HL Deb 07 July 1988 vol 499 cc412-9

4.29 p.m.

The Earl of Caithness

My Lords, with the leave of the House I think that it might be convenient. If I now repeat a Statement which is being made in another place by my right honourable friend the Secretary of State for the Environment. The Statement is as follows:

"With permission I would like to make a Statement, Mr Speaker, about a number of matters which will bring local authority finance in England up-to-date for the introduction of the new system in 1990.

"First, my right honourable friend the Secretary of State for Wales and I are issuing, a consultation document today on local authority capital expenditure. The paper has been placed in the Library and is available in the Vote Office: it will be sent to local authorities and their associations today.

"The new system will take effect from 1st April 1990. It will be a control on borrowing and all forms of credit, rather than on expenditure. I believe authorities will welcome this.

"Capital receipts will continue to be another source of finance for capital expenditure. But the debt attributable to past capital expenditure by local authorities in England and Wales now stands at £45 billion. We propose that a proportion of the accumulated and future cash receipts should be set aside for debt redemption or to meet future capital commitments. Local authorities will be free to spend the balance, in whatever year they like.

"Local authorities will also be free to finance additional capital expenditure from revenue contributions, subject only to the discipline of the community charge. I believe that the new system will provide local Government with greater assurance and flexibility in the planning of capital programmes. Secondly, under the new system in the Local Government Finance Bill, revenue support grant is to be paid on a fixed basis, authority by authority. Authorities will have certainty about their grant entitlements. There will be no adjustment to take account of actual spending. The discipline will come from the community charge. My right honourable friend and I have decided to pave the way towards this new system by introducing greater certainty for 1989–90.

"In doing so, we will remove any scope for creative accounting by an authority designed to increase its grant entitlement by reducing its reported total expenditure without changing its true spending. There would otherwise be a number of ways in which authorities could do this for next year, this year and indeed earlier years.

"We therefore propose to bring forward legislation as soon as possible to alter the basis on which grant will be paid in England and Wales. For the current year, and for the previous three years, final supplementary reports have not yet been made. For some of these years it would still he open to local authorities to undertake book-keeping transactions or financial deals unrelated to true spending but which alter the level of reported total expenditure and therefore gain extra grant. We envisage that the Bill will provide that for all years up to 1988–89 grant entitlements should be calculated in general using total expenditure information which was with our departments by midnight last night.

"In a normal year grant payments would be calculated taking account of grant related expenditure assessments, block grant mechanisms, any arrangements for limiting grant changes and authorities' reported expenditure which I announce following consultation in the autumn. Grant payments for 1989–90 will be calculated in the same way except that the legislation will provide that grant payments for individual authorities should be calculated not on authorities' reported total expenditure, but on a figure derived for each authority based on information about their present levels of total expenditure and projected forward. Allowance will be made for changes in function where appropriate. In making the calculations we shall use in general only that information about total expenditure which was with our departments by midnight last night.

"When the RSG report has been approved, and subject to Parliament approving the new legislation, grant will be paid on the new basis. This will provide local authorities with greater certainty about their RSG entitlements for 1989–90 and previous years. It provides a basis for an orderly transition to the new system and for bringing the existing system to a close. Without the new legislation, it would have been necessary to recalculate grant under the present system well into the 1990s. I hope it will now be possible to make the last supplementary reports under the present system during 1989–90—otherwise I should have been asking the House to approve them probably up to 1992 or 1993.

"Thirdly, my proposals for next year's RSG settlement for England: I propose to set the level of provision for current expenditure at £29,140 million. This is 4 .7 per cent. or £1 .3 billion more than authorities' budgets for this year, after deducting the cost of polytechnics. which from next April will be the responsibility of central government. This increase is slightly above the anticipated rate of inflation.

"This sum includes £110 million in respect of the current costs next year for preparing for the introduction of the community charge. This is in line with the estimate of these costs made by Price Waterhouse, and is consistent with the figures put forward by the local authority associations.

"Since authorities continue to spend more than they need, I again intend that there should be a margin between the total of grant related expenditure assessments and provision.

"I propose that aggregate exchequer grant should be set at £13,575 million. After allowing for the removal of polytechics, this is £600 million more than the settlement allowed for this year, and is about £1.1 billion more than the grant which will be paid for 1988–89. That represents an increase of about 9 per cent. on the amount of grant that will be paid out. Under my proposals for closing down the system, grant payments to authorities will not be affected by their level of spending in 1989–90.

