Mrs. Margaret Thatcher (Finchley)
May I follow Niall MacDermotthe Financial Secretary in expressing our appreciation to the Commissioners for the tremendous amount of work that they do and the way in which they carry it out? My own thanks are specially due for the 90th Report of their work, which they have even managed to make sound interesting. It contains a detailed account of the history of the Board back to the year 1817, when I note that, even in those days, loans were issued carrying an interest rate of some 5 per cent. Our thanks on all sides of the House are due to the Commissioners for the work that they do continually on a voluntary basis.
The Financial Secretary pointed out several times the need for the Exchequer to limit its borrowing this year, and that James Callaghanthe Chancellor had been fairly successful in meeting that aim. In reply, I must point out that one of the reasons why the Chancellor has limited his borrowing this year—that is to say, borrowing for [column 787]which he pays interest—is that, by various devices which the Financial Secretary will know, he has compelled everyone to make large interest-free loans to him, and, therefore, the amount for which he is having to pay is considerably reduced.
It is perhaps a little ironic that, at the beginning of the week, we were discussing a Measure under which local authorities would be compelled to make loans interest-free to the Government, and, at the end of the week, we are discussing a Measure whereby the Government will make loans to the local authorities for which they will charge them interest, albeit at a preferential rate.
The Financial Secretary gave a most lucid and helpful analysis of the Bill, of the Exchequer borrowing that will be required this year and of the issues from the Exchequer to the Public Works Loans Board. May I follow him in his analysis of the White Paper on Local Authority Borrowing, because there is not very much point in going over ground before that time? Present policy stems from that White Paper, and the policy which we now have before us in the Bill is to some extent a continuation and to some extent a modification of that policy.
At the outset, one can scarcely describe as a routine Bill one which provides about £900 million over a period of 18 months. It is an extremely important Bill. The £900 million amounts to virtually £45 for every family in the country; that is to say, every family has to provide £45 in order, then, to borrow it back.
Turning to the White Paper on Local Authority Borrowing, two and a half years have elapsed since it was presented, and I think it right that we should have a review to see how far its objectives have been attained. In introducing a similar Measure last year, the Financial Secretary pointed out that this year we should need to have a fresh look at the whole subject of local authority borrowing.
The White Paper covered three aspects of borrowing policy. First, it introduced a limit on short-term borrowing which it defined as borrowing of under 12 months' duration. Secondly, it provided for greater access to the Public Works Loans [column 788]Board, with the aim that the Board should ultimately provide 50 per cent. of long-term borrowing needs. I take it that that objective has not been abandoned, but still remains. Thirdly, it provided for the modernisation of borrowing and lending techniques between the Board and the borrowers. I say nothing more about that third objective because, in the main, it has been attained and implemented by previous Acts passed after the White Paper was published.
We are concerned, therefore, with how far the first two objectives, relating to short-term money and enlarged access to the Public Works Loan Board, have been achieved. The aim of short-term borrowing was to reduce to 20 per cent. of total borrowing the amount of money borrowed short-term, and that was to be achieved by the 1st April, 1968. Local authorities had some four years in which to modify their financial arrangements. At that time, about 15 per cent. of the outstanding loan debt was in short-term money.
The first of the four years showed an alarming increase to the figure the hon. and learned Gentleman gave last year of nearly 19 per cent, although it has been modified this year, as a number of statistics are always modified in retrospect, to about 18 per cent.
We should clear up this point. I was struck by the difference myself. The explanation lies in the different dates. The figure of 19 per cent. was up to 31st March and the figure I gave today of nearly 18 per cent. was up to 31st December. That is the reason for the apparent discrepancy.
I am obliged to the hon. and learned Gentleman. In that case, the increase of short-term debt rose to about 19 per cent. of the total outstanding loan debt.
I think that this was probably because the first of the four years proved very inauspicious for funding. An interesting feature developed and it is a good illustration of what happens when one puts on a control of any kind. There is always a great deal of activity on the limits of the control. What happened was that short term borrowing lengthened and long term borrowing shortened and [column 789]so there was a good deal of borrowing of money between one year and two years.
This had been envisaged in paragraph 18 of the original White Paper, and the hon. and learned Gentleman has quoted the warning given that, if this increase in money between one year and two years took place, it would have a quite serious effect on the quotas from the Board and the whole basis upon which the calculations had to be made.
