. It is one of the fundamental principles of democracy that the courts are separated from the executive. I believe the clause—failing a satisfactory explanation—to be very dangerous.

I find Clause 9 rather disturbing. A requirement on the Secretary of State to consult local authorities before exercising his power is all very fine. I should have thought however that it would have been equally necessary for there to be a requirement on the Secretary of State to consult on the principles on which those powers are exercised. So far, the local authorities have not been consulted.

In our view, on this side of the House, the Bill is yet again a further example of greater centralisation of decision-making. We believe that responsibility in local government comes only by increasing democratic accountability and not by repression and further centralisation. My colleagues in the other place voted against the Second Reading of the Bill there. That is not done in your Lordships' House, but we shall have many amendments to put down before we are prepared to agree to this Bill.

7.40 p.m.

Lord Denning

My Lords, I am afraid that I may not be able to stay until the end of this discussion. However, I should like to make some constitutional points on this matter.

I have a letter in my hand from two professors of public law and two senior lecturers of University College, London. Their comment on the provisions in the Bill is that: the breadth of protection afforded by this Bill is unprecedented, unnecessary and is contrary to the basic principles of executive accountability under law". I have studied what they have said and I endorse their opinions.

I should like to summarise the position. The game is given away in the opening words of the Explanatory and Financial Memorandum: Relevant expenditure and total expenditure, which are essential elements of the rate support grant and rate limitation systems in England and Wales, have been calculated in a way which conflicts with the legislation concerned". To put it bluntly, they have not complied with the law and they admit it.

In a way I can understand how it has happened. My noble friend Lady Hooper explained that there are two interpretations of the legislation: the wide interpretation which the Government thought was right, and the narrow interpretation which the local authorities wanted. The local authorities brought such pressure to bear for their narrow interpretation that they persuaded the Government to go by that and not to go by the wide interpretation required by law. Afterwards the Attorney-General advised the Government that they were wrong to give way to the local authorities in the way that they did. That is the basic point.

The Government are putting forward a proper system, an understood system, in this Bill but at the same time in two subsections they are seeking to validate not only their own wrong calculations but all the other provisions in the Bill if they are for purposes relevant to the Bill. I have tried to put Clauses 4(1) and 4(6) into ordinary language. It comes to this: if the department has done anything which is not in compliance with the statutory provisions, it shall nevertheless be deemed to have complied with them.

The other subsection dealing with the courts says that no court shall have any power to say that a department did not comply. What an interference with the law! The executive is putting itself above the law of the land and that is something which it has never been able to do. That is the width of these provisions and the courts have inherent jurisdiction to make the departments accountable before the law. Yet this Bill would seek to take away from the courts that inherent jurisdiction.

It reminds me of the statement made by Thomas Fuller: Be you never so high, the law is above you". That is what the Government are purporting to do in Clauses 4(1) and (6) about which I have spoken. Constitutionally that is erroneous. If I were to challenge that vilification I could do so because it says that: Anything done by the Secretary of State … for the purposes of the relevant provisions … shall be deemed to have been". I query their conduct. They did not do it for the purposes of those provisions; they did it in order to get round the provisions.

At all events, I could argue as a lawyer against that. It seems to me that those subsections are unconstitutional in placing the executive above the law, saying that it does not matter what the law says. The judge may say that they have not complied but they will say that they have complied. That is the constitutional principle which I raise, supported by the professors.

It could be done. I understand that it is desirable to get the matter straight and to make the calculations in accordance with what ought to have been done. That could be done by a simple piece of legislation without any width such as we have here. The two professors say that it could be done quite simply by a clause saying that the calculations which have been used in the past shall in future be held to be correct. There could be some simple provision such as that—it may be retrospective but that does not matter—saying why the calculations should be deemed to be correct but not dealing with all the other provisions and so forth.

It is the width of the language to which exception is taken. It could be done better and more simply, and perhaps that can be achieved in the course of the various stages of the Bill.

7.47 p.m.

Lord Silkin of Dulwich

My Lords, my justification for intervening in this debate on a very difficult subject, with which I have never professed to be especially familiar, is that, like the noble and learned Lord, Lord Denning, I find aspects of the Bill worrying constitutionally and disturbing as possible precedents for the future. As the noble and learned Lord has already said, that view is shared by eminent academic lawyers who have written the letter to which he referred.

This is a Bill retrospectively to alter the law relating to certain aspects of the rate support grant and hence, no doubt, to indemnify the Secretary of State against liability for past illegal actions. Its very limited objective is fairly described in the opening paragraphs of the Explanatory and Financial Memorandum to which the noble and learned Lord referred. It says: Relevant expenditure and total expenditure, which are essential elements of the rate support grant and rate limitation systems in England and Wales, have been calculated in a way which conflicts with the legislation concerned … The Bill is designed to deal with the situation which has thus arisen". There is nothing new in retrospective legislation of this character. Indeed, it has been not infrequent during the currency of the present Government as they have sought to tiptoe delicately between the various banana skins which seem to strew their path. I recall in particular the National Health Service (Invalid Direction) Act 1980. I described that Bill in another place as the "Patrick Jenkin Indemnification Bill". It plainly displayed the Government's dislike of seeking sound legal advice before acting. Unfortunately it is a dislike which we have seen only too often, and Westland was another example of it. The Attorney-General has my fullest political sympathy as well as my personal sympathy and I hope that he has a speedy recovery.

The need for retrospective change in the law normally arises when the courts have declared some ministerial or local authority action to be mistaken in law, usually ultra vires. So it was with the Patrick Jenkin episode. As I understand it, no such court decision has been made in this case. In this case, after having followed a particular practice for many years, the Secretary of State has been told by legal advisers that he was wrong in that practice. Thus he seeks to change the law and effectively to declare that it always has been as changed. This is despite the fact that as recently as the 1965 Greenwich case the Court of Appeal, the Secretary of State and the local authorities proceeded on the basis that the previous practice was good law.

Since the Secretary of State has no point of reference in a formal court decision, he has decided to create an enormous umbrella. Wherever the rain may fall the Secretary of State intends to remain as dry as his reputation. He seeks to accomplish that by, in my view, the remarkable language of Clause 4(1) and Clause 4(6) which have already been referred to. As I understand them, the effect of those subsections is that whatever the Secretary of State has done in the past which has a relationship to the rate support grant, however unlawful it may be, it is to be validated and made lawful. That is to be so even if the court hereafter purports to decide the contrary. Whether the word "purports" is as respectful to the courts as it should be is perhaps beside the point. It is Mr. Ridley's language, and we have to accept it.

