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Local Authorities (Rating And Capital Expenditure)

Volume 129: debated on Wednesday 9 March 1988

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3.31 pm

With permission, Mr. Speaker, I should like to make a statement about three issues which will require amendments to be introduced to the Local Government Finance Bill. Two relate to recent court decisions affecting rating, and one relates to the control of local authority capital expenditure in England and Wales.

First, it is central to the rating system that the value of a hereditament should reflect the physical condition of the property and the "state of the locality" at any particular time. But the basis for the valuation should be the property market conditions as they were at the date of the last revaluation.

For many years now the view has been that the expression "state of the locality" related to its physical state and its amenities, and that in order to make a case for a change in rateable value appellants had to show that there had been physical changes to the property or its locality.

This view was recently tested in the case of Addis v. Clement, which turned on whether a factory on the borders of the Lower Swansea Valley enterprise zone could rely on the introduction of the EZ to seek a reduction in rateable value. The Court of Appeal upheld the traditional view by holding that the establishment of an EZ was not a change affecting the state of the locality. The House of Lords, however, took the opposite view.

Following that judgment, it appears that ratepayers may obtain changes in rateable value to reflect changes in market conditions since 1973. Many thousands of new proposals may result. In my view, changes in economic circumstances should be taken into account at the general revaluation in 1990.

I therefore propose to bring forward amendments to the Local Government Finance Bill so that, with effect from midnight tonight, proposals to amend current rateable values will be determined according to the law as it was understood to be prior to the decision in the Addis case. This means that changes will be taken into account only in so far as they relate to the physical state of the hereditament and its locality. Changes in economic factors will be taken into account in the 1990 and subsequent revaluations.

Proposals already made will be decided, where relevant, in the light of the law as decided by the House of Lords in the Addis case.

The second issue affects the rating of water hereditaments. Most such hereditaments are currently rated by statutory formula. Others, particularly sewage treatment works, have, however, always been treated as excluded from the formula and rated conventionally. The Court of Appeal has now held, in the case of Severn Trent Water Authority v. Cakebread, that the Water Act 1973 changed the statutory definition of a water hereditament so that those hereditaments previously excluded from the formula are covered by it, even though the formula did not make allowance for that.

This decision would give a continuing windfall benefit to water authorities. We have therefore decided to restore the law to the position previously accepted for many years, also with effect from midnight tonight.

These two decisions will affect the revenue of the local authorities concerned. Rateable values are of course constantly changing as a result of the appeals process and net additions to the rateable stock. Ordinarily, and by agreement with the local authority associations, rateable values, once set for a year, are not changed for rate support grant purposes, for that year or earlier ones. Exceptionally there is provision in section 67 of the Local Government, Planning and Land Act 1980 for authorities to be compensated if they suffer a reduction of more than a prescribed proportion of their rateable value in any year. This proportion is presently set at 2·5 per cent. It is not yet clear whether, as a result of these decisions, any authority will lose rateable value in excess of that level and, therefore, whether the existing arrangements will be triggered. While my right hon. Friend the Secretary of State for Wales and I are prepared to listen to representations on this, we see no need to extend the existing arrangements for compensation. We intend, by making our proposals effective from today, to limit the losses which might otherwise arise.

Thirdly, I have to inform the House that, once again, a minority of local authorities are employing artificial devices to incur capital expenditure and to undertake borrowing over and above the levels permitted to them under the existing capital control system.

Only a minority of authorities are involved, but the sums involved are large. Individual deals can give rise to future expenditure of several hundred million pounds. If all options granted under agreements recently entered into are taken up, several billion pounds of capital expenditure may be incurred. No Government could ignore evasion of their expenditure controls on this scale.

A number of different devices are being used. They fall into two classes. First, there are schemes under which local authorities are acquiring capital assets on terms which are outside the letter of existing capital controls — for instance, by the taking of medium term leases or by barter. Secondly, there are schemes under which local authorities are raising money by lease and leaseback or sale and leaseback of their operational assets. This is borrowing in fact, although it may not be borrowing in law. In effect, money is being borrowed by disposal of capital assets in order to finance deficits on revenue account.