I agree that the Government, therefore, had to take action, as the new trend would have had far-reaching implications for Exchequer management. We first had some indication that action would take place in the White Paper “Loans from the Consolidated Fund” , which said, in paragraph 10:
“An authority's quota will however be reduced to the extent that it has already drawn a quota loan in one year on borrowing maturing in the succeeding year. It is estimated that on this basis the Exchequer issues to finance loans by the Board in 1966–67 will be about £485 million gross (£398 million net).”
It would seem perhaps easy to describe this new development as being tantamount to redefining short-term borrowing as a period of up to two years instead of a period of up to one year. Thus one finds, in a sense, that the first objective of the White Paper is not being achieved very fast, but that the borrowing development envisaged in the White Paper has taken place and this in itself is causing a reassessment of the future of local authority financing.
I turn now to the second point concerning enlarged access to the Board. As the hon. and learned Gentlemen said, the expectation was that the percentage access should be increased every year. It has, as we know, reached 30 per cent. a year for ordinary local authorities and 40 per cent. for those in specific regions. Looking back to last year, I remember that there a form was issued to the local authorities which led them to believe that they could borrow three-sevenths of their total long terms loans from the Board.
Mr. Brian O'Malley (Rotherham)
I had a similar difficulty in studying the figures. It might be helpful if I explained what the situation seems to be. Assuming that a local authority has a total capital expenditure in a year of [column 790]£100,000, obviously 30 per cent. is £30,000. But for the purpose and method of calculation the Board, in its circular to the local authorities, did not use the figure of £100,000, but the figure of £70,000—which is £100,000 minus 30 per cent. The quota is, therefore, three-sevenths of that 70 per cent., which is £30,000 and still 30 per cent. of £100,000.
I did not have to deal with the forms but, having enquired from some local authorities and treasurers, I know that they expected this year to be able to borrow three-sevenths of their total long term borrowing. Some of them told me that they were rather disappointed that, with the new formula, the total amount they will be able to borrow is rather less than that. A number of them had already made plans on the basis that the old formula would continue and I think that even the hon. Gentleman would agree that the old formula—the formula which reigned before the one that the Financial Secretary has just explained—would have given them a higher amount from the Board than the new formula.
Indeed, had the larger amount been totalled up, the hon. and learned Gentleman has said that it would have come to much too high a sum for the Exchequer to bear and that is why it has been reduced. The effect is to cut the access this financial year by about £118 million. In some ways, I think that the local authorities themselves are critical of this arrangement. In the Local Government Chronicle of 7th May, 1966, on page 780, the following words occurred:
“The provision made for loans to the nationalised industries is up by nearly £200 million; local authorities are still the poor nephews!” .
I do not think that that comment is entirely warranted, as their borrowing was very considerably up last year and unexpectedly so, and I accept that the developments which have occurred in the changing borrowing habits of local authorities necessitated some changes in the policy of the Exchequer. The point is that the local authorities are wondering what will happen next. They have been making their plans on the basis of the White Paper, on the basis of the old formula. This has suddenly been changed this year. What will happen next year? [column 791]
How are they to make their plans for the future? The treasurers have to find the money and they suddenly have to revise their plans in the light of the amount which they can get from the Board. There is not a great deal they can do. They are told that they must not borrow short, so they attempt to borrow slightly longer. When they do, the effect of that is negatived. How long will that process go on? If they borrow slightly longer still, will the effect of that be negatived by the next Bill?
If they borrow really long, they will have to pay 7 per cent. or 7½ per cent. They will have to queue to get an issue from the Stock Exchange. They are in something of a difficulty in trying to find the money which Parliament, in its wisdom, has by Statute ordained that they must find. We make it clear that we do not blame treasurers for trying to borrow in a way that will reduce loan charges to the minimum. They are in some difficulty in trying to get their capital this year and are also worried as to what will happen next year.
During the Committee stage of last year's Act, the hon. and learned Gentleman pointed out that we would have to take a fresh look at the position of borrowing this year. I am not certain whether the policy he announced today and which became apparent in the White Paper issued with the Budget is a new policy or whether it is an interim policy. I suspect that it is the latter.