"I am conscious that some local authorities will be disappointed that no grant increase will be available in recognition of any shortfall in their spending in the current year and last year. I believe, however, that if they look at the total picture they will recognise that the package I am proposing is a fair one. If spending is held steady in real terms this settlement will enable most authorities to hold the increases in rates to less than the rate of inflation.

"I shall be discussing all these proposals with the Consultative Council on Local Government Finance on Monday.

"Fourthly, rate limitation. I am today laying before the House a report setting out how general purpose authorities will be selected next year. The selection criteria I am adopting are the same as I adopted last year: first, for authorities not selected in 1988–89, budgets of at least 121/2 per cent. above GRE and showing a growth of at least 6 per cent. since 1987–88; secondly, for authorities that are selected in the current year, budgets of at least 121/2 per cent. above GRE.

"On these criteria seven authorities will he reselected for 1989–90—Camden, Greenwich, Hackney, Lewisham, Southwark, Thamesdown and Tower Hamlets. No authority which was not selected last year is being selected this year.

"I am today also setting the expenditure levels for the seven rate-capped authorities at the same level as in 1988–89.

"My right honourable friend the Secretary of State for Education and Science has laid a separate report designating the Inner London Education Authority and he will be setting an expenditure level. This completes the Government's proposals for designating authorities in England."

My Lords, that concludes the Statement.

4.38 p.m.

Lord McIntosh of Haringey

My Lords, I wish to thank the noble Earl for repeating not just one statement but four statements on four different topics which have been made in another place. The four topics are: capital expenditure; the past revenue support grant, which will require legislation; the statement of the rate support grant for 1989–90; and, finally, a statement on capping. These are major matters to be dealt with in a short statement considered at such short notice, in light of the fact that the Central Consultative Committee on Local Government Finance is meeting only next Monday and that so far only a draft agenda has been issued to the local authorities taking part.

On the capital expenditure statement, the noble Earl said that the Government have issued a consultation document. Can he tell us how long will be given for the response? It is a classic tactic of government in such circumstances to issue consultation documents to local authorities just as they are going into the summer recess and to expect responses before they return. I hope that that is not being done again in this case.

On capital receipts, the statement uses two words which will cause a great deal of anxiety in many local authorities. It says that past capital expenditure debt amounts to £45 billion and proposes that a proportion of the accumulated and future cash receipts should be set aside for redemption. This sounds like a proposal for paying off the national debt and if it were proposed, for example, to pay back that £45 billion over a very short period, the result would be that there would be virtually no capital receipts available for any expenditure purposes and that those authorities particularly Conservative authorities, I suspect, which have been accumulating past receipts in order to fund major ventures—for example, town centre redevelopment and so forth—would find them being taken away from them to pay off past debts. I shall be grateful for the Minister's comments about that matter but I imagine that it will cause some concern to a number of authorities which are not included in the Government's list of spendthrift local authorities. Will the Minister give the proportion, say how rapidly it is intended that the past debt will be paid off and indicate how it can be achieved from accumulated past receipts?

The reference to financing additional capital expenditure from revenue contributions is something of a sick joke, given the fact that every pound of expenditure above the needs assessment will entail a £4 increase in the community charge. That is due to the gearing of the community charge and the fact that it will account for only 25 per cent. of local authority expenditure. I hope the Minister does not think that is a really serious contribution to local authority finance.

The second statement related to the past revenue support grant system. We do not express support for creative accounting. It appears that what is now proposed is restrospective legislation and action going back over three years. In other words, all the time-honoured systems of supplementary reports for setting RSG and for confirming the amount of RSG after the year has been completed are now being scrapped. The Statement indicates that legislation will be brought forward to alter that basis. Can the noble Earl say when that will be and how quickly it is intended that it shall be on the statute book?

The third statement refers to revenue support grant for England for 1989–90. The statement proposes a provision for current expenditure of just over £29 billion. Is it not the case that the argument put forward by the local authority associations is that, in order to continue to fund present policies with no increase in expenditure, there ought to be a provision for £30.17 billion? Therefore we are talking about a shortfall of £1 billion in the amount needed by the authorities to continue present policies.