Amendments have been made to the prescribed expenditure regulations for England and Wales. These will take effect from midnight tonight. But the amending regulations will be temporary in the first instance. My right hon. Friend the Secretary of State for Wales and I will consult local government and other interested parties about whether any changes or clarification are required before the amendments are made permanent. We have adopted this procedure to avoid any repetition of the events of 1986–87, when consultation preceded a change in the regulations and when nearly £2 billion worth of deals were rushed through in the interim.

The main changes made by the regulations are that, with some exceptions, acquisition of a leasehold interest in land for a term of more than three years will score as prescribed expenditure. The present limit is 20 years. And, regardless of term, prescribed expenditure will be scored on acquisition of a lease of property in which the authority holds a superior interest or which has during the previous five years been the subject of a development agreement to which the authority was a party. There are also some changes in the provisions about capital receipts where acquisition of the assets concerned did not involve prescribed expenditure.

Some authorities may as a result of the new regulations incur prescribed expenditure as a result of the exercise of options provided for in agreements already entered into. I and my right hon. Friends will consider issuing additional capital allocations where we are satisfied that the agreements were not entered into for the purpose of evading capital expenditure or borrowing controls.

Subject to the approval of Parliament to the necessary provisions, we propose to supplement the changes in the regulations with certain changes in the primary legislation. Those changes are as follows: to clarify that, when a local authority acquires land in terms other than freehold for cash, the amount of prescribed expenditure scored is the value of the interest acquired on the assumption that it was acquired freehold and for cash. That was the intention of the Local Government, Planning and Land Act 1980; to provide that where a local authority acquires property, or where works are carried out on a property which the authority owns, and valuable consideration for the acquisition of the works is given but not in money, then prescribed expenditure will be scored; to clarify that, where a local authority acquires an interest in or right over land and the interest or right does not confer a right of occupation, nil prescribed expenditure is scored only if the interest is neither a freehold nor a leasehold.

In addition, we intend to widen the statutory definition of prescribed expenditure to include the acquisition of share or loan capital in a body corporate and expenditure incurred in the discharge of obligations under a guarantee or indemnity relating to borrowing by a person other than the local authority.

All the legislative changes that I have outlined will be included in the Local Government Finance Bill. They will, however, be made effective from midnight tonight.

Is the Secretary of State aware that the effect of enterprise zones, which he now complains of and which he seeks to change by changing the law from midnight tonight, was always predictable and was forecast by my right hon. Friend the Member for Birmingham, Sparkbrook (Mr. Hattersley) speaking for the Labour party in 1980 when the Local Government, Planning and Land Bill became an Act? After eight years, the enterprise zone problems in that regard are now coming home to roost. They have resulted in increased rental values inside the zones, decreased rental values outside the zones and a consequent very large and continuing loss of income to local authorities as a result of rateable values being depressed.

Is the Secretary of State aware—I am sure he is—that the city treasurer in Swansea has calculated that the loss to the city's finances could be in excess of £1 million? Is the Secretary of State also aware that in Salford—another enterprise zone — the local authority has calculated that the Secretary of State's decision is likely to result in very large rate increases or a continuing loss of income to the city's finances?

There are 19 enterprise zones at the moment. In all those areas, local authorities and ratepayers have sustained and continue to sustain very large losses in income and therefore sustain extra penalties as citizens of those communities. In addition, is the Secretary of State aware that enterprise zones continue to attract the transfer of firms and companies across the boundaries, simply relocating companies from one area to another without necessarily or very often creating new jobs?

Why will the Government not recognise that attempts to ring-fence the economic effects of enterprise zones have failed and will continue to fail? Apparently the Government recognise that—at least privately—because in Monday's glossy press release document on policies for the inner cities enterprise zones are relegated to a single sentence in 32 pages. The Government have abandoned their attempts to monitor the impact and effect of enterprise zones.

Will the Secretary of State make clear what redress will be available to local authorities and ratepayers in those areas? Although I welcome his commitment to listen to representations from the local authorities — that is certainly the right thing for him to do—it seems clear that in most cases the provisions in section 67 of the 1980 Act will not be adequate to allow him to compensate them. I ask him to reconsider the provisions to ensure, through legislation if necessary, that the local authorities and their ratepayers can be properly compensated.