The important point is the effect of that. If Clause 4(6) went no further than to deal with what is set out in the Explanatory and Financial Memorandum—that is to say, the calculation of relevant expenditure and total expenditure in a way which conflicts with the legislation concerned—one could have no complaint, but the language certainly appears to go very much wider. We shall want to know why that should be.

When we come to Clause 6, subsections (1) and (4) repeat the same formula. Past Acts are to be validated although we know not what those past Acts consist of. If we do, why do we not specify them? Why do we give this blank chequebook to the Secretary of State to fill in cheque after cheque as he may hereafter wish? However honourable and punctilious the Secretary of State may be, some future government, less honourable and less punctilious with an equally large paper majority, may be tempted to take action on the borderline between what is and what is not authorised by law. May not some future Secretary of State say, "Well, let us do it first and legislate later, in broad enough terms to cover any defect in what we do"?

This legislation in this form is both unnecessary and constitutionally dangerous. As a matter of constitutional practice this House should insist, in the absence of the very strongest reasons to the contrary, that all retrospective legislation is specific and related to clearly defined errors. Why ever not? In particular, it should do so if there is no court decision but merely an advice by however eminent a law officer to the effect that a practice in the past has been wrong. The legislation should not be so wide that its effect cannot be plainly determined at the time when Parliament is considering it. This legislation is so wide; at its best it is slapdash and at its worst it is pernicious.

I have searched the debates in another place, and indeed elsewhere, for an explanation of the language of those subsections. The Secretary of State explains the language by asserting that that language is no wider than necessary to deal with relevant and total expenditure, but that is plainly not so. The wording of those subsections goes far beyond those two concepts.

Part VI of the 1980 Act, which is included in the relevant provisions by Clause 4(2), goes very much further. I do not profess to be especially expert on these matters, but I have been given a long list of actions which the Secretary of State might take which fall within the language of those subsections and which are not matters directly concerned with the relevant provisions. For all we know, the Secretary of State may have fallen into error in any or all of the respects concerned. We simply do not know because there has been no court decision. Why should what are at present unknown errors be validated in this way?

The same type of criticism applies, in my view, to the wording of Clause 2 of the Bill, which is very wide wording indeed. Perhaps I may briefly turn to that. Clause 2 looks to the future. It prescribes what is revenue for the purposes of the rate fund revenue account. It says that this is to be decided in accordance with certain accounting practices. We ask: what are those accounting practices? They are described in the clause as: the proper practices applicable to accounts … kept by local authorities … taking into account variations of practice occurring from time to time.". So far so good. No doubt the accounting profession can advise local authorities of what are the proper practices from time to time, varying as they may do, but then we have subsections (4) and (5). Subsection (4) enables the Secretary of State to specify kinds of expenditure or income which are to be regarded as of a revenue nature. Subsection (5) provides that the practices to be observed are to be subject to any specification by the Secretary of State. Thus on the face of Clause 2 the Secretary of State can so specify as to override the proper practices as advised by the accounting profession.

So long as he is not quite unreasonable in what he does—in that case what he does would be open to judicial challenge—his specification is not open to challenge. It may be said that the Secretary of State would not deliberately specify that which is not a proper practice, but if that is said why not say so in the Bill? Why not make his power to specify subject to his specifying only that which is a proper practice?

The danger is a greater one. This Bill is necessitated by error on the part of the Secretary of State. How easy to compensate for some future error by a borderline specification. So another large umbrella is put up at the service of future Secretaries of State to shield them from storms created by their own errors. For my part I can see no good reason at all for the power to specify. The proper practices are surely adequate. If the I louse is persuaded that there is good reason for that power, at least it should be specified in the Bill to go no further than what is a proper practice, so as to make it open to challenge in the courts.

It may be that the evils in this Bill as it stands at the moment, can be cured in Committee. Certainly, we shall do our best to cure them. In another place there was a marked reluctance to cure, or even to recognise them. I do not follow why. Retrospective legislation is always regrettable but is at times a necessary evil. At least it should be a plainly limited evil. If even potential ambiguity can be removed, it should be removed. Otherwise, the temptation to legislate ambiguously in order to anticipate future eventualities may become too strong to resist.

I should like to ask the Minister when he is replying to the debate conscientiously to reconsider these clauses. Perhaps I may tell him that, however mellifluous may be the reading of his brief and however well phrased that brief, it will not suffice to cure the anxieties created by this Bill.

8.2 p.m.

Baroness Gardner of Parkes

My Lords, I thank the Minister for introducing this Bill to us. I should like to clarify a point relating to the opening remarks of the noble Baroness, Lady David, when she said that only one noble Lord who spoke last Wednesday on the subject of local government was speaking tonight. I think the comment was confused. There were many speakers last Wednesday on what I understand was a very good but very long debate. I was not one of those speakers.

Baroness David

My Lords, if the noble Baroness will forgive me, I did not say she was one of the speakers. I think I said there were many Tory Peers speaking last week and this week there is only one Back Bencher.

Lord Skelmersdale

My Lords, will the noble Baronesses accept that there were very few Peers on the Opposition Back Benches who spoke in that debate?

Baroness Gardner of Parkes

My Lords, I would accept that that is exactly what the noble Baroness said but I considered that it was slightly ambiguous and could be interpreted that only one speaker tonight was one of the speakers who had spoken on Wednesday. I just wanted to make that point quite clear. I thought that possibly those who had spoken last Wednesday found that it was such a long, late night that they could not face it again. I had been involved in the inner cities debate on the Monday and for that reason I did not speak in the debate on Wednesday.

The noble Baroness went on to speak about the manipulation of expenditure. It is very easy for noble Lords to remember the tombstoning and the various profligate rate expenditures which led to the rate-capping Bill being brought in in the first place. The noble Baroness also made the point in her speech that the Secretary of State had taken no action from the date when he knew that this could be a fault. This point was made by other speakers. When we read the debates which have taken place in the other place it was quite clearly stated by the Secretary of State that when this matter was brought to his attention, (and it was through his own department that this happened) he did then seek legal opinion immediately. He also followed that up with second legal opinion. As all noble Lords know, many of these legal opinions take a considerable time. It would be quite unfair to say that there was no action taken as soon as the matter was discovered.

