HL Deb 13 May 1987 vol 487 cc656-62

4.34 p.m.

Lord Glenarthur rose to move, That the order laid before the House on 1st April be approved [19th Report from the Joint Committee]

The noble Lord said: My Lords, I beg to move. The purpose of this order is to amend the definition of "capital expenses" contained in Section 94(2) of the Local Government (Scotland) Act 1973 to bring this more in line with the definition of "capital" used in the national accounts.

Section 94 was introduced to replace the previous system of issuing borrowing consent for projects. Its intention was to permit the Secretary of State to exercise overall control of the level of public expenditure in Scotland, while at the same time allowing individual local authorities more freedom and flexibility to determine their capital expenditure priorities within the broad limits set centrally. From both the government and the local authority viewpoint the system has by and large been successful, though there has been the need for minor improvement leading to amendments in 1975, 1981 and 1982. The order before us today is another such small improvement.

Neither the definition of capital expenses at present used in the 1973 Act nor the amendment the Government propose will reduce local authorities' accounting flexibility to decide whether an individual item of expenditure should properly be charged to a capital or a current account. This is a matter for an authority's own decision, subject to the concurrence of its auditor. The Government have no wish to become involved in the complexities of trying to decide centrally on the appropriateness of capital or current treatment for everthing a local authority might buy. Nevertheless, a fundamental difficulty for the Government is that the present statutory definition of what we actually control through Section 94 does not quite match our view of what we ought to be controlling. Because of this we have had to make ad hoc arrangements which are not entirely satisfactory and we think the time has come to tidy up the statutory position.

This difficulty relates to so-called "capital from current revenue" spending—CFCR for short. This is expenditure on things which, in terms of the national accounts (and often also in terms of any reasonable layman's view), are capital assets but which the local authority is perfectly free to finance entirely out of current income in the year in question and to charge to a current account. For the purposes of the public expenditure survey and of the local authority capital cash limit reported to Parliament, this CFCR expenditure is regarded as truly capital and therefore the Secretary of State has no choice but to treat it as such. But because of the wording of the present Section 94 he has no statutory means of controlling it. In practice what happens is that we have to make a guess at authorities' likely use of CFCR for the year ahead and then hold back this amount from the public expenditure provision available to be shared out as consent allocations.

This rather cumbersome procedure does not present serious control problems provided authorities' use of CFCR does not vary greatly from year to year. Recently, however, authorities' use of CFCR has become much more unpredictable with the result that authorities' Section 94 allocations were set at a lower level than they might otherwise have been. Provisional figures for 1986–87 indicate a similar picture for that year. With the prospect that the pattern of CFCR expenditure may be equally unpredictable in future years, the Secretary of State proposes to simplify the present position—hence this order.

Under the revised arrangements, capital from current revenue will no longer count against current expenditure guidelines as it does at present but instead will score against authorities' capital allocations. Consequently, from 1988–89 local authorities' Section 94 consent allocations will cover all capital expenditure no matter how it is financed. This will be more flexible than the existing arrangements under which authorities which express an intention to finance some capital expenditure from current revenue are given a lower Section 94 allocation. If they subsequently decide to finance that capital expenditure by borrowing, it is not possible for them to have their Section 94 allocation increased accordingly and they are stuck with the original decision which may have been made over a year previously. This inflexibility has certainly caused problems for some authorities in the past.

In conclusion, including capital expenditure financed from current revenue within Section 94 is essentially a tidying up exercise to put on a simplified statutory basis the control we already exercise by administrative means. It will be less wasteful of scarce resources and have real benefits for central government in terms of a simplified control mechanism. For local government it will mean greater. flexibility in taking decisions on financing capital projects and will allow a more equitable distribution of the available resources between authorities. I commend the order to your Lordships and I beg to move.

Moved, That the order laid before the House on 1st April be approved. [19th Report from the Joint Committee]—(Lord Glenarthur.)

Lord Ross of Marnock

My Lords, I had the impression that in the last hurried days of this Parliament everything we were doing in asking for the indulgence of Members was related to urgency. I do not know whether noble Lords have had a look at the Definition of Capital Expenses (Scotland) Order 1987: Made 25th March 1987; laid before Parliament 1st April 1987; coming into force 1st April 1988". What is the urgency about this? Noble Lords have been holding back. They should have liked more time to discuss the last Bill, which went through in a flash. There is a Bill on Scotland on which I do not think a word has yet been said in another place, and it is unlikely that anything will be said here. There is no justification for this.