The Secretary of State has also decided not to accept the decision of the courts. That means that, unless he makes arrangements for adequate compensation, the people involved will not be able to benefit from the court judgment. That is his intention, but if he does not intend them to benefit from the decision it is surely incumbent on him to arrange for them to be properly compensated in some other way.

The Secretary of State has made an important and complicated series of technical financial announcements about local authority finance. Will he confirm—

Will the Secretary of State confirm that the local authorities to which he refers have been acting within the law? Is it not strange that he has uncomplimentary things to say about them, but nothing to say about the banks in the City which are falling over themselves to facilitate these deals?

Why is it that yet again the Secretary of State has made a statement without mentioning the range of effects that are likely to follow? Will he confirm, for example, that his proposals will affect large and small local authorities right across the country, under Tory as well as Labour control? Will he confirm that the proposals will affect the capital programmes of many of those authorities, including house-building programmes, redevelopment programmes and capital expenditure on leisure centres and other such facilities? Will he also confirm that the statement has implications for budgets that have already been fixed, and rates that may already have been announced for the coming financial year? Will that not cause severe problems in some local authority areas?

I welcome the Secretary of State's proposal that these matters should be the subject of amendments to the Local Government Finance Bill. But what are the Government's intentions with respect to the tabling of those amendments? Will he assure us that they will be tabled in the House of Commons, so that we have the proper time and facilities to debate them in Committee, rather than being pushed into the Bill in the House of Lords at the last moment, as the auditors' powers have in the Local Government Bill which will be before us later today?

May I also have an assurance that the Committee will have additional time to consider these important proposals? Will the Secretary of State guarantee that his amendments are tabled in good time for us to consider all their implications before they are debated in Committee? We are fed up with important decisions on local government finance and powers being bounced through the House without our having adequate time to discuss them.

On a point of order, Mr. Speaker. On documentation, the Secretary of State's bag-wallah has been moving around passing out copies of the statement. Why—

The hon. Member for Copeland (Dr. Cunningham) made some comments about the merits or demerits of enterprise zones, which do not arise on the statement. His comments may or may not be true. The point is whether the state of the locality should be taken into account when considering a revaluation proposal or whether only the physical state of the land or property should be the subject of a revaluation. It is that legal point that has caused me to make this statement. The Court of Appeal thought that the law was as we all thought it was, but the House of Lords has decided otherwise. Therefore, it is necessary to put it right.

I welcome the hon. Gentleman's implied support for putting this right through an amendment to the Bill. It was clear that he was concerned about the local authorities whose revenue would be affected if we did not put it right in the future. That is what we want to do, and we look forward to his support.

In relation to compensation, as I said in my statement, there are precedents for dealing with the matter. I have nothing further to add to that.

The hon. Gentleman asked about the court judgment. Yes, I am accepting the court judgment; that is why it is necessary to legislate. [Laughter.] Those who have benefited in the past will be able to enjoy their lower rateable values; those decisions are not being upset.

The hon. Gentleman asked me about sale and leaseback and lease and leaseback. The transactions we have all read about, including the question of Brent town hall, appear to be legal at present, although they will not be legal from midnight tonight. That is all we are seeking to do.

I join the hon. Member for Copeland in condemning those who have felt it to be a good investment to make major loans to local authorities because they must realise that they are at risk, partly because the Government do not stand behind local authorities and partly because some of the deals are based on options, which it might be more difficult to exercise in future. Of course, the regulations and the new legislation will apply to all councils. However, only a small number have been abusing the system, and I think that they are all under the control of the Labour party.

The amendments will be produced as soon as possible and I am hopeful that they will be available for the Report stage. Since the Committee has not been able to fill the time allotted to it, I can hardly believe that the hon. Gentleman is asking for more time.

Order. I draw the House's attention to the fact that we have a full day ahead of us. I ask for brief, and single, questions on this matter.

Is my right hon. Friend aware that ratepayers in Ealing will warmly welcome the third of his announcements this afternoon. A £100 million deferred purchase loan has recently been taken out by the Labour council, the repayments of which will total £20 million a year but not until after the lifetime of the present council. Can my right hon. Friend confirm that existing negotiations, details of which have been sent to his Department, cannot now proceed without his consent?

I am grateful to my hon. Friend. In the case of Ealing, the deal has been done; therefore, it is legal and stands. However, the deal contains options that are not of a legal nature until they are exercised. It may be more difficult for the council to exercise those options after the statement I have made today.