The statement refers to inflation, but is it not the case that local authority expenditure is particularly affected by the additional cost of the social services which are being laid on local authorities and also the change in the age structure of the population resulting in significant expenditure needs? I could quote many other examples.

We are interested to see that the estimate of £110 million given by Price Waterhouse is now being accepted as the basis for policy. That is not what we have been told within the past week or so. Will the noble Earl now confirm that the figure of £50 million to £70 million given in the financial memorandum to the Local Government Finance Bill which is still before this House, was a gross under-estimate and barely more than half the actual figure? Will the Minister be good enough to tell me what are the current estimates for future years?

The final statement relates to rate capping. I suppose that I ought to express gratitude that the London borough of Haringey is no longer included in the rate capping list. However, I notice that none of the unelected joint boards is included in the rate capping provisions. Can it be right that rate capping—in other words, the imposition of expenditure levels—is considered right for elected authorities but that unelected or partially elected authorities are allowed to spend whatever they wish? That seems to be a total denial of democracy.

In conclusion, it appears to be the case that the Government are preparing to sweeten the pill of the poll tax by making the rating system as unpopular as possible. Cuts of £ 1 billion in what is needed for local authority expenditure, and the principle of retrospection on the calculation of past RSG, indicates a brutal attitude which must be designed to make the rating system unpopular as it reaches its final years.

4.45 p.m.

Lord Winstanley

My Lords, we on these Benches also wish to thank the noble Earl for repeating the important and complex Statement. He will understand that some of us need more time to study the Statement with care before reaching final conclusions. I do not propose to divide my response to the Statement into four parts, as did the noble Lord, Lord McIntosh. I should like to deal with it as a whole.

In general, we welcome the simplification of local government capital finance. However, we should not welcome simplification if it proved to be at the expense of just and proper distribution. We believe that the authorities now most in need will continue to be short of the funds they will need for necessary and urgent purposes. However, there are parts of the Statement which we warmly welcome. For instance, we shall be delighted to see the end of some examples of creative accounting. They will leave heavy burdens to be borne by some citizens in some inner city areas for many years to come.

I am a little unclear about the extent to which local authorities will be able to use funds from the sale of council houses for the repair of empty and dilapidated properties. I note that the Statement makes no mention of additional allocations to those authorities which cannot spend their capital receipts from the sale of council houses because they have not sold many such houses. They are the inner city authorities whose housing need is greatest.

Despite the opinion of Price Waterhouse we on these Benches, like the noble Lord, Lord McIntosh, are by no means convinced that the extra sum provided to cover the cost of preparing for the community charge will be adequate. We note that many of the figures are based on a forecast of future inflation which could prove to be inaccurate. Can the noble Earl say whether provision has been made for appropriate adjustments to be made if that later proves to be necessary?

I should like to ask the noble Earl one specific question. What is the proportion of capital receipts that the Government will require local authorities to set aside for debt redemption or to meet future capital commitments? That matter is referred to in paragraph 4 of the Statement, and perhaps the noble Earl can reply to that specific question.

The Earl of Caithness

My Lords, I am grateful for what both noble Lords have said. I am particularly grateful to the noble Lord, Lord Winstanley, for welcoming some parts of the Statement. As regards consultation, I should like to say to the noble Lord, Lord McIntosh, that there will be a period of three months for the responses and that the deadline is 7th October.

I turn to deal with the important point raised by both noble Lords about debt repayment and I should like to put the matter into perspective. At the moment the local authority debt is £45 billion. Servicing the debt costs £6 billion per year; that is £170 for every adult in the country. Taking that into account, we envisage local authorities setting aside 75 per cent. of their housing receipts and 50 per cent. of their non-housing receipts for debt redemption. Under these proposals, local authorities will still be able to spend nearly £4 billion from capital receipts in 1990–91.

The noble Lord, Lord McIntosh, raised the question of the introduction of legislation on the new capital system. I can go no further than the Statement, which indicates that it will be introduced as soon as possible. The noble Lord also commented on the claimed £1 billion shortfall in the level of expenditure required by local authorities. My right honourable friend does not accept that authorities need to spend £30 billion. The present policies need not continue and authorities need to tailor their spending to what ratepayers can reasonably be expected to be able to afford.