The local authorities were never mentioned. The Minister did not say whether the local authorities agreed with this, welcomed it or criticised it. That is rather bad. They have been discussing the matter since about November last year. The Government suggested that they were going to do this at some time or other and the local authorities discussed it. They sent a letter to the Scottish Office on 2nd February suggesting that it required more consideration and asking for another meeting if it could not be withdrawn. They received no reply.

One of the deputy directors of CoSLA who was down here on other business—and we can all guess what the business was—discovered by chance that it had been laid before Parliament on 1st April. This is not good enough. It is not good enough for the Government to say that this is a small matter adding to a tidying up operation; that we did it in 1975; that there was another one at another time and that this is just adding to it.

The fact that the Government have been asked by CoSLA to reconsider this and to have another meeting to discuss it is symptomatic of the distrust that has grown up over the years between the local authorities and the Scottish Office. It has happened elsewhere as well. The distrust has deepened with every local government finance measure or clause within a miscellaneous provisions Bill. We have guidelines, penalties, clawbacks, interference, determination of local government powers, and here we have a fairly simple thing.

I am not saying that the present situation is ideal. It will never be ideal until we have a proper definition of capital expenditure. Many things which are dealt with out of current expenditure in one area would be considered capital expenditure in another. We heard about the problems with computers in the Highlands—software and the rest of it. That might be considerable capital expenditure there, but in Strathclyde it could be construed as normal expenditure that is met out of current expenditure. Some people could construe buying an electric typewriter as capital expenditure. What is wanted is for local authorities to come together with advisers of the Government, work it out and come to an agreed solution.

There is plenty of time. What the Scottish Office is doing here is taking more control of all that is construed by the Government to be capital expenditure, whereas at the moment under the definition if a certain project can be completed within a year—and within the guidelines, because we are still controlled by guidelines in respect of current expenditure—it is allowed. If the authority decides to do it the general allocation for Scotland is changed and the allocation for that local authority is changed. So there is still full control but there is a certain measure of flexibility for the local authorities.

The Government are cutting out the possibility of a local authority doing that and saying that everything, whether it is financed out of borrowing, out of the capital fund or out of current revenue, has to be lumped together and has to be approved by the Secretary of State. This is guaranteed to create mistrust of the intentions of the Government.

Everything the Government want to do is being done. They may consider that it is being done in a roundabout way. The local authority can decide to spend something within the financial year out of revenue and then a calculation is made in regard to its capital allocation and it is reduced from that. What the Government are trying to do here is unnecessary and has led to suspicions among local authorities that they are being clamped down again by the Scottish Office. We have come to a terrible pass in respect of this and we have seen it getting worse and worse. If the Government are not prepared to drop this they should withdraw it today and have another meeting with the local authorities. They have plenty of time. They have a full year. It does not come into force until 1st April 1988. I suggest that they do that.

4.45 p.m.

Lord Glenarthur

My Lords, the noble Lord is concerned about the commencement date. He ended his remarks by saying that we had plenty of time to deal with it. I am sure the noble Lord will recognise that authorities need to plan ahead. They need to know on what basis they have to complete their financial plans which have to be submitted in the autumn. That is the reason for dealing with the order now.

I heard what the noble Lord said about consultation. He explained that an official he had met had thought there had been no reply to the letter. My information is that the objection by letter of 2nd February was dealt with by the authorities being told on 20th February that after due consideration of its comments the Secretary of State had decided to proceed. This was confirmed at a meeting in April. Perhaps the message had not reached the person concerned.

Lord Ross of Marnock

My Lords, April was not that long away and we were busy with other things. What date in April was this?

Lord Glenarthur

My Lords, I do not have the date with me, but I can certainly find out the precise date and let the noble Lord know.

The noble Lord said that the amendment is unnecessary and will lead to further complications. I recognise his concern but I cannot agree that that is the case. The Treasury requires that all capital expenditure, no matter how it is financed, must count against the cash limit, but the statutory definition is out of step with that, requiring us to make assumptions about authorities' likely use of CFCR and hold that amount back before issuing capital allocations. This is a cumbersome procedure and not very accurate when authorities' use of CFCR is as unpredictable as it has become in recent years.