Does the Secretary of State accept that many local authorities are forced to engage in leaseback and barter deals not because of outrageous overspending but because they simply cannot provide even the minimum level of service demanded by the Government? Moreover, is he aware that many of those councils are in that stale because they are historic low spenders, not because they are overspenders? Will the Secretary of State give the House time to debate these important new principles on the Floor of the House?

I do not quite understand the hon. Gentleman's point of view. In the main, councils that engage in these massive borrowing exercises—which is what they are — are, at the same time, councils that massively overspend; they are borrowing to finance their overspending. I have listened with patience to the hon. Gentleman for many hours already, and no doubt I will have to listen to him again on the subject of these clauses.

Does my right hon. Friend accept that today's announcement will be welcomed not only by the ratepayers of Ealing but by all honest local authorities throughout the country? Does he agree that creative accounting amounts to municipal deception, and will he confirm that appropriate steps are being taken in the Committee on the Housing Bill to ensure that local authorities are not able to transfer their council estates to other side-by-side companies to evade the provisions of that Bill and the rights of tenants?

I am grateful to my hon. Friend. These practices represent massive borrowing of capital moneys to finance revenue expenditure, which will then have to be paid back in later years by councillors who may not have been elected and by ratepayers who may not be ratepayers at present, and that would be to mortgage the future in an unacceptable way.

The first part of the Secretary of State's statement concerned the effect of a legal decision arising from the setting up of an enterprise zone in Swansea. We have now heard that there is to be a mini U D C in Leeds, with many of the results which flow from an enterprise zone. Do I deduce from that that the amendments—when they are revealed to us at a later stage — will affect the result of a mini U D C in Leeds?

No, Sir, because urban development corporations do not have de-rating as part of their attractions. Firms in urban development corporation areas pay full rates, so there can be no conceivable valuation effect in the sense that there has been with the enterprise zones.

My right hon. Friend has already referred, in answer to the hon. Member for Truro (Mr. Taylor), to the coincidence of a number of these authorities also being high-spending authorities. May I tease my right hon. Friend to add a little more? Will he confirm that a high proportion of those authorities have been identified by the Audit Commission as delivering an inefficient and incompetent service? If they were simply to deliver the services that most authorities do, they would not need these arrangements.

My hon. Friend, as always, is absolutely right. Those authorities are not only incompetent in providing current account services but, as the Audit Commission has recently pronounced, extremely inef-ficient at managing their capital assets and have not been able to manage their portfolios of land and buildings in such a way as to produce maximum advantage to the councils.

Is the Secretary of State aware that the budget and rate of Brent council, which he has just rendered illegal, were agreed under the law that he brought before the House and that was agreed by the House, and that they were taken out on legal advice, which pointed out that the budget was lawful? Is he aware that the budget includes cuts of 19 per cent. in services? Those cuts will lead to the loss of teachers' jobs and social service provision being slashed and are at the margin of what is tolerable. They were kept below 20 per cent. only by the leaseback arrangement, which was organised by the lead banker, Guinness Mahon. In condemning that, will he talk to his colleagues who have a financial interest in that firm?

Is the right hon. Gentleman aware that if the budget is ruled illegal it will mean that those cuts will increase from 19 per cent. to 38 per cent.? I remind the Secretary of State that Brent has managed to avoid, by the efforts of Labour and Conservative councillors, all the upheavals and riots in London during the past decade. What does he think the response on the streets will be when those cuts of about 38 per cent. hit to the bone of people's lives, and will he take responsibility for it?

The hon. Gentleman should listen to what is said. I said that the deal that Brent had carried out is legal. I regret that it is legal. I have to admit that it is, but it will not be legal for others to do the same in future. However, there is no question of upsetting that deal or of Brent's budget being illegal as a result of anything that I have said today.

Does my right hon. Friend accept that many of us welcome an end to devices for avoiding financial discipline and will he say now that, if any Japanese banks get into difficulty as a result of municipal default, they will be on their own?

Yes, I look forward to seeing any merchant bank, be it British or Japanese, or from Leeds, taking over the council house toilet fixtures, the town hall or whatever has been mortgaged for the loans. I look forward to seeing them making a physical repossession of those factors if they ever need to secure their security.