The noble Baroness, Lady Robson, who is not here, said in her speech that we all knew about the matter in late summer and early autumn. I do not think that anyone claims to have known anything about it until September, which is the earliest date mentioned. I confirm that the Government's Statement was on 16th December. There is an urgent need to pass this legislation because until it is passed the rate support grant for 1987–88 cannot be agreed, and is being delayed. This situation causes a degree of uncertainty and worry to the local authorities, which are waiting for news of the rate support grant.

A very interesting point was made about the process of appeal against rate-capping, the redetermination of expenditure. I should be very interested to know whether or not the agreed percentages are considered to be higher and therefore more relaxed for those authorities than they might otherwise have expected. Perhaps the Government are erring on the side of being too generous rather than being too hard. I do not know. I have always been a great supporter of rate-capping because I have seen the very severe effects on both residents and businesses in areas where rates have risen not just slightly but by multipliers.

The noble Baroness also referred to correspondence or attitudes of the district councils. The point which she made is true but she did not mention that many other points were made in their correspondence. The district councils make the point very clearly that all the laws that were considered carefully by Parliament at the time were considered in conjunction with lengthy consultation with all the local authority associations. Noble Lords cannot say for one moment that there was any doubt whatever at the time about what was being done. It is only as recently as last year that these doubts arose. The noble Lord, Lord Silkin, made the point that even court cases have been heard on these matters and at no time has anyone ever questioned the validity of the basis on which the case was brought.

The Association of Distrisct Councils has raised a relevant point which is important. It is concerned about the statement made by the Secretary of State when he said that transfers to special funds which cause a deficit on the general rate fund would clearly not be allowed under this proposed legislation. My noble friend in her opening statement referred to this matter, but the Association of District Councils does not seem to know exactly where in the Bill that matter is covered. It was assured that the Bill would cover the point. I am referring to the type of transfers which were mentioned and which can mean that one authority, or a number of authorities together, can gain £38 million extra at the cost of other district councils. I should be very grateful if the Minister can inform me in his reply which part of the Bill covers that point.

The noble and learned Lord, Lord Silkin, interestingly spoke as to the need for powers to specify. I had intended to say that I thought Clause 2(2) was the best part of the Bill, because it is important to specify. I say that from the point of view of the local authorities themselves the greatest difficulty when trying to work out accounts is to know exactly what you are entitled to include and what you are not. It would have been helpful for local authorities to have a more specific list of what is allowed.

Lord Silkin of Dulwich

My Lords, I am not disputing the matters put forward by the noble Baroness but would she not agree that the power to specify must be a power which is within the proper practices and not outside them? Therefore, if there is any doubt about that that doubt ought to be put right.

Baroness Gardner of Parkes

I agree with the noble and learned Lord that we shall have a good Committee stage on this Bill when we will go into the detail of all these points being raised tonight. My own experience in local government has been that different people can decide when different expenditures will be claimable or allowable, or by clever means one can move funds from one account to another. In this way it is possible to get around the ruling. For that reason I support a more specific list. Basically my support for this Bill is because there was a general consensus in the past about relevant and total expenditure. Those are the two key options in the local government finance system. When legislation was drawn up in the past, the advice of the local authority associations was sought and given. Indeed, no one would wish to accuse them of giving their advice in anything but the best faith.

I hope that the Bill will make clear—I await confirmation of this—in the transfers between funds and accounts what is expenditure and what is not. It will also mean that the rate support grant can proceed for the coming year. I think that it is a good thing that the rate fund revenue account will be a clearly defined item, and that Clause 1 requires the keeping of this record. I am somewhat surprised to read in the report of proceedings of the other place that not all authorities have kept such records. I should have thought that basic housekeeping would ensure that all authorities kept records, and it seems desirable to have that done. I therefore welcome the Bill.

8.11 p.m.

Baroness Ewart-Biggs

My Lords, I too was grateful for the painstaking presentation of the Minister in explaining the Bill, though, having heard previous speakers, I feel that the contents of the Bill may have been rather less acceptable than the presentation that the noble Baroness made.

I will make only a brief intervention. My noble friends Lady David and Lord Silkin, who have spoken fully on the Bill, have covered the constitutional aspects of it and pointed out the major objections to it. They have stressed particularly how the specific assurances that the Government gave at the time of the Rates Act 1984 are contradicted in the Bill as drafted. As my noble friends said, the Government gave assurances at that time that the appeal procedures in the Act would be an essential safeguard against arbitrary decisions made by the Department of the Environment. That is not honoured in the Bill.

I will not say anything about the main part of the Bill, therefore, but I should like to say a word or two about its implications for the Inner London Education Authority. I wish first to say a few words about the cuts that would affect ILEA as a whole. Then, as I am a governor of two small ILEA schools, I should like to try to relate how those cuts, if carried out, will specifically affect one of the schools.

The budget of the Inner London Education Authority at present totals nearly £1 billion and the authority is responsible for maintaining nearly 1,000 institutions ranging from polytechnics to nursery schools. The authority has been rate-capped since 1985, and remains so automatically until at least 1988–89 under the terms of the Local Government Act 1985. It has received no rate support grant since the present system was imposed in 1981–82.

Under Schedule 2(2) of the Bill, a formula is to be applied for ILEA's precept limit. This would produce a precept income of £942 million. I understand that this precept, in the very precise form to which the noble Baroness, Lady Gardner, referred, is based on the advice of Government departments which have no direct experience of the education service in London. At no point, I understand, has the education officer of the authority been asked for his advice. Moreover, in the course of the next few months, if the formula which provides the basis of the authority's budget proves to be flawed, it will not be possible for the Secretary of State or the authority to make adjustments.

Baroness Gardner of Parkes

My Lords, may I ask the noble Baroness whether the authority about which she is speaking is the highest spending and least effective authority in the whole country?

Lord Graham of Edmonton

Not true.

Baroness Ewart-Biggs

My Lords, I am sure that the noble Baroness is very knowledgeable. She is probably a governor of several schools of the Inner London Education Authority, and perhaps they are not as well run as the two of which I am a governor. I speak having some knowledge of how those schools are run, and the standard is very high.

It is estimated that the cost of ILEA's current policies next year, including appropriate provision for pay increases and reserves, is £1,067 million. Therefore, the gap between income and ILEA's needs is about £125 million, which represents 12 per cent. of the proposed expenditure.

