§ 7.40 p.m.
§ Lord Skelmersdale
My Lords, I beg to move that the Bill be now read a second time.
This is mercifully a short Bill to abolish the procedure known as grant recycling. It deals with the arrangements by means of which block grant is paid to local authorities, and has been certified in another place as a Money Bill. It nonetheless requires your Lordships' consent, and the House will therefore wish me to explain both the reason for it and the way in which it works.
Before I do this, however, it would be appropriate for me to describe briefly how the system works at present and why it needs to be changed. Well before the start of each financial year my right honourable friend the Secretary of State for the Environment announces how much grant is to be made available to local authorities from the Exchequer. From this he deducts the amounts which he estimates will be needed for specific and supplementary grants, and after a further deduction for domestic rate relief grant the balance is the amount of money which he calculates will be available to local authorities as block grant.
My right honourable friend also announces in advance the principles on which that grant is to be distributed and provides an estimate of the amount of grant which each authority can expect to receive for a given level of expenditure. Some assumption about authorities' expenditure needs to be made at this stage, both in order to provide these exemplifications—since an authority's grant entitlement depends on its level of spending—and to set the grant-related poundage schedules which govern the distribution of the total grant available. It can only be an assumption, of course, because authorities at this stage have not yet set their budgets for the year.
Later on information about authorities' actual grant entitlements becomes available as their actual spending levels become known. Some authorities will have spent below the assumed level and in most cases are therefore entitled to more grant. Others will spend above the assumed level and can claim less grant than anticipated. In either case, however, because a fixed total amount of grant must be distributed, the whole sliding scale of grant entitlements and the grant-related poundage schedule which governs their distribution must be re-calculated in a supplementary report so as to achieve this. When authorities in aggregate spend more and lose grant entitlement, the resulting 1008 underclaim is eventually redistributed among all authorities on a common poundage basis. This is what is meant by the term "grant recycling", otherwise known as "close-ending". The process is repeated periodically for each grant year as new and better information about authorities' actual spending becomes available, always ensuring that the same aggregate amount of grant is distributed.
The procedure has a number of disadvantages which have become increasingly apparent to the Government and also to many local authorities. First, individual authorities have no real certainty as to their likely grant entitlement at the crucial stage when they are setting their budgets and their rates for the forthcoming year. Any estimates of grant can only be provisional, as relatively large amounts can later be made available, or be lost, purely as a result of other authorities' spending decisions.
This makes for uncertainty and instability. Even where authorities subsequently gain additional grant, this often happens too late to be taken into account in rating decisions; and of course in cases where negative recycling, or clawback, operates as a result of a grant overclaim, this can cause particular difficulties.
In 1985–86, for example, initial grant claims exceeded the amount available by £123 million. So £123 million had to be clawed back from all authorities' entitlements. But that is not the end of the matter. During the course of the year the GLC adopted a new budget, with the aid of some creative account-ing, which reduced its budget by £34 million. Subsequent court decisions against the GLC reduced its actual spending by another £100 million. As a result, its grant entitlement has risen by £100 million. That amount will have to be found at the expense of all other authorities, well after the end of the year in question, simply to ensure that the same total amount of grant is paid out as was originally envisaged. That provides a good example of the absurdity of the current close-ended system and the quite unacceptable uncertainty which it creates for local authorities.
A further disadvantage of the present system of particular concern to the Government is the fact that any grant recycled when there is an underclaim is distributed to both high- and low-spending authorities alike. Authorities which choose to penalise themselves by spending up and which lose grant as a consequence can paradoxically receive back large amounts of windfall grant, regaining on the swings what they quite justifiably lost on the roundabouts. This then is how the system works at present, and why it needs to be changed. The Bill which is now before your Lordships for consideration will amend it with effect from the financial year beginning on 1st April.
Clause 1 contains the substance of the Bill. It enables the Secretary of State to end the practice of grant recycling by requiring him not to be concerned always to distribute a fixed aggregate amount of block grant. Instead he may vary the amount of grant payable, as the sum of authorities' actual grant entitlements varies.
Clause 2 contains a clarification of the definition of classes of authority which, though incidental to the abolition of grant recycling, is needed to ensure the smooth operation of the modified scheme by 1009 removing a possible area of doubt in the existing legislation. It ensures that the definition which applies in Section 59 of the 1980 Local Government, Planning and Land Act applies in other sections of that Act where the words, "authorities of the appropriate class", appear. The third and final clause of the Bill provides that it shall apply in England and Wales only.