The Secretary of State has been quick to rush to the House to condemn Brent council for attempting to preserve its services. Why has he been so tardy in failing to come to the House to condemn Westminster city council for selling off its assets? Why is it that those who seek to preserve life through the provision of nurses, discretionary grants for schools and decent houses and services for all the people are condemned, while those who sell off the dead are applauded?

No, far from being quick to come to the House, I have been tardy. I am afraid that Brent has got away with it.

Is it not true that when the enterprise zones were set up they were, in many cases, eagerly bid for by local authorities, including many Labour local authorities? Is it not also true that they were not forced on local authorities? Indeed, Derbyshire county council refused to have one. Therefore, why do we suddenly have this display of whingeing self-righteousness by Labour Members?

My hon. Friend is quite right. However, the statement is not about enterprise zones; it is about a technical point on rating and valuation law. It is extraordinary to hear the Opposition railing about enterprise zones at this time when they have provided many thousands of jobs in their areas.

Is not the Secretary of State in effect using the budget mechanism effectively to draft a national leasing agreement which will tightly define all local leasing and freehold arrangements? Where is his concern for local conditions and local discretion? Is not this, in detail, another prime example of dictatorship from the centre for local government?

The 1980 Act and the Act that went before it controlling local authority capital expenditure were all attempts to define exactly what functions local authorities had in raising and investing capital. The point is that they have been evaded. Labour Members are keen to condemn those who evade the tax laws, but they seem to have a rather different view on those who get round the laws on capital spending.

Does my right hon. Friend agree that the banks' behaviour in lending money to irresponsible local authorities is a disgrace and that ratepayers and residents will have to live with the consequences for many years to come? Will he have no sympathy whatever with any of those banks if they get their fingers burned?

My hon. Friend is right. I cannot condemn people who do things that are perfectly legal, but I do wonder whether some of the banks have understood the great risks they face and the great difficulties that they would have if it came to repossession.

Since the changes stem from court cases in Wales and England and a House of Lords' decision is involved, will the proposals also apply to Scotland? Given that the Minister is waiting until 1990 to introduce changes in economic factors as part of the procedure, is he aware that Scotland has regularly devalued every five years? Therefore, in fairness, should not the ability to have lower rateable value apply to Scottish businesses right now? Will they lose if his proposals are applied to Scotland?

This statement does not apply to Scotland. Scottish law is quite different and the judgment does not apply to Scotland. In no sense does anything that I have said today have any Scottish implications.

Is my right hon. Friend convinced that he has closed all the leaseback loopholes so improperly and callously misused and exploited by Left-wing councils to the long-term detriment of the ratepayer? If he cannot give that assurance, will he consider tabling enabling legislation in a local government Bill to allow him to deal with future fiddles by Left-wing councils?

The measure that I have announced today will deal with all known abuses of the capital control system, but my hon. Friend will know that, if time permits, we intend to legislate in the autumn for a total reform of the capital control system. It may well be a good idea to take powers in that legislation to stop up some of the abuses, but that is a matter that has not yet been decided upon.

Will the Minister take it from me that the ratepayers of Salford will see his announcement today as an unnecessary penalty upon their local authority and that they will now question whether it was sensible to have co-operated all the way down the line with the Government?

No, Sir. Today's announcement comes to the relief of the ratepayers of Salford and everywhere else who otherwise would have continued to lose rateable income if we had not stopped up the loophole.

Does my right hon. Friend agree that the legislation has been a long time in coming and that the actions of councils, such as Sheffield city council, which placed the city in hock several years ago to the Bank Paribas, should have led to legislation being brought in before this?

I never knew that the hon. Member for Perry Barr (Mr. Rooker) had a bank. I congratulate him. I hope that he will not go on lending to Sheffield.

When will the Secretary of State's campaign of hatred against Labour local authorities end? Is he aware that local authorities have become involved in various financial arrangements in order to try to defend jobs and services in areas that are desperately being deprived of them by the Government? Since he is so quick to condemn those local authorities, why does he not answer the question put to him by my hon. Friend the Member for Brent, South (Mr. Boateng) on the actions of Westminster city council, which sold off the cemetaries for 5p and is now trying to buy them back? Will he be ordering an inquiry into that piece of financial chicanery?

