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.