Local Loans Fund (Amendment) Bill, 1987 [Certified Money Bill]: Second Stage.

Question proposed: "That the Bill be now read a Second Time."

Minister for Finance (Mr. MacSharry)

The object of this Bill is to reduce the expense and administration involved in financing capital programmes of local authorities. The present system involves an expensive roundabout of payments with the Exchequer making a loan to the local authority and then providing the local authority with the money needed to meet the loan charges.

It is proposed to fund the relevant capital programmes in future by way of direct Exchequer grants. This Bill will allow the Minister for Finance to write off the principal and interest outstanding on the existing subsidised loans.

Though the Local Loans Fund goes back about 100 years, it was formally established by the Local Loans Fund Act, 1935. The purpose of the fund was to provide loan finance for local capital programmes such as housing. Initially, a limit of £5 million was set on the advances that could be made from the fund. This limit was increased by a series of amending Bills, the most recent being the 1986 Bill which raised the limit to £4,500 million.

Currently the major programmes financed from the fund are local authority housing, sanitary services and local authority mortgages for house purchase. As capital spending by local authorities grew, the burden of repayments increased and subsidies on loan charges were introduced. These subsidies gradually increased over the years until the current situation arose where the Exchequer provides the funds for most of the repayments on loans made by the Exchequer.

The subsidies available range from 100 per cent for local authority housing to between 40 per cent and 60 per cent for sanitary services. In fact, the only major unsubsidised programme left is the mortgage programme. The effect of having a full subsidy on loan charges is that the Exchequer provides the loan and then provides the money needed to repay the loan to itself through a complex and costly series of payments. Even where the loan charges are only partially subsidised the State provides, by way of the rate support grant, funds to meet the balance of the repayments.

It is proposed to break this expensive and time consuming circle of payments by giving direct grants to local authorities to finance these capital programmes in future. In addition, it is proposed to write off the outstanding balance on the loans previously issued from the Local Loans Fund in the case of programmes where the repayments were fully or partially subsidised.

Total advances from the fund stood at about £3,560 million at the end of 1986. It is expected the write off will be about £2,700 million. The balance outstanding in the fund relates to unsubsidised loans which will not be written off.

There will be no cash loss to the Exchequer. Where a fully subsidised loan is written off obviously the cash position of neither the local authority nor the Exchequer will be changed. Where a loan with partially subsidised loan charges is written off the rates support grant will be reduced by an amount corresponding to the unsubsidised portion of the repayments. Thus the writing off of the principal and interest outstanding on subsidised loans will have no adverse effect on the finances of either the Exchequer or the local authorities. However, it will lead to savings in the costly administrative system required to supervise the present system of payments.

As mentioned earlier, the only major unsubsidised scheme left is the local authority mortgages. As this scheme is self-financing and the repayments are unsubsidised, there is no circle of payments and there is, therefore, no need to alter it.

An incidental effect of this legislation is that it will reduce the total figure in the national debt statement by eliminating double counting. The statement at present includes the Exchequer's liability to subsidise repayments of principal by local authorities despite the fact that this liability is to the Exchequer itself. The Exchequer borrowing necessary to provide the advance to the local authorities in the first place is also included in the statement. Thus the national debt is overstated in the finance accounts.

It is overstated only by the amount of the Exchequer's liability to subsidise the repayments of principal by local authorities. So the reduction in the national debt statement will be less than the total amount that it is proposed to write off. As indicated earlier, this will include the full amount outstanding on loans which are only partially subsidised.

When the loans are written off, the gross debt will be reduced because the theoretical liability to subsidise repayments will have disappeared. I should say that the element of double counting is explained each year in a footnote to the finance accounts. The Central Bank and the OECD are fully aware of the position. What is at stake now is a technical accounting change and it must be stressed that the burden of the debt will not be lessened in any way and the reduction in public borrowing remains a high priority.

In summary, this Bill will allow the system of funding the capital programmes of local authorities to be greatly simplified. It is intended to substitute grants for loans and to adjust the rates support grant from 1 January 1988. This change will have no adverse effect on the funds available to local authorities for their capital programmes.

Section 1 of the Bill provides that the Minister for Finance may waive the repayment of any unpaid balance, including interest, on a loan advanced from the Local Loans Fund. Section 2 provides that from time to time a statement of such waivers shall be laid before each House of the Oireachtas. Section 3 provides for consequential amendments to two other Acts which have sections dealing with the writing off of sums outstanding on loans from the Local Loans Fund.