On a technical level, what this Bill does is to ensure that the grant-related poundage schedule determined in the main rate support grant report to distribute the full amount of grant then available will not in future be redetermined to take account of individual authorities' spending decisions. What this means in practice is that if authorities collectively are entitled to less grant because spending turns out to be above the assumed level, the unclaimed grant will not be recycled to them. Conversely, if they turn out to be entitled to more grant in aggregate, this will be made available from the Exchequer.
This, we believe, will bring real benefits to local authorities in terms of greater certainty and stability. They will know their grant entitlement for any given level of spending at the time of the RSG settlement and will be able to set their budgets and their rates in the knowledge that other authorities' spending decisions will not affect them, as they do at present. Unlooked for and uncovenanted sums of grant will no longer wash in to authorities' accounts long after their rates for the year have been set; neither will the Government take away grant in order to pay for some sudden increase in another authority's entitlement. An authority's grant will depend solely on its spending decisions. I commend the Bill to your Lordships.
§ Moved, That the Bill be now read a second ti me.—(Lord Skelmersdale.)
§ 7.48 p.m.
§ Baroness David
My Lords, I should like to thank the Minister for his explanation of the Bill and of grant recycling, clawback, flowback, close-ending and so on. We are becoming familiar with those terms after the last week or so.
This Bill is, I think, the 43rd piece of legislation concerning local government and the 16th actual local government Bill which we have had from the Government since 1979. This Bill is designed to make further provision as to the calculation of entitlement to block grant. The Local Government Finance Bill, which we passed just this afternoon, is a Bill to validate things done by the Secretary of State in connection with rate support grants and the limitation or reduction of rates and precepts for local authorities.
The Rate Support Grant Act 1986 is,An Act to validate certain block grant determinations already approved by the House of Commons; and to clarify and amend the law relating to rate support grants.The Local Government Act 1986 is,An Act to require rating authorities to set a rate on or before I st April: to prohibit political publicity and otherwise restrain local authority publicity.The Local Government Act 1985 is,An Act to abolish the Greater London Council and the metropolitan county councils; to transfer their functions to the local authorities in their areas and, in some cases, to other bodies.1010 The Local Government (Interim Provisions) Act 1984 is,
An Act to make provision for the composition of the Greater London Council and the metropolitan county councils pending a decision by Parliament on their continued existence.The Rates Act 1984 is,An Act to enable the Secretary of State to limit the rates made and precepts issued by local authorities.The Local Government (Miscellaneous Provisions) Act 1982 is,An Act to make amendments for England and Wales of provisions of that part of the law relating to local authorities".The Local Government Finance Act 1982 is,An Act to abolish supplementary rates and supplementary precepts; to require rates and precepts to be made or issued for complete financial years.It all started with the Local Government, Planning and Land Act 1980, of which we have heard quite a lot in the last few weeks, which had the audacity to call itself—and this is how it still reads—An Act to relax controls over local and certain other authorities".That is the history, or some of the history, of the local government Acts with which we have had to cope, and with which local authorities have had to cope, since this Government took over in 1979.
This Bill, short as it is, will have a serious and damaging financial impact on most local authorities, and also give the Secretary of State yet further powers for future years to determine the principles on which the allocation of grant to local authorities is made. It is plain for all to see that the Government are attempting to smuggle through major changes to the grant system in a Bill which they are trying to claim is non-controversial, and which indeed the Minister was claiming just now is for the benefit of local authorities. It is also plain from a close reading of the Bill that retrospective legal cover is being sought for previous decisions made by the Secretary of State in respect of the distribution of grant between different kinds of local authority.
Clause 1 seeks to curtail the practice of flowback or grant recycling. That is the process which the Bill seeks to curtail, the practical consequence being that any surplus grant under-claimed will return to the Treasury rather than be redistributed to local authorities. If the present system of grant recycling were to operate in the financial year 1987–88, it has been estimated by the county treasurer of Somerset—and he is the official adviser to the Association of County Councils—that about £400 million would return to local authorities by way of reallocated grant through the flowback system.
This broad figure of £400 million loss of grant in 1987–88 is confirmed by figures produced by the AMA. These show that, if local authorities' expenditure in England globally is 3 per cent. above the DoE's estimates for 1987–88, then £408 million in block grant would be forgone by authorities and would not return to local government via the flowback system. If expenditure rises to 5 per cent. above DoE assumptions, the total of grant forgone rises to £693 million.