I ask, therefore, that we should soon have an announcement about the Government's long term policy. I understand that the local authorities regularly have discussions with the Treasury and an account of these sometimes appears in the Municipal Review. There was a supplement to the Municipal Review in May, 1966, which indicated the line some of the discussions had been taking. I quote from paragraph 11 of a record of one of the interviews with the Treasury, when the whole problem of shorter borrowing was discussed and the present policy was put up as an alternative. It states:
“Subsequently an alternative proposal had been put to local authority associations which was to continue basing the calculation on gross longer-term borrowing but to reduce the quotas to the extent that an authority had already drawn a quota loan in one year on borrowings due to mature during the succeeding year, [column 792]this arrangement would affect loans raised for a period of from one to just under two years.”The next sentence is the important one from the point of view of this debate, for it states:
“The Treasury would not regard this as necessarily suitable as a permanent arrangement but only as a possible interim measure pending a more thorough review of the problem.”
That says, in effect, that what the Financial Secretary said today is only a temporary measure and I therefore ask him to give an indication of the kind of long-term permanent arrangement he is envisaging.
A great deal of the problem arises from the increased expenditure of local authorities—as my hon. Friend the Member for Oswestry (Mr. Biffen) pointed out by implication in a question to the Financial Secretary—and the total outstanding debt of local authorities is rising tremendously. One is tempted to wonder sometimes where it will end.
Considering the 90th Annual Report of the Public Works Loan Board, the figures in Appendix C show that in the year 1953–54 the total debt of local authorities to the Board and other lenders was £3,889 million. By 1958 it had risen to £6,030 million. By 1961–62 it had risen to £7,380 million and the latest estimate one can get for the year 1964–65 is £8,600 million.
Mr. David Winnick (Croydon, South)
Does the hon. Lady feel that local councils should spend less on housing, education and other essential amenities? She is implying that the amount of money being spent is far too high. Would she give an indication of where local councils should cut down on their expenditure?
Order. If the hon. Lady did so she would be outwith the scope of the debate.
I was not implying what the hon. Gentleman suggests. I was pointing out, as a matter of fact, how capital spending had risen, and it follows from that that when we are considering the policies, which we are not at the moment, of authorities in these respects, we must also consider how they are to meet the commitments which are placed on them. And, in considering that, it would seem relevant to consider the rate [column 793]at which these commitments are rising. How far are the commitments likely to rise this year? How much loan sanction was given in 1965 and is currently being given?
The latest figures we can obtain are those in the 1964 Report of the Ministry of Housing and Local Government, and we see that loan sanctions in 1964 totalled £1,082 million. I suspect that in 1965 the figure will be up to over £1,100 million and I expect that in 1966 it will be up again, especially bearing in mind that local authority lending on mortgage is to be reintroduced.
These figures do not, of course, take into account the increases which local authorities will have to bear as a result of the last Budget. I cannot go into detail on the housing or education programmes, but in asking the Financial Secretary about his future policy, I urge him to remember that the figures we have had to date do not take account of increases which we know are already in the pipeline—increases not only in policy terms but brought about by the rising costs of housing and education, without even taking into account the new policies.
One must also consider the effect of high loan charges on the rates. In 1965, for example, loan charges were £457 million, according to the White Paper issued with the Budget. That represents one-sixth of the total current expenditure of local authorities. Looked at from that angle, it is important to enlarge the access to the Public Works Loan Board to enable local authorities to borrow at a minimal rate of interest and to prevent them being driven on to the market for too high a proportion, which they must at present borrow at 7 per cent. to 7½ per cent.
I think the Financial Secretary will agree that it is unlikely that borrowing on long-term can be obtained by borrowing at lower rates of interest than those at present obtaining. I notice that the National Savings issue is 7¾ per cent. interest gross, and that seems a good indication of the price which the Government consider that they will have to pay for raising money in the long-term. It seems, therefore, that local authorities, if they go to the market for long-term maturities, will have to raise money at [column 794]7 per cent. to 7½ per cent. It therefore seems that local treasurers will attempt to raise as much short-term as possible, because that can be done at a very considerably reduced rate of interest below the 7 per cent.
I would not like to conclude without expressing admiration of the treasurers of local authorities because they have to grapple with all sorts of problems. They must raise money often without knowing from where it will come and, from their point of view, it is important that they should once again be able to decide their plans in the long-term.
My hon. Friends and I will, naturally, not oppose the Second Reading of the Bill in any way. We believe that it is partially a continuation of the White Paper, although we would like to know from the Financial Secretary what is the Government's policy for next year.