It is thought that the difference can be accounted for by four factors, first the government underestimate of existing levels of ILEA costs; secondly, the government under-provision for pay and price increases, and unavoidable increases in costs in 1987–88; and thirdly, the government under-provision for future costs and risks which might well occur in running a £1,000 million business. The last factor is the Government's planned level of cuts, which is £71 million.

Basing their calculations on that £71 million, ILEA officers have undertaken a comprehensive examination of budget cuts of either £50 million or £80 million to see how such cuts would affect the services of the various institutions. As I said, I should like to relate these calculations as made by ILEA officers to how they would affect the particular schools to which I referred and of which I am a governor.

One is a small primary school in Chelsea called Marlborough School, with 150 children in the primary section and 340 in the nursery school. In spite of the very well-to-do neighbourhood in which it is set, as many as one quarter of the children are on free school meals, and as many as 30 different nationalities are represented in the school. At present the school is managing all right, but only just all right—things are very close. The class size of 28 is regarded as about the right size for the children to receive an adequate and good education. The capitation amount also seems adequate at present. There are enough staff to cover the emergencies and sicknesses and the problems of having not only quite a large section of underprivileged children but a very large section of foreign children in the school. The head teacher still feels that he has a sufficient degree of flexibility to ensure that backward children, non-English speaking children, and so on, are provided for. As I said, things are very tight, and the standards of the school are only just being maintained.

The head teacher told me that the implication for him of a £50 million cut on the whole authority would be as follows. From a staffing point of view, he would lose at least one teaching post by the end of the year. He, like others, would lose about 10 per cent. Of support staffing—secretarial, technical, library, schoolkeeping—and this might well amount to one full-time post.

From the point of view of finance for books and equipment, a school of 200 pupils—about the same as his—would lose nearly £400 from an allocation of £6,000. This would have a serious effect on books and equipment. Maintenance in all schools would be cut by 60 per cent. This would produce a major reduction in interior decoration, day-to-day maintenance and equipment repairs. This school would suffer particularly because it is an old school and the maintenance is already falling a little behind. With a 60 per cent. cut, there would be a great backlog of maintenance of the school. From the point of view of other expenditure, there would be cuts in school journeys, games and swimming; and concerts and drama visits would be reduced by 10 to 20 per cent.

The head teacher would feel that he was no longer really in control of his own school; that he would no longer have the leeway necessary to make the necessary adjustments in a complicated school containing children of so many nationalities. He and his staff wonder whether they would maintain the high standard that this school—and I can vouch for this as a governor—at present maintains.

I have given your Lordships that one example of how the cuts would affect a school that I know of. Of course the only protection that could be afforded to this particular head teacher and many others in other authorities would be if the Bill were to contain a provision for some discretion to be exercised should circumstances require it, and that is what I hope we shall be able to put in at Committee stage.

8.21 p.m.

Baroness Fisher of Rednal

My Lords, when I first entered local government as a member of Birmingham City Council one of the most difficult tasks that one had was to learn—and learn fast—how one spent the money. That meant that one had to understand about rate support grants and about all the other grants that the local authority received. After 15 years—and having been chairman of the housing committee during that time—I think I left the local authority with a rather clear understanding of how the rate support grant worked and how all the various components worked when we had specific grants.

However, as my noble friend Lady David said, with all the major changes which have been taking place in local government finance since this Government took office, I would readily accept that if I sat an examination my marking now on understanding the rate support system would be C-minus. That is not because I have not tried to apply myself. I have tried to understand, but as the noble Baroness, Lady Hooper, herself said, the terminology of local government finance is out of this world.

Take the jargon that is used. We have positive marginal grant and negative marginal grant. They are just opposites, are they not? Then we have close-ended; we have clawback; flowback; holdback; and so far as concerns Birmingham I should add "take back" because that is the intention of this Bill. Then we look at the Bill itself. We look at the schedules. Did you ever see such algebraic mumbo-jumbo? An example is: (EL times 1.04) minus BG times 100 over RV. If you are a metropolitan county police authority, that is your formula. I supose that these people will have all these marvellous computers to feed this into. I only hope that if anything has to go to court the judges have the same kind of provision.

There is a complexity about the Bill. It is important that this time the Government should get the wording right. There should not be any more cause for concern. However, only as recently as half past five I was handed a reference from the Association of District Councils. It said, among other things, that they were, concerned at the poor drafting of the Bill. Even for those with expertise in both law and RSG matters the Bill is difficult to follow". Then it goes on to enumerate the various clauses which no doubt will be debated at Committee stage.

The noble Baroness, Lady Hooper, when introducing the Bill said that it was introduced to correct what the Government see as an error in the way in which expenditure is calculated for block grant purposes. However, noble Lords and noble Baronesses have already pointed out that the Bill goes beyond this to retrospectively penalise authorities for decisions that they took as far back as 1983–84.

If I may speak about the city of which I was proud to be a councillor for so many years, Birmingham is set to lose up to £17.7 million of block grant as a result of actions taken in 1984–85. Part of that period was when the local authority was in the control of the Conservative Party, with the Labour Party taking the latter part of that period.

The penalty to be imposed if the retrospective clause in the Bill is approved causes great concern. The accounts were certified by our approved auditors, Price, Waterhouse. The Government say that this suddenly dawned on them in September. Price, Waterhouse themselves wrote to the Department of the Environment on 16th May explaining that the city had created a supply of goods and services fund. They said that they thought that it was a lawful charge on the city's accounts. That was sent to the Department of the Environment on 16th May. Therefore it knew that there was some kind of interpretation of the law that perhaps it may not have known.

It is also true to say that not only did the approved auditors accept what Birmingham did but the Audit Commission also accepted it. It was said in the debate in the other place that there was nothing illegal in what Birmingham was doing. When the discussion was all about what was called at one stage by the Bill's opponents the fiddle, an honourable Member asked a direct question of the Secretary of State. This was on 26th January, as reported at col. 72 of Hansard. The Member asked: Is the right honourable Gentleman saying that it acted illegally?". The whole of the debate was about Birmingham. At col. 73, Hansard states: Mr. Ridley: It was not an illegal act"— one sentence. Then he said other things, but he said that it was not an illegal act.

Birmingham did not act illegally. Birmingham acted in good faith. As my noble and learned friend Lord Silkin explained in perhaps more knowledgeable terms than I can, there must be an objection to a retrospective change in the law which would disallow that which was believed to be lawful and was lawful at the time.