I commend the Bill for the approval of the House.

Mrs. Bulbulia

I welcome the Minister to the House. I am so pleased to find that he is happy to come into this House and that he feels a sense of familiarity with it.

The Explanatory Memorandum which comes with this Bill is a particularly good one. It sets out in a clear, concise, factual way the purpose of the Bill and was particularly helpful in the course of preparation for debate on it. This is a technical Bill which simplifies and streamlines public accounting procedures. It is a long overdue administrative reform and as such it is welcomed by my party. The Local Loans Fund was established in 1935 under the Local Loans Fund Act. Before this there was a non-statutory fund which was financed by a grant-in-aid which was voted annually. The origins of that measure go back about 100 years. We are, indeed, seeing a change today. Much has changed in the intervening years.

When the fund was first established on a formal basis in 1935 a limited £5 million was set on advances from the fund. The most recent amendment in 1986 increased this limit to £4,500 million. The actual position on the ground now is that the majority of loans to local authorities are loans in name only. Something of a fiction has arisen over the course of time. There is a 100 per cent loan for local authority housing and subsidies, as the Minister said in his speech, on sanitary services range between 40 per cent and 60 per cent. One hundred per cent subsidy means that the Exchequer provides the loan and the repayments. Even where there is a partial subsidy as is the case with sanitary services in the 40 per cent to 60 per cent bracket, the Exchequer in effect meets all repayments, some through the Local Loans Fund itself and the balance of course through the rate support grant.

The whole exercise has been carried out by way of an elaborate, circuitous and expensive method of payment. In many instances there have been some six or seven stages involved from start to finish. The whole operation, as I said, was something of a fiction and it is high time it was reformed. As a reform we welcome it. Today's measure is introduced specifically to simplify the system and to call a spade a spade. From 1988 onwards grants will be given for all the programmes which previously qualified for subsidised loans. The Minister must then have the necessary powers to write off the outstanding principal and interest due on all existing loans. This writing off, I am pleased to hear the Minister state, will have no net effect on either local authority or Exchequer finances. Overall the net cash position will remain the same. I am pleased to hear the Minister state that the house purchase mortgage will continue to be provided. As these are not part of the unwieldy mechanism which the Bill seeks to change, there is no need, of course, to alter the present arrangements.

I welcome the fact that the Minister has stated there will be no adverse effect on the amount of funds available from the Exchequer to the local authorities and that the administrative costs of providing these funds will be reduced. I also welcome the fact that under section 2 of the Bill details of any waiver action taken by the Minister will be laid before the Houses of the Oireachtas from time to time.

The Minister commented on a matter which has been controversial in the context of this Bill and which was raised specifically outside the Houses, and, indeed, on Report Stage in the Dáil in relation to this Bill. I would be interested, when he replies to second Stage, if he could expand and elaborate on the double counting mechanism inherent in calculating the national debt. Will the movement from a loan scheme to a grant type scheme eliminate some of the double counting and would he explain how the double counting occurs and tell us whether he believes this measure will affect the figures in any way? I understand it will not in any real or any concrete way reduce our liabilities but I would be glad if he would expand on that point. As I say, it has been controversial both within and without the House. The net question is: does it in any way affect our overall debt liabilities?

There is concern in local authorities that this change will impact adversely on their cash flow and, indeed, at a committee meeting on finance of my own local authority — Waterford City Council — the question was asked by those on the finance side and by the senior executive people. They were concerned lest the passage of this new measure would adversely affect their already critical and precarious cash flow. My own local authority are starting with an opening deficit of some £600,000 and they are a Council where local authority charges have not won popular support from the Minister's own party. The situation is quite critical. Reassurances as to how this measure will be implemented with the minimum of impact on the cash flow of local authorities would be welcomed in the course of the Minister's response.

The manner of the implementing of this measure is seen by local authorities and not only my own one — Waterford City Council — as having enormous significance particularly now as they sit down to debate their estimates and to discuss the financial situation which must, of course, be resolved by the end of November. The net question, therefore, is how is this going to be implemented on the ground. Obviously, any hint or any suggestion that there would be a further reduction in their overall funding, which is already insufficient by virtue of the 14 per cent cut in the rates support grant, is an area of concern of them.