Far from my hating Labour local authorities, when will the hon. Gentleman stop hating ratepayers?

As a councillor in the London borough of Brent from its inception in 1963 until 1974—a borough which, during the whole of that time under both Labour and Conservative administrations, never entered into the sort of chicanery that we are debating today—may I tell my right hon. Friend that the people of Brent will be most grateful, not least my mother and the other elderly people who live there, for his statement today? The only criticism that I have is that it is far too late and should have been made years ago.

With my usual humility, I plead guilty to the charge that my hon. Friend lays against me.

Is it not significant that it is the Secretary of State who, during the course of his tenure in office in the Department of Transport and now in the Department of the Environment, has had to come to the Dispatch Box on at least six occasions because he has become involved with the courts, mainly because of the continual battle which is going on between local democracy and the Government who are taking away powers on every possible occasion? Is it not also ironic that the Government, who give £1 billion in tax relief to the banks that are rescheduling debts with countries that cannot pay them back, are now hammering Labour local authorities because they have taken part in a similar exercise? Surely there are double standards here.

I have news for the hon. Gentleman. The major judgment with which we are dealing today—the Cakebread judgment—arises out of an error made in the Rating (Water Hereditaments) Order 1975, produced by the Labour party, signed by Mr. Anthony Crosland, which would cost all local authorities dear.

Does not my right hon. Friend agree that the effect of the third part of his statement will be to protect people who do not now have the vote or enjoy the accountability of their local authorities? Does he agree that his announcement will have a great impact on people when they come to pay the community charge? That protection will save them from the perils of Socialism, which says that one can spend today and pay back later.

Will my right hon. Friend give the important assurance that the amendments will in no way block the implementation of the Local Government Finance Bill? The sooner it gets to the statute book the better.

My hon. Friend raises a serious point. It is of great concern to me that some authorities are prepared to borrow massively in order to have to repay in later years, when the present councillors may no longer be in office, thus landing their successors and those who will pay the community charge in future with very large bills. I believe that this House owes it to future community charge payers to prevent that sort of thing.

May I welcome my right hon. Friend's clarification of the position following the Addis v. Clement decision, which will be widely welcomed in my local authority, which contains an enterprise zone? But would he agree that the negative comments of the shadow Secretary of State, the hon. Member for Copeland (Dr. Cunningham), irrelevant though they may be, will cause dismay in areas where there are enterprise zones—particularly in my own? The Delyn enterprise zone has played a significant part in reducing unemployment by 42 per cent. in the past four years. Is Labour now against enterprise zones?

I entirely agree with my hon. Friend. It does not matter what the hon. Member for Copeland (Dr. Cunningham) says, because he will never do anything except sit on the Opposition Benches.

May I ask the Secretary of State to reconsider his announcement that these amendments will be presented to the House only on Report? As there are several more weeks of Committee proceedings, why is the Committee being denied the proper time in which to scrutinise his proposals and debate them properly in detail? If the right hon. Gentleman insists on bringing them to the House only on Report, I hope that he will arrange with his right hon. Friend the Leader of the House to provide more time.

What will the right hon. Gentleman say to the council leader from Surrey, who told me a few days ago that what the Secretary of State did on capital controls did not matter, because with bankers like his council's — Rothschild's—it would always be able to find a way to do what it wanted, and to finance deals anyway?

Is not the right hon. Gentleman's concern for the ratepayers in inner-London authorities a little partial? Why does he not show any concern for the ratepayers of Westminster? Why does he not intervene there, as he is so keen to intervene elsewhere? Why is he content to allow asset-stripping of cemeteries at a cost of millions of pounds to the ratepayers? Should he not be inquiring into those events, too?

Since the hon. Gentleman appears to be going to support the new amendments that I have said will be tabled, I cannot think why he wants such a great deal of time in which to debate them—particularly as the Standing Committee has not found it possible to fill the time allotted to it. I can assure the hon. Gentleman that we shall do our utmost to get the drafting done and bring the amendments before the House as soon as possible, but I cannot promise precisely when that work will he completed. Of course, I must discuss matters of time with my right hon. Friend the Leader of the House.

The hon. Gentleman knows full well the limit of my powers in relation to the Westminster matter.