Perhaps I may say in conclusion that Birmingham is not an inefficient or profligate local authority. It is a large authority. I suppose it still is the largest local authority in Great Britain, and it knows its real tasks. Though it changes regularly from Labour to Conservative, it is a local authority in which there is a consensus of opinion in the large council of 150-odd members. That council knows it real tasks, in that it is to provide services for the people in its locality. Its officers know that they have a responsibility to maximise the largest amount of grant that they can possibly get. I do not think that there is anything wrong in that.

I shall be bringing up the difficulties that Birmingham faces during Committee stage, and therefore I hope that the Minister will look seriously at the Birmingham case. I know that other local authorities are in similar circumstances. Though most of them are classified as Labour-controlled, as my noble friend Lady David said, Cambridge, which I understand is a hung council, is in the same kind of difficulties. I hope the Minister will be able to accept that when these local authorities made their decisions they made them properly and in the very best interests of their ratepayers.

8.30 p.m.

Lord Underhill

My Lords, as with others who have taken part in this Second Reading debate, I appreciate the very clear manner in which the noble Baroness, Lady Hooper, introduced the Bill. At the risk of being thought chauvinistic, may I say that her manner, was gentle and disarming. And that, I believe, was vitally necessary when one recalls that in last Wedneday's debate on the inner cities, the noble Lord, Lord Skelmersdale, referred to outrageous local authorities. Today we are dealing with an outrageous Bill, an outrageous piece of legislation brought forward by this Government. As my noble friend Lady David has made perfectly clear, echoed by others, we recognise the need to clarify the law and to make certain it is as it was thought to be.

Noble Lords will recall that a Statement made in the other place on 16th December was repeated in your Lordships' House. It stated clearly, at column 115 of Hansard: The Bill is designed to make no changes in policy but as far as possible to apply existing policy within a tight timetable.". That is what we were promised by the Secretary of State in his Statement on 16th December.

Introducing the Second Reading debate in the other place on 12th January, the Secretary of State said: As the House knows, the purpose of the Bill is to validate the practice that my Department and the Welsh Office have both adopted since 1981–82, in line with the wishes of local government.".—[Official Report, Commons, 12/1/87: col. 391.] That was stated at Second Reading to be the purpose of the Bill. As my noble friend Lady David has made absolutely clear, if that was the sole purpose of the Bill, then the fullest co-operation was promised by the Opposition to get it through expeditiously. I am assured, however, that the Opposition spokesmen in the other place were never contacted to get such cooperation.

The noble Baroness, Lady Gardner of Parkes, put up a creditable and loyal defence of the Bill and attempted to justify the timetable that has been followed. But, as my noble friend Lady David said, the timetable now being followed shows ineptitude, a lack of straightforwardness and gross inefficiency.

On 16th December, in his Statement, the Secretary of State said that the first he knew of the difficulty was in October. In the Second Reading debate in another place, he then admitted that it was in September when he first knew. The Secretary of State addressed another place in the debate on the Loyal Address on 17th November. There was not the slightest inkling that there were problems to be dealt with if this difficulty was to be overcome. On 3rd December, Labour's environment spokesman in another place put a PNQ to the Secretary of State asking whether he would make a Statement on proposals for rate support grant for 1987–88. Not an inkling was given that there were problems and that legislation may have to be brought forward to put the law as we all thought it was. We had to wait until 16th December to be told of the Government's full intentions. Even then we had no idea that the Bill was to go beyond clarifying the law.

The noble Baroness, Lady Hooper, says that legislation is urgently needed in view of the present procedures that have to be followed. If there had been a very simple Bill, as I think one noble Lord suggested, of two or three clauses, we could have clarified the law and we could have followed the usual procedures in connection with the existing rate support grant.

I propose to say nothing of the legal problems contained in the Bill. The speeches of the noble and learned Lord, Lord Denning, and of my noble and learned friend Lord Silkin, in their respective ways, were devastating legal criticisms of the contents of the Bill. I hope that as many noble Lords as possible will read those speeches—by two noble and learned Lords who are well respected and whose legal standing is beyond question—before this House goes into Committee on the Bill.

Reference has been made to the very serious defect in the Bill which abolishes the opportunity for an authority to seek redetermination. It must be emphasised again that during consideration of the Rates Act 1984, which gives each rate-capped authority a proposed maximum rate, it was stressed beyond any doubt that there was to be a degree of flexibility in relation to the circumstances of each authority to enable representations to be made and so provide, if possible, the opportunity to reach agreement.

The Government gave specific assurance that appeal procedures would be essential to safeguard against arbitrary decision-making by the Department of the Environment. Those pledges were made when we were considering the Rates Act 1984. Now, in the Bill, there are proposals to prevent discussions, or the possibility of discussions, on flexibility.

What does the Bill propose instead? Reference has been made to Schedule 2 which sets out blanket formula for maximum rates in blocks of different types of constituencies. It is not concerned with the particular circumstances of an individual authority or the consideration of the needs of individual authorities. The block formula is added to the taking away of the possibility of redetermination. The Bill will take away the ability of a local authority to enter into discussions on a proposed maximum rate.

The Association of Metropolitan Authorities has stated clearly that to decide higher expenditure levels by classes of authority is very crude. It means for previously rate-capped authorities that expenditure levels are frozen. For all newly-capped authorities, it means a 2 per cent. increase, for all police authorities a 4 per cent. increase, irrespective of individual needs. The association asserts that this is neither logical nor fair.

The noble Baroness, Lady Gardner of Parkes, said she was not certain whether these figures were too high or too low. Incidentally, the AMA is to meet the Secretary of State on 12th February to discuss the Bill. Heaven knows what they will discuss, unless the Secretary of State is prepared to listen to criticisms of the Bill and himself propose amendments. Otherwise, I cannot see what discussions are possible—only firm criticisms of what the Government are proposing.

My noble friend Lady Ewart-Biggs has dealt with the effect of the Bill's formula on ILEA and my noble friend Lady Fisher has explained from her personal knowledge the effect of the Bill on the great city of Birmingham. I thought that I would look to see what the AMA has suggested are the implications for the six new joint passenger transport authorities. With my interest in transport questions, I thought that I would look to see what was proposed. Of course, this concerns the six metropolitan areas, each rate capped by the Local Government Act 1985. In July 1986, each of those PTAs was informed by the Secretary of State of its expenditure level for 1987–88, and given the opportunity for appeal.