It is tempting, of course, to broaden this debate into a discussion on the method of local authorities financing. We all, I suppose, in different parties have our own views on this. We were fortunate in this House in being able to have a three hour debate on local authority funding and I imagine Members will confine their remarks to the specifics of this Bill which is a relatively confined measure. I certainly intend to be pertinent in my contribution.

I ask the Minister to comment on the persons who were employed in this elaborate and circuitous method of ensuring that the local authorities got the necessary funding. These people were employed either at local level or at Central Government level. Is it planned to redeploy these people? Does the Minister envisage great savings in terms of finance or man hours? I also would like to ask what is the actual saving in administrative costs. If the Minister could quantify that it would be helpful.

Finally, I will sum up by saying I welcome the Bill. It is a small measure. I hope there will be further eliminations of costly, wasteful and ridiculous procedures in an attempt to streamline bureaucracy which should always be seen to be straightforward, uncomplicated and modern in its method of application. I am happy to support this Bill in the knowledge that this is, in fact, the case.

Mr. Fallon

I too would like to welcome the Minister. This is a major Bill in many ways but yet a simple Bill and one that will receive a general welcome in this House. Basically the Bill is a clear attempt to simplify and to make easy public accounting procedures. It is an attempt to simplify the system of financing of the various capital programmes operated by the local authorities. The actual position now is that most of the loans to the local authorities are loans in name only. Having granted a 100 per cent subsidy, having provided a loan, central Government also provide the repayments. There is a real belief that central Government lend almost exclusively to the local authorities for various capital programmes. This Bill will confirm that that is, in many ways, a myth. Realistically it is a grant scheme. The Bill is coming clean and telling what the exact position is.

The Minister has indicated that the local loans fund goes back almost 100 years but that it was formally established in 1935 by the Local Loans Fund Act. The area of sanitary services and the area of local authority housing have expanded as a direct result of what we have known as the Local Loans Fund. We are pleased to note that this will not change on the passing of this Bill except in the very practical way of better and more specific administrative procedures. Effectively the Minister is now saying: "Let us call a grant a grant". From 1988 onwards this will, in fact, be the position.

The natural consequence of this move is that the Minister has the power to write off any outstanding principal and interest due on existing loans and this is clearly referred to in section 3 of this Bill. Like the previous speaker, I also welcome section 2 which provides that from time to time a statement of such waivers shall be laid before each House of the Oireachtas. Again it has been made clear that the administrative changes in the Bill will not affect the finances of the local authorities but will save central Government some finances as a result of reducing various administrative costs.

Like Senator Bulbulia, I congratulate the Department for providing us with an excellent straightforward Explanatory Memorandum. It makes the point that, for example, the loan charges for local authority house construction are subsidised 100 per cent since 1977. The rate of standard subsidy for sanitary services programmes ranges from 40 per cent to 60 per cent. In so far as any residue of loan charges on subsidised services remains as a local authority liability, the authorities can draw on the rates support grant to meet the residual charge. I believe that in the case of capital schemes that are not getting the maximum grant such as major sanitary schemes, the capital funds will now become capital grants and the subsidy normally paid twice yearly when the loan charges are needed will have the rates support grant reduced on a monthly basis by an amount equal to the subsidy. In the knowledge that this could be the position in the future a local authority could be penalised in some way as a result of not getting money on time. Could the Minister comment on that and, if that is the position, perhaps some form of compensation might be available for the various local authorities?

There is a temptation on this Bill to go into other areas of local government being discussed at length throughout the country at present. Reform of local government is long overdue. I know the Minister for the Environment is working hard on this problem and I hope we will have something worth while in the near future. It has been promised now for the past 15 to 20 years. It is peripheral to this Bill. This Government and Governments over the years have been rather unfair to local authorities, for example in the higher education grants area, when you consider that the local authorities have had to pay out all the higher education grants. The cost of grants in Westmeath to date this year is £636,000 but, unfortunately, we will not get that money until February or March. Therefore, there is a bank interest charge which could amount to maybe £30,000 or £40,000. As part of the ongoing streamlining and simplifying local authorities would welcome a quick response from the various Government Departments if they are working and acting in an agency capacity.

Also peripheral to this Bill my hope would be that, having made a start as the Minister has made a start here, there would be further examination aimed at tidying up transfers of finances to other bodies. Hopefully that would have a beneficial effect in the future and result in savings all around. The Bill is welcome in general. It is a clear opportunity to streamline and tidy up the administrative system. I think all Members of this House will welcome this.