So far as concerns the classification of capital expenditure, the convention raised this point when it was consulted in September, and at its request the Scottish Office consulted the Controller of Audit. He confirmed our view that, although there may be difficulty at the margin in drawing a distinction between capital and current expenditure, this would not be exacerbated by the proposed change in the wording of Section 94(2). We are not attempting to define capital expenditure as such. That, as I am sure the noble Lord will agree, is a job for the Local Authority Accounts (Scotland) Advisory Committee.

The Government are not seeking to define that, for example, a computer is always a capital item but that a floppy disk, which goes into the computer, is always a current item. That is the sort of example that would fit into the remarks that I have just made, and that surely would be more a matter for the local authorities to settle with their own auditors as a matter of common practice.

Lord Ross of Marnock

My Lords, I do not know whether the Minister realises it, but the advisory committee will meet fairly soon to discuss the whole question of the definition of capital expenditure. Would it not be far better also to remit this to them for consideration? Why should there be haggling between the Government and the local authorities about this kind of thing? It creates distrust and eventually leads to confrontation. The Government have plenty of time. Why do they not withdraw this order? They can always bring it back; they have time to do so.

As regards the business of giving extensions in respect of capital limits, this is done all the time. Even after this order is agreed to, it will happen. Very often one discovers that the capital available is not being used up by one local authority and one gives an additional sum to another during the financial year. That will continue. The noble Lord's remarks in that respect bear no relevance at all to what is being done here.

Lord Glenarthur

My Lords, the noble Lord referred to the meeting that the advisory committee is about to have. As I understand it, that meeting will not discuss the definition. The noble Lord seems to think otherwise but I am advised that that is not the case. Nor will the order have any effect on the amount of public expenditure provision for capital expenditure by local authorities.

I hear what the noble Lord says, but I think that this is an improvement. I accept that CoSLA has made representations. As I have explained to the noble Lord, this has now been taken forward and we do not believe that the concerns it has expressed are as justified as it believes them to be. It is a reasonable change to make and it is broadly parallel to other changes which have taken place to try to improve the section over the years. I do not think that I have anything else to add to what I have said. I hear what the noble Lord says, and beg to move.

Lord Ross of Marnock

My Lords, before the noble Lord sits down, does he not appreciate that he is simply doing as he is told by the Treasury? They are just carrying forward the kind of cavilling procedure of tying up the local authorities as much as possible. My information in relation to the working party is entirely different from his. My information is that they are going to discuss the difference between capital and revenue expenditure. I do not know where the noble Lord gets his information, but I get mine directly from someone concerned in this.

Lord Kirkhill

My Lords, I am not too sure whether or not the Minister has actually resumed his seat, but on the supposition that he is just on his way down and has not quite got there, perhaps I may draw his attention to one facet of difficulty on the Scottish local government scene at the moment which I hope that this order might at least more clearly define?

I refer to the real difficulty which exists between the citizens of Aberdeen—and I think that I can put it as broadly as that rather than say the district council of Aberdeen—and the use to which they wish to put their common good fund. The Minister will know of the difficulty over the common good fund of Aberdeen. The district council and indeed the wider body of the citizenry properly think of the fund as being under their purview to develop capital investment as they determine.

In the meantime the Secretary of State takes the view that this cannot be the case and that they are not to be allowed their most reasonable expenditure. I hope that the Minister will give me some confirmation that the discussions which are about to take place will at least lead to some clearer definition in this regard.

Lord Glenarthur

My Lords, with the leave of the House, I am grateful to the noble Lord for raising that point and I shall come back to him in a minute on the Aberdeen common good fund. I may have inadvertently misled the noble Lord on the question of the meeting between the local authority advisory accounts committee and the Scottish Office. That committee is meeting to discuss the definition of capital expenses but the order does not seek to distinguish between capital and current. I think that that is where our misunderstanding may have arisen.

As for the common good fund, there is no connection whatever between this order and capital expenditure financed from common good funds. Section 94 already applies to expenditure financed from such funds whereas, as I said, the purpose of the order is to simplify the control system by bringing capital expenses financed from current revenue—that is, nearly all rating income—within the scope of Section 94. I think that that is the answer to the noble Lord's point. If the noble Lord is content, then I commend the order to the House.

On Question, Motion agreed to.