Five of the six PTAs sought redetermination. None was decided, and their wish to seek redetermination goes if the Bill remains as it is. Under the block formula in Schedule 2, the AMA makes it clear that each PTA will have an expenditure level involving an increase of 2 per cent. Time does not permit at this stage going into all the transport problems that we know PTAs are going to face during the coming year. Schedule 2 proposes block formulae irrespective of individual needs.

I have had a letter from the Tyne and Wear Passenger Transport Authority expressing the concern not simply of a Labour-controlled authority but with all-party support from members of the authority. That concern is with the standard formula which takes no account of the special needs of Tyne and Wear. The authority had sought redetermination; that will go by the board. It is particularly concerned with the loss of the right of appeal against the maximum precept set for 1987–88.

The authority makes a point which has not yet been referred to. Looking at the block formulae in Schedule 2, there is the use of rateable value instead of the penny rate product. The Tyne and Wear PTA says that this formula and the use of that particular rateable value criterion will mean that it has a shortfall in revenue next year.

I have also heard from the Greater Manchester Passenger Transport Authority in precisely similar terms. It was also seeking redetermination, but that goes by the board. It fears that the shortfall in 1987–88 will be no less than £11.4 million. Yet in a letter to the Greater Manchester PTA dated 22nd December, the Minister said that he looked forward to the implementation of proposals by the authority, which he considered to be overdue. The Manchester PTA has made it absolutely clear that these cannot possibly be proceeded with if there is to be a loss of £11.4 million.

If we take a quick look at the fire and civil defence authorities' block formulae, I gather that the standard uplift there is 2.5 per cent. for all. Various fire and civil defence authorities have indicated what this means and the problems it will entail. South Yorkshire says that it will be unable to fill vacancies and that its manning level is below the level recommended by the Home Office. There is a possibility of no replacement of fire appliances and vehicles which may need urgent attention. Other fire and civil defence authorities have put forward similar views to the AMA.

Under the Bill, there is no way to question in detail the reasoning, the thinking, the logic (if there is any) and the preparation that led the Secretary of State to declare that he would rate-cap an authority. Under the Bill, it will not be possible to debate a particular authority. There will be no necessity to lay an order before Parliament, not even under the negative procedure. The Secretary of State will be able to act without any parliamentary scrutiny, just by sending a letter to the local authority concerned.

My noble and learned friend Lord Silkin referred to Clause 2(3) which refers to the proper practice to be followed in connection with the entries in the rate fund revenue account. As he rightly says, "proper practice" is not defined in the Bill. But the auditor, who is responsible, has to see that an authority has followed proper practice in the compilation of its accounts. CIPFA has issued a code of conduct for local authorities on local authority accounting. I would emphasise a point that was made by my noble friend. Under the Bill, local authorities will need to observe proper practice but at the same time they will be expected to carry into effect the specifications which the Secretary of State may make on the nature of the rate fund.

In conclusion, my noble friend Lady David referred to the guillotine procedure adopted in the other place. On the 26th January—not long ago—the Government secured this guillotine procedure whereby ten clauses after Clause 7 and three schedules were not debated in the other place. Mr. John Biffen, the Lord Privy Seal and Leader of the House, said in the debate on that procedural motion, at col. 39: The main motivation and desire has been to get the Bill to another place where it will undoubtedly by very fully considered and then reported to this place". I hope that the words of the Leader of the other place will be taken to heart, that we will give this Bill serious consideration, and that we will amend it and send it back in a far better state; that is, if the Government do not see common sense and withdraw the Bill, putting forward just a simple Bill to clarify the law.

8.47 p.m.

Lord Skelmersdale

My Lords, we have had an interesting and wide-ranging debate on what is by any standards a highly technical Bill. I agree with all noble Lords who have spoken that it is a highly technical Bill. Indeed I have needed to do more homework on this Bill than on any other I have been involved in during my time in your Lordships' House.

It is complicated also by the fact that the nitty gritty, if I may so call it, of local government finance is a subject which we in this House are not used to dealing with on an annual basis and one which we come to look at only on rare occasions. I say this having listened to, and understood, the points made by the noble Baroness, Lady David, and the noble Lord, Lord Underhill, on the frequency of legislation. It is nothing like as frequent as some other subjects we discuss in this House.

However, that is no reason why the Bill's very technicality—that is a point on which I sympathise with the noble Baroness, Lady Fisher—should obscure the one simple principle behind it, which is to maintain so far as possible the status quo in the conduct of local government finance by putting practice on a proper statutory footing. That means continuing with the definition of expenditure adopted in line with the wishes of local government in England, Wales and Scotland, and providing for the 1987–88 rate support grant settlement and the rate limitation process to be implemented for England and Wales with the maximum of certainty for the authorities concerned. I assure the noble Baroness, Lady Robson, that the Bill has absolutely nothing to do with the loony Left. The position is that the system which has up to now been followed was agreed with the local authority associations at the very beginning, when it came into operation. The Government are putting forward legislation that gives statutory form to the system that the local authorities always wanted. There is essentially no change, I can tell the noble Baroness, Lady Fisher.

I have considerable sympathy on this occasion for even the noble Baroness, Lady David, who argued that rather than bolster up an existing system where faults are widely acknowledged, we should turn immediatly to something else. Whether she would like that to be the Green Paper proposals remains to be seen. Unfortunately it would have been quite impossible to set up the new system, including necessary transitional measures, in the time available. The urgent need for that reform is, however, more apparent than ever. I should also make the point that the rate support grant system which we now have is much simpler than that which the Government inherited in 1979, which used a computer in Ohio, of all places, to do the calculations.

I shall not repeat again the detailed summary of the Bill given by my noble friend Lady Hooper—to whom I am extremely grateful—at the start of the debate. I should underline, however, that there is no intention here to create new structures or impose new burdens on local authorities. The Bill translates into statute what is effectively current practice in calculating relevant and total expenditure by reference to what is commonly called the rate fund revenue account. The point here is that, although this will be the first time they are expressly referred to in statute, all local authorities already keep such accounts. It is not therefore the huge step that has been alluded to in certain quarters. So far as it is possible, it adopts the wording of the provisions of the Local Government, Planning and Land Act 1980. Noble Lords will of course have the opportunity to consider the approach in detail during Committee. However, I can assure them that their scrutiny will not unearth the kind of centralising measure which some have claimed this Bill to be.