Mr. Mullooly

Very briefly, I also want to welcome the Bill. I applaud the Minister for having introduced it. We need more of this type of legislation to deal with the bureaucratic maze which exists in many Departments at present. The Bill provides for reform which will reduce and streamline the administrative procedures which exist in relation to the subsidisation and repayment by local authorities of loans from the Local Loans Fund. This administrative procedure is both expensive and time-consuming.

The Local Loans Fund is the source of loan capital for local authorities. Loans which local authorities draw down from the Local Loans Fund are used to finance the various capital programmes of the local authorities such as house construction, mortgages for house purchase and the various sanitary services schemes. Over the years subsidies were made available to local authorities to enable them to meet their repayments. Since 1977 the loan charges for local authority house construction have been 100 per cent subsidised.

I do not know how I would be regarded if I lent somebody £5 and said I was charging £1 interest on the loan and then gave that person £6 to enable him to repay the loan to me. Yet that is exactly what was happening in the case of loans raised by local authorities from the Local Loans Fund. If I were to do as I have stated I would be regarded as an object of ridicule. It was certainly time to reform repayments by local authorities to the Local Loans Fund.

I am pleased the Minister has stated that the new procedure will not involve any extra cost for the Exchequer and should lead to savings in the administrative costs and overheads which are currently involved in organising and supervising the present cumbersome system of payments.

I also welcome the fact that the change of itself will have no effect on the amount of funds available from the Exchequer each year to local authorities for their various capital programmes. I wish to join with the other speakers in welcoming this Bill and in hoping that we will see more of this type of legislation in the months ahead.

Minister for Finance (Mr. MacSharry)

First, let me thank Senators who contributed and many others who would probably have been as interested and would probably have liked to say what has been said. It is a small Bill and I think we have nearly all contributed in the same way. Those who have not spoken would probably have had much the same to say. I am glad everyone has welcomed the Bill as in the Dáil. It is necessary to eliminate these wasteful circular transfers costing huge amounts in administration.

I referred to this before and Senator Bulbulia raised it again — question of double counting. It was farcical and at least now it is being corrected. But farcial as it was, as I said in my Second Stage speech, it was taken care of by an example given or a statement at the bottom of a particular page of the finance accounts showing what was happening. To put on record again exactly what the position was, the finance statement at present includes the Exchequer's liability to subsidise the payments of principal by local authorities despite the fact that this liability is to the Exchequer itself. We had to show it as a bill to be paid to the local authorities but, nevertheless, we were the ones to receive it in the end. The Exchequer borrowing necessary to provide the advance to the local authorities in the first place is also included in the statement. We had it on both sides. The new procedure will eliminate the necessity for that.

The national debt was overstated in the finance account by a substantial amount. That obviously has consequences. There is no point in saying it because when we covered it in the Dáil — well, Senator Bulbulia referred to the publicity outside. The fact of the matter is that it has a consequential effect in relation to the debt as a percentage of GNP but it does not change our overall indebtedness. We still have to pay every penny we owed yesterday or on 31 December but by this change is will appear to be a smaller percentage of GNP on 1 January than it did before. That does not change £1 of what we owe and what we will have to pay. There is absolutely no change in the debt; it is important that we clearly understand that, as Senator Bulbulia requested.

It is also important to note that there will be no change in relation to the local authority capital finances. It is not the intention that anybody will be worse or better off from the point of view of the Exchequer or the local authority. The intention is that we eliminate the circular transfers and the administrative costs that are involved in it which brings me to the next point illustrated by Senator Bulbulia. There are about 20 staff involved mainly in the Office of Public Works and the savings will be about £250,000 in that area and this will enable us to have redeployment in other areas where there is greater pressure and necessity for additional staff. That is the saving; it could be more but, roughly speaking, it is around £250,000.

The point raised by Senator Fallon is taken. It is not our intention to leave the local authorities any worse off. While there might be administrative delays on the Exchequer side or on the side of Government, sometimes the local authorities themselves are to blame. We are having discussions with the local authorities about this matter and with the Department of the Environment and it is not our intention to have any delays or to in any way leave any of the local authorities worse off in 1988 than they might consider themselves to be. I think that covers the points made. I do not know if there was any other point but I am sure if there was we can pick it up in detail on Committee Stage.

Question put and agreed to.

Agreed to take remaining Stages today.

Seanad Éireann debate - Tuesday, 3 Nov 1987