Clause 1 as drafted also ends the close-ending of block grant totals. Ministers have stressed that they 1011 wish to stop close-ending in order to prevent "abuse" of the system, whereby individual local authorities can so arrange their accounts as to maximise their block grant receipts at the expense of other local authorities, which would have to lose grant in order that other authorities claiming and entitled to more could, in fact, receive more. Accordingly, the Bill specifies that the aggregate amount of RSG payable in pursuance of a Supplementary RSG report,may accordingly be more or less than any amount previously calculated as the aggregate amount available for it.This provision enables Ministers to do one of two things: either to make available more cash for block grant if the Treasury approves, and if they make a political judgment that at the time concerned the claims submitted are reasonable; or to make available a lesser figure of block grant than set out in the initial RSG report, as local authorities spend more than DoE assumptions and consequently reduce their block grant entitlements.
It is our view that the new system proposed will have an automatic deflator built into it. This is because, in most years, the Treasury is unlikely to agree further sums to be available from contingency reserves in order to pay for local authorities' expenditure; and it is fair to say that the new system will encourage the DoE to set their expenditure assumptions for local authorities at an unrealistically low level in order to guarantee an overshoot on local authority expenditure, a consequent lower level of aggregate RSG and a consequent windfall gain to the Treasury in undistributed RSG.
We believe that the system now being created by Clause 1 of the Bill re-erects a system of penalties on all local authorities for alleged overspending only shortly after the Government abolished targets and penalties. The year 1986–87 was the first year without targets and penalties. The new system will, we believe, mean a permanent and recurring loss of grant to local authorities in circumstances where many of them are already struggling to meet growing social needs with reduced or static financial resources.
It is clear that the whole of Clause 1 gives the Secretary of State broad discretion on a number of issues. First, he may determine the principles for calculating grant-related poundages for the RSG report and any supplementary report on any basis. Secondly, he may make assumptions on any basis about the total expenditure of local authorities. Thirdly, he does not need to match claims for grant from local authorities with the originally determined total of block grant available; it can be higher or lower. And, fourthly, he may make wholly different assumptions about the position of individual local authorities or descriptions of authorities, which may lead him to mete out less favourable or more favourable treatment to individual authorities or descriptions of authorities by way of grant-related poundage and thereby the grant system as a whole.
The introduction of Clause 1(3) is very significant indeed. In the past, Secretaries of State have had to base their differential treatment of different local authorities on the concept of classes of authorities. This has meant that, in theory and in law, all county councils or metropolitan district councils would have 1012 to be treated in the same general fashion as far as the calculation of rate support grant is concerned. This Bill allows Ministers to establish different assumptions and hence different outcomes for the purpose of calculating grant-related poundages.
Such a provision is unprecedented and we oppose it, as it gives a general power to discriminate against, or in favour of, any individual local authority without further parliamentary scrutiny. The Bill as drafted also allows Ministers to discriminate in favour of, or against, different descriptions of authorities and allows them to determine what a "description" of authorities should be. No doubt it will be argued that there is a need to create these new descriptions of authorities, in order to meet new circumstances such as the teachers' pay settlement where government wish to direct additional resources to education authorities only. The current response to this argument is, we believe, that government can so direct additional resources to education authorities only by reference to the definition of clauses in the 1980 Act as amended.
If we had been able to amend the Bill. we should have liked to see a clarifying amendment to Clause 1(3) to limit the scope of the subsection to clearly defined and agreed sets of circumstances. Perhaps the Minister will give some reassurance when he replies, because, without such an amendment or deletion of subsection (3) as a whole, the suspicion will remain that the Government are granting themselves new and universal powers to deal more favourably, or less favourably, with groups of local authorities or individ-ual authorities as they please.
There is, however, a second purpose in the existence of Clause 1(3) as drafted: it is further evidence of their desire to "judge-proof" their legislation. As drafted, the subsection gives Ministers what is intended to be perfect cover against legal challenge based on the Wednesbury principles; for, if Ministers under this Bill can treat individual authorities or groups of authorities differently from others of the same class, then it would be unlikely that a challenge based upon Rednesbury could succeed. In short, the Bill gives the Secretary of State discretions which are far too wide and which will be a standing invitation for an unscrupulous and unfair Minister to exploit.
I now turn to Clause 2. The Minister will know that I wrote to him this morning to ask a series of specific questions to which I think the House as a whole is entitled to answers. These questions, relating to the operation of Clause 2, are as follows. What discrimi-nation between authorities of the same class has taken place on an illegal basis since enactment of the Local Government, Planning and Land Act 1980? If such illegal discrimination has occurred, what has been the practical effect of such discrimination? What effect, if any, does Clause 2 as drafted have on the outstanding litigation between the London Borough of Greenwich and the Secretary of State? What Statement is the Minister prepared to make following the Parliamentary Under-Secretary's commitment in Standing Committee on 19th February, at col. 60, in which Mr. Chope stated that he undertook to look at the matter again? We look forward to receiving concrete replies to those important questions.