Finally, on rate capping the noble Lord, Lord McIntosh of Haringey, gave what I may call a cautious welcome to the fact that there is now a reduction of 10 in the number of authorities being rate capped. I can confirm to him that Haringey is not among those to be rate capped next year and I believe that that shows that Government policies are working.

Lord Rippon of Hexham

My Lords, I believe it will be readily agreed that this Statement does not lend itself to off-the-cuff comment. However, I should like to ask the Minister whether he could follow up the point made by the noble Lord, Lord McIntosh, about the period of consultation. Can he say how long this will be and with whom it will be? Will it be sufficient to avoid our recent experience of retrospective legislation to amend retrospective legislation which will involve more retrospective legislation. I should like him to say a little bit more about consultation.

The Minister gave an assurance that local authorities would have greater flexibility and greater assurance in planning their capital programmes. I believe it would help everybody, especially those in local government, if he could say that all that means greater freedom for authorities to spend their own money.

The Earl of Caithness

My Lords, on the consultation period, I repeat to my noble friend Lord Rippon of Hexham that the consultation period with the local authorities and others who are interested in this subject will be three months with a deadline of 7th October.

I believe that it is right that I should mention the potential damage that could be caused if the action which we propose is not taken. The possibility exists that authorities could, through creative accounting devices, claim hundreds of millions of pounds in additional grant from the Exchequer without reducing their underlying level of expenditure. We have seen evidence and proposals are being worked out to enable authorities to reduce their reported total expenditure to claim this grant through such methods as factoring and interest rate swaps. Once a few authorities adopt those proposals there is danger that a herd instinct will develop and that others will follow. Indeed, some treasurers may regard themselves as being under a duty to ratepayers to seek to maximise the benefits to be gained by such devices by all legitimate means. I hope that puts in context what we are seeking to do.

Lord Diamond

My Lords, I am extremely unhappy about the official use by the Government of the words "creative accounting". That seems to cast quite unnecessary reflections on a perfectly normal process and, secondly, on what seems to be an inevitable warning to us that they are about to introduce retrospective legislation.

It is not a question of whether a person chooses to describe the truth in figures in a particular way. It is a question of fact and of law as to whether he is entitled so to do. I cannot understand the continual reference by the noble Earl to authorities fiddling—I suppose that is what he is saying—their accounts in order to obtain an advantage which is not available to them under the law. If it is available to them under the law then he is not entitled by retrospective legislative action to prevent them making that claim. That is what appears to be the case by reference to the one year already passed. He is not entitled to do so.

I hope that the noble Earl will give me a more careful reply than he has given so far to the questions which have been raised on retrospective legislation and the rights of local authorities to claim their due under the law.

The Earl of Caithness

My Lords, I note carefully what the noble Lord, Lord Diamond, has said. I hope that with his experience of his former position in Government he will also be aware that the possibility exists, as I have just said, for claims of hundreds of millions of pounds to be undertaken if we do not take the action that we have been able to do for future reports.

Lord McIntosh of Haringey

My Lords, I hesitate to come back. There were two points where the noble Earl in his answer to the noble Lord, Lord Rippon, positively went against what the Statement says. He says that the Statement gives greater flexibility to local authorities but at two points the Statement says the reverse.

First, on capital expenditure, he is now proposing that accumulated cash receipts from capital disposals from the past shall be required to be used to repay the past capital expenditure debt. That means that those who have prudently been building up their cash receipts for major projects will no longer be able to spend them on those projects.

Secondly, as regards the RSG, those authorities who have had a short-fall in expenditure in the past in order to have greater expenditure in another year will no longer have a grant increase as a result. Is it not a fact that in both these cases—both capital and revenue—local authorities are being given less flexibility and chance to exercise sound financial management?

The Earl of Caithness

My Lords, I disagree with the noble Lord, Lord McIntosh of Haringey. Perhaps I could just repeat part of the Statement so it is clear: We propose that a proportion of the accumulated and future cash receipts should be set aside for debt redemption or to meet future capital commitments. Local authorities will be free to spend the balance, in whatever year they like. Local authorities will also be free to finance additional capital expenditure from revenue contributions, subject only to the discipline of the community charge. I believe that the new system will provide local government with greater assurance and flexibility in the planning of capital programmes".