As regards timing, the Government came to this House in December, as soon as they were able to present to Parliament their fully worked out proposals for handling the problem. It would have been quite irresponsible to come without such a solution and thus face local government with the great uncertainty which would have followed. My right honourable friend also made clear that while he was alerted to a problem in this area in mid-September, he did not receive legal advice upon which the Government acted until late December.

As we all know, it took some six weeks before my right honourable friend was in a position to have a Bill sufficiently drafted to be able to make the announcement that he made. I can assure any noble Lord who has experience—and I know that the noble and learned Lord, Lord Silkin, certainly has such experience—of the progress of drafting legislation that this happened at the pace of a cheetah and not at the pace of a snail, as suggested by the noble Lord, Lord Underhill.

Lord Underhill

My Lords, in order to assist the noble Lord, I believe that he referred to the end of December. Surely he must have meant October, since the Second Reading debate was 12th January.

Lord Skelmersdale

No, my Lords. The Statement was on 16th December and that was the six weeks' period to which I referred.

My noble friend Lady Hooper explained what decisions the Bill did and did not validate. In brief, all future decisions of the Secretary of State on rate support grant and rate limitation will be subject to review by the courts in the normal way. Anything done for purposes of the statute falling within Clause 4(2) and Clause 6 are validated. The Bill expressly provides for this in Clause 4(1) which says: Anything done by the Secretary of State before the passing of this Act for the purposes of the relevant provisions in relation to any of the initial years or intermediate years shall be deemed to have been done in compliance with those provisions". The position of rate limitation is dealt with in Clause 6. It is here that the Opposition's basic misunderstanding of the Government's intentions arises. I ask noble Lords to cast their minds back to the discussion on the rate support grant arising out of a Statement I repeated on 13th January. The noble Lord the Leader of the Opposition pressed me hard to say that that was a definitive Statement, exactly like previous years. If I had bowed to that pressure and my right honourable friend had introduced the usual accompanying order, that would have been quite improper.

As the situation stands under the Bill, local authorities will, if they so wish, be able to challenge future decisions on rate support grant relating to the current and past years. The decisions we intend to make in the future comprise the conclusive calculations of authorities' block grant entitlements for 1981–82 and 1982–83; one further supplementary report and thereafter the conclusive calculations for 1983–84 and 1984–85; and getting more up to date, we intend to make at least two more supplementary reports, and the conclusive calculations for 1985–86. Last but by no means least, it will be necessary to make all four supplementary reports and the conclusive block grant calculations for 1986–87.

My right honourable friend made clear in the 13th January Statement that none of these—not one—will be made before the Bill becomes law. They are thus not validated by Clause 4 or any other clause.

Noble Lords opposite—principally the noble and learned Lords, Lord Silkin and Lord Denning—have also sought to argue that the validation of past decisions goes too wide. They have argued that validation should only cover matters directly related to the definitions of relevant and total expenditure. The Government's view, however, is that there should be no doubt about what is and is not validated. We have considered carefully how the validation should be effected. We believe that the approach we have adopted is both necessary and right.

Noble Lords opposite speak of putting the Executive above the law, as the noble and learned Lord, Lord Denning, did, but this is not so. As I and my noble friend Lady Hooper have repeatedly said, the Bill validates past decisions of my right honourable friend. Once it is enacted, those decisions will be deemed to be valid.

I say in passing that Clause 4(6) and (1) should be read together. Perhaps this is where some of the confusion has arisen, although I am sure the confusion is not in the mind of the noble and learned Lord, Lord Silkin. I can perhaps give an idea of the sort of uncertainties which would arise if we followed the path proposed by the Opposition in another place. It was suggested that many provisions of Part VI of the Local Government, Planning and Land Act 1980 were not dependent on total or relevant expenditure definitions. Examples given were the Secretary of State's duty to consult local authority associations; determination of the aggregate amount of domestic rate relief grant; calculation of block grant to each authority; the principles to be specified in the rate support grant report; the power of the Secretary of State to apply multipliers to the product of grant-related poundage, multiplied by gross rateable value; and the duty to frame guidance by reference to principles applicable to all local authorities.

For example, although I accept that the Secretary of State's duty to consult the local authority associations is not itself dependent on total or relevant expenditure, he has consulted annually on proposals based on an erroneous calculation of total and relevant expenditure. Although the determination of the aggregate amount of domestic rate relief grant is not in itself dependent on total or relevant expenditure, domestic rate relief grant is part of aggregate Exchequer grant, which the Secretary of State determines in the light of his view of relevant expenditure.

A calculation of block grant to each authority is in large part dependent upon the total expenditure of the authority concerned. The concepts of total and relevant expenditure are endemic in the principles specified in the rate support grant report, in multipliers and the grant related poundages. In all but one year the Secretary of State has framed guidance for local authorities on the basis of total expenditure. It is therefore quite wrong to suggest that these matters have nothing to do with total or relevant expenditures and therefore could be exempted from the validation proposed. No doubt we shall return to this issue during the Committee stage of the Bill. I hope that today's debate will have made clear what we intend to validate and why we believe it is necessary so to do.

Noble Lords opposite questioned the powers we are seeking in relation to local authority accountancy and in particular those in Clause 2(4). Let me say at the outset that the Bill is not about regulating local authority accounting. It is establishing in statute for the first time a method of calculating relevant and total expenditure, which will be broadly the same as the practices which have been traditionally followed by local authorities. The traditional practices involve calculating relevant and total expenditure by reference to the rate fund revenue accounts, which authorities have traditionally kept, although not hitherto required to do so by statute.

Clauses 1 and 2 of the Bill set up in statute for 1987–88 onwards the rate fund revenue account. The provisions are designed so that the new statutory rate fund revenue accounts will be similar to, if not the same as, those which traditionally authorities have in general kept; and I know that the local authorities believe this to be so.

Clause 2(4) is designed so that some items of expenditure or income can be specified as being of a revenue nature where there may be some doubt. The powers of Clause 2(4) do not permit my right honourable friend to specify that an item is not revenue—in other words, that it is capital. Nor do those powers provide for specifications about items such as transfers between accounts and funds which are not expenditure or income.