1013 This Bill is part of the continuing pantomime of the Government's local government legislation. They are in a mess and they know it. There are some on the Government Front Bench who will be relieved not to have to go through a Committee and Report stage on this particular Bill.
There are still two further local government Bills to come before us this Session. There may be more if the Government invent yet more legislation to keep us busy. We dislike this Bill very much as it is part of the Government's strategy of centralisation and it gives Ministers powers which, on the record before us, we fear will be abused. Unfortunately, as it is a Money Bill we can do no more than express our opposition. But that opposition is strong, as is that of all the local authority associations who also feel that a number of questions remained unanswered when the Bill left another place. The Minister suggested that the local authorities ought to be pleased about the Bill. I can assure him, from communications I have had with all three associations, that they are not.
§ 8.3 p.m.
§ Baroness Stedman
My Lords, I should like to join with the noble Baroness, Lady David, in her condemnation of this Bill. My background, as many of your Lordships know, is in shire counties. I have felt for many years, not only with this Government but with the preceeding one, that the shire counties got a very raw deal. It seems to me that the only certainty about the proposals in this Bill is that local authorities as a whole are going to receive less in block grant than they do in the system of flowback which we have at the moment. I believe that the total abolition of block grant recycling and the other technicalities in the Bill can only produce a new kind of mechanism which will restrain local authorities' spending, which is every bit as unfair and severe, particularly on the shire counties, as the discredited system of targets and penalties which we abolished in 1986–87.
The Association of County Councils is extremely concerned about the effects of this Bill. It feels that there are quite a few things which have been left unanswered. I hope that the Minister may be able to give us some reassurances tonight. It is concerned that the Bill as it stands does not give a future Secretary of State any discretion to reintroduce a system of flowback unless we have yet more primary legislation, and that there are no provisions in the Bill for the Secretary of State even to consult with the local authority associations on any aspect of his policy. I thought we were trying to work with local authorities and not against them. The Association of County Councils also fears that there is a potential in the proposed change for it to be used for a much wider purpose than the explicit intention behind this Bill, which is to deal with the rate-capped authorities. To put it simply, they are very suspicious of what is going on; and who can blame them after the plethora of Bills we have had affecting them.
§ 8.6 p.m.
§ Lord Skelmersdale
My Lords, if I were a stranger from Mars listening to the noble Baronesses I should immediately say, "poor local authorities". However, I 1014 do not believe that it is a case of poor local authorities at all. I must congratulate the noble Baroness, Lady David, for her stamina. After a long and mentally exercising day—I do not know whether she found it mentally exercising, but I assure the House that I certainly did—she spent the first two and a half minutes of her eighteen-minute speech on pieces of legislation which had absolutely nothing to do with the Bill. Was it 42 or 43? Who is counting, except the noble Baroness and her right honourable friend in another place? I gave up counting months ago. It is just as well, because I cannot count, and as the noble Baroness has said, we are going to have at least two more local government Bills this Session.
§ Lord Skelmersdale
Exactly. Nonetheless, my Lords, we have had plenty of opportunity today to consider the intricacies of local government finance. The Bill which we are now considering is meant to he short and is essentially confined to a single purpose: the abolition of grant recycling. I am reminded that on a previous occasion—I do not have the reference, but no doubt the noble Baroness, Lady Stedman, will remember it—the noble Baroness said that grant recycling was a bad form of changing around grant and that it was invidious to local authorities. Does the noble Baroness remember that? I shall send her the reference.
§ Baroness Stedman
My Lords, I do not. However, after 43 Bills no one can remember what was said on any one of them.
§ Lord Skelmersdale
My Lords, I must admit that I too have a selective memory. However, on this occasion I believe that my memory is correct.
§ Baroness David
My Lords, I think that it was the previous Secretary of State, Mr. Kenneth Baker, who praised grant recycling highly about a year ago.
§ Lord Skelmersdale
My Lords, it was my right honourable friend the current Secretary of State for Education who changed his view and who introduced the idea of the abandonment of clawback. However, the spending plans of the Government this year are realistic because they provide for a substantial increase in authority current expenditure—£3 billion more at £251 billion. The settlement provides for most local authorities—except, as I admit, those which are rate and precept limited—to increase their current spending by 51/2 per cent. This is well above the expected rate of inflation of 31 per cent. I am advised that if authorities spend at inflation in the current year, they would get at least 150 million more grant from the Exchequer than the firm intentions Statement provides.
The noble Baroness, Lady David, almost accused me of a con, I think, on behalf of the Government.