I also draw the attention of the House to the assurance which my honourable friend the Under-Secretary gave in another place that my right honourable friend has no intention of specifying something to be revenue which the whole world thinks is capital. In other words, that will be covered by the phrase "normal accountancy practices", as described by noble Lords and as promoted by CIPFA.

Lord Silkin of Dulwich

My Lords, is the noble Lord undertaking on behalf of the Government that the Secretary of State will not specify except in relation to a matter which is a proper practice within subsection (3)? If he is saying that, would he object to an amendment which makes that plain on the face of the clause?

Lord Skelmersdale

My Lords, what I said is that we have no intention of specifying something to be revenue which the whole world thinks is capital. Knowing the speed with which my mind is working at the moment, I shall have to reflect on the question that the noble Lord has just asked me. But I can undertake to give him an answer before the Committee stage starts.

My noble friend Lady Hooper also explained why we have had to adopt for 1987–88 only the approach to rate and precept limitation contained in the Bill. It would simply not have been possible to carry through the normal Rates Act procedures given the need for legislation on the definition of expenditure. Some noble Lords have argued that the method adopted and the formulae proposed in the Bill are quite unreasonable. On closer examination of the Bill I hope your Lordships will accept that this is not the case.

I listened with great care to the noble Baroness, Lady Ewart-Biggs, who spoke about ILEA. However, what she did not say is that ILEA is rate-capped by law under the Local Government Act 1985.

I turn now to appeal procedures under rate limitation. I accept on behalf of the Government that normal procedures are not being followed for 1987–88 as laid down in the Rates Act 1984. My right honourable friends have made it clear that this was not possible given the need for the expenditure legislation. In reaching decisions on the formulae the Secretary of State took into account all representations made in redetermination applications and at meetings about them.

I do not accept the assertion of the noble Lord, Lord Underhill, that my right honourable friends have behaved in an underhand manner in respect of rate limited authorities. As I said, in reaching their decisions my right honourable friends have, as in any normal year, considered all the information available to them about the designated authorities. They took particular note of applications for redetermination of expenditure levels. The representations made at meetings about those applications were carefully considered. Of course, given the need for the formula approach, limits cannot be precisely tailored to individual circumstances as in a normal year, but so far as is possible they reflect the decisions the Secretary of State would have taken under Rates Act procedures, and they are of course for one year only.

The Bill carries through the policy of protecting ratepayers by holding down rates and expenditure. Some authorities, despite being rate limited in 1985–86 and again in 1986–87, have attempted to maintain their high levels of spending and have taken no steps to cut out waste and inefficiency or other burdens on their ratepayers. The position has been all too clearly expressed in the Audit Commission's recent report on certain London authorities. It is right therefore that the disciplines of rate limitation should be firmly maintained. For authorities newly selected for rate-capping in 1987–88, my right honourable friend has proposed some additional flexibility above original levels set in July. The fact remains, however, that these authorities were among the highest spenders and the purpose of rate limitation is to constrain that spending.

In talking about constraining spending perhaps I may say that the Inner London Education Authority is by all accounts and in any person's vocabulary a high spending authority. It educates 4 per cent. of the children in English state schools but is responsible for 8 per cent. of the spending by education authorities. It spends 30 per cent. more per pupil than the inner city authorities of Manchester, Liverpool and Newcastle, and almost 60 per cent. more than the beloved Birmingham of the noble Baroness, Lady Fisher. The formula in the Bill produces a figure for a maximum precept, which is a 3.2 per cent. increase on this year. My right honourable friend the Secretary of State for Education and Science considers that such a precept would be sufficient for ILEA to provide an adequate service in 1987–88 while protecting the interests of the ratepayer.

The noble Lord, Lord Underhill, mentioned, not surprisingly because I know his interest in these matters, a whole range of passenger transport authorities. I should like to refer to one of them—namely, Tyne and Wear. The transport authority is too gloomy about the effect of deregulation on the Metro. The authority has a superb chance to promote it and noble Lords all around the House have congratulated the authority on the Metro system. There is healthy competition from bus services, which is why the promotion is so necessary. People will use it if it gives them the service they want. I do not accept the need for cuts in concessionary fares, but that is a matter entirely for the passenger transport authority.

Although the noble Lord, Lord Ross of Marnock, apologised and said that he was unable to be here, I think it would be right briefly to refer to the position in Scotland. What has gone wrong has been that since 1983–84 transfers between the general rate fund and special funds have been taken into account in determining grant penalties; in other words, there have been reductions in rate support grant as a penalty for overspending. This procedure, though now revealed as wrong, was with the agreement of the Convention of Scottish Local Authorities and has been in the local authorities' interests. If the transfers had not been corrected, most authorities would have paid more in penalty, and I am sure the noble Lord, Lord Ross, would not have liked that.

I am extremely grateful, knowing her particular and peculiar circumstances this evening, to my noble friend Lady Gardner who asked a specific question about deficit financing and the £38 million which she quoted. The relevant provision in the Bill is in Clause 3(1). This in itself does not outlaw deficit financing. It allows the Secretary of State to make specifications so as not to take these transfers into account in calculating relevant expenditure. Generally, there is a duty to consult before making any such specifications.

The noble Baroness, Lady David, questioned the cost of this legislation. There will be no significant extra costs to government, nor do we expect there to be any significant costs to local authorities. I am sure that the noble Baroness will agree that we should take all the necessary steps to give certainty to all past decisions on rate support grant and to enable us to continue the present practices in calculating relevant and total expenditure, which local authorities themselves wanted.

It is normal at this point to say something about the inevitably complicated Notes on Clauses for this Bill, which I had intended would be placed in the Printed Paper Office by the close of business today, but I think that under the circumstances, if noble Lords will allow, perhaps tomorrow morning will serve the interests of the House just as well.

I can only conclude from this debate that there has been a serious but complete misunderstanding somewhere along the line which we cannot get to the bottom of tonight. I urge the House to give its usual thorough consideration to what my noble friend and I have said, and we shall look forward to exploring any avenue noble Lords wish to pursue in Committee and at subsequent stages. The Bill is essential if we are to be able to pay grant to authorities next year on the basis of long accepted practice. It maintains the status quo. It contains no new centralising power. It validates only those decisions which we believe it necessary to validate to avoid the uncertainty which the discovery of the error on expenditure could otherwise have caused. For all these reasons, I recommend to your Lordships that the Bill be now read a second time.

On Question, Bill read a second time, and committed to a Committee of the Whole House.