§ Lord Skelmersdale
My Lords, I am glad that her noble friend agrees with my analysis of what the noble Baroness said. This Bill in no way attempts to smuggle 1015 in major changes. My right honourable friend announced last July that he proposed to abolish grant recycling and consulted the local authorities and their associations on his proposals. The principle of the abolition of grant recycling has been welcomed by many authorities. I do not call that smuggling.
I was asked whether Clause 1(3) enables my right honourable friend to discriminate against particular authorities. That is a fear of which I have heard before. I have to say that it is quite groundless. Clause 1(3) enables different expenditure assumptions to be made for different authorities or descriptions of authorities, primarily in order to allow for the fact that it seems sensible to assume that rate-limited authorities will spend at expenditure levels and not at the levels we have assumed for all other authorities. It also enables new assumptions to be made for certain authorities in exceptional cases; for example, for education authorities in order to channel for them the extra grant which the Government have indicated will be made available to them to fund the teachers' pay settlement.
Those assumptions feed into the figure which is used to set the national grant-related poundage for spending at grant-related expenditure. That is a very technical concept. What it means is that by making different assumptions for certain authorities, grant entitlements may be affected on a national basis. However, there would be no differential effect on those particular authorities. If for some reason we were to make a wildly different spending assumption for one authority, that could alter the national grant-related poundage, but the effect on that authority would be minimal and would be the same for all authorities. It would not therefore be possible by this method to discriminate against particular authorities' grant entitlements. Clause 1(3) is an entirely innocuous provision.
I am grateful to the noble Baroness, Lady David, who, for a change, turned the tables on me and sent me a missive. She said in it that she would ask various questions about Clause 2 of the Bill. I am pleased to be able to reassure her that this provision has no validatory purpose and no practical effect whatsoever in terms of past actions. The relevant powers in the Local Government, Planning and Land Act 1980 have never been used in a way which differentiates or discriminates between the different classes of authority set up by Section 59 of that Act. The retrospective element of Clause 2 of this Bill simply ensures that the same interpretation of the words in question applies for all years and not just from 1987 onwards, and is included simply for the sake of legislative tidiness and consistency.
Clause 2 has no effect whatsoever on the matter which is currently the subject of litigation between the London Borough of Greenwich and my right honourable friend the Secretary of State. My honourable friend the Parliamentary Under-Secretary of State gave a detailed explanation of the effect of Clause 2 during Committee stage in another place. I accept straight away that this was before my right honourable friend had decided to appeal on the Greenwich case. My honourable friend the Minister of 1016 State subsequently wrote to the Opposition spokesman, Mr. Fraser, on 26th February, reassuring him that the fears which had been expressed about Clause 2 were entirely groundless. These assurances were repeated during the Third Reading debate in another place when my honourable friend the Parliamentary Under-Secretary of State said:Clause 2 is not intended to have any retrospective effect in the sense of validating any past decisions or actions".I am pleased to repeat that assurance here today and to tell the House that there are no sinister, ulterior motives behind this provision.
Responsible local authorities pursuing sensible spending policies need have nothing to fear from this Bill, but I admit that it screws the screw tighter on the irresponsible ones. The responsible ones will benefit from the increased certainty which it brings. In future it will be clear to all authorities at settlement what their grants will be for any given level of spending. They will be able to make their budgets on this new and more certain basis quite independent of what other authorities are doing. Authorities determined to push spending upwards will know exactly what the grant consequences will be for them and their ratepayers. They will have a choice—just as they have at present—but this Bill will make the consequences of that choice crystal clear. I commend the Bill to the House.
§ Baroness Stedman
My Lords, before the noble Lord sits down, will he tell us what form of consultation there will be with local authority associations? At the moment, when the Minister is making his decisions about rate support grant and block grant some consultations go on with the consultative body. Will that continue or will the Minister make the decision arbitrarily without hearing what the associations think?
§ Lord Skelmersdale
My Lords, what I said was that the consultations had taken place before the drafting of the Bill and that they had continued practically up to the last moment. As to whether consultations will go on in the future, consultations about the rate support grant settlement will continue into the future because this is one of the bases of the 1980 legislation. Consultation with the local authority associations is a necessary and desirable part of the process leading up to the making of any rate support grant report or supplementary report. Provision requiring such consultation is already present in the main legislation, in Section 60(5) and Section 61(2) of the Local Government, Planning and Land Act 1980, of which noble Lords opposite have so much disapproved in their miscellaneous speeches today. No further specific provision is therefore necessary in this Bill. I hope that that answers the noble Baroness's question.
On Question, Bill read a second time; Committee negatived.
Then, Standing Order No.44 having been dispensed with (pursuant to Resolution of 9th March), Bill read a third time and passed.