United Kingdom House of Lords Decisions

Parliamentary Archives,
HL/PO/JU/18/250

Regina
v.

Secretary of State for the Environment (Respondent) ex parte
London Borough of Hammersmith and Fulham and fifteen other

appeals (Appellants)

(Conjoined Appeals)

JUDGMENT

Die Martis 17° Julii 1990

Upon Report from the Appellate Committee to whom was
referred the Cause Regina against Secretary of State for the
Environment ex parte London Borough of Hammersmith and Fulham
and fifteen other appeals, That the Committee had heard
Counsel on Tuesday the 10th, Wednesday the 11th, Thursday the
12th, and Monday the 16th days of this instant July, upon the
Petition and Appeal of the London Borough of Hammersmith and
Fulham of Riverview House, Beavor Lane, W6 9AR, Barnsley
Metropolitan Borough Council of Town Hall, Barnsley, South
Yorkshire S70 2TA, the London Borough of Islington of Town
Hall, Upper Street, W1 2UD, St. Helens Metropolitan Borough
Council of Town Hall, St. Helens WA10 1HP, the London Borough
of Lambeth of Lambeth Town Hall, Brixton Hill, SW2 1RW, North
Tyneside Metropolitan Borough Council of 14, Northumberland
Square, North Shields, Tyne and Wear NE30 1PZ, Derbyshire
County Council of County Offices, Matlock, Derbyshire DE4 3AG,
the London Borough of Greenwich of Town Hall, Wellington
Street, SE8 6PW, the London Borough of Camden of Euston Road,
NWl 2RU, Doncaster Borough Council of Copley House, Waterdale,
Doncaster, South Yorkshire DN1 3EQ, Rotherham Borough Council
of Civic Building, Walker Place, Rotherham S65 1UF, Bristol
City Council of The Council House, College Green, Bristol BS1
5TR, Avon County Council of Avon House, The Haymarket, Bristol
BS99 7DE, Rochdale Metropolitan Borough Council of Town Hall,
Rochdale DL16 1AB, the London Borough of Brent of Town Hall,
Forty Lane, Wembley, Middlesex HA9 9HX and Basil don District
Council of the Basildon Centre, Pagel Mead, Basildon, Essex
SS14 1DL, praying that the matter of the Orders set forth in
the Schedules thereto, namely Orders of Her Majesty's Court of
Appeal of the 27th June 1990, might be reviewed before Her
Majesty the Queen in Her Court of Parliament and that the said
Orders might be reversed, varied or altered or that the
Petitioners might have such other relief in the premises as to
Her Majesty the Queen in Her Court of Parliament might seem
meet; as upon the Case of the Secretary of State for the
Environment lodged in answer to the said Appeals; which said
Appeals were conjoined by Order of the House of the 5th day of
this instant July; and due consideration had this day of what
was offered on either side in this Cause:

Oral Judgment: 17.7.90
Reasons: 4.10.90

HOUSE OF LORDS

REGINA

SECRETARY OF STATE FOR THE ENVIRONMENT

(RESPONDENT)

EX PARTE LONDON BOROUGH OF HAMMERSMITH AND

FULHAM
AND FIFTEEN OTHER APPEALS

(APPELLANTS)
(CONJOINED APPEALS)

Lord Bridge of Harwich
Lord Brandon of Oakbrook
Lord Oliver of Aylmerton
Lord Goff of Chieveley
Lord Jauncey of Tullichettle




LORD BRIDGE OF HARWICH

My Lords,

The Local Government Finance Act 1988, as amended by the
Local Government and Housing Act 1989, introduces a radically
reformed system of local government finance and local taxation in
place of the long familiar rating system. As is well known, the
central feature of the new system, the community charge, is a
matter of acute political controversy. Scarcely less controversial
in a political sense is the control which the Act enables the
Secretary of State for the Environment to exercise over the
finances of individual local authorities, subject to approval by the
House of Commons, by setting a maximum which an authority's
budget may not exceed and thereby limiting the amount which
those liable to the community charge in that authority's area can
be required to pay. The process is colloquially referred to as
"charge-capping" or simply "capping" and this is a convenient
terminology to adopt for brevity when referring to the statutory
process. The current financial year, commencing on 1 April 1990,
is the first year of the operation of the new system. After local
authorities had set their budgets for the year the Secretary of
State proposed to cap 21 authorities, 19 of whom challenged the
legality of the action taken by the Secretary of State in
proceedings for judicial review. These applications, together with
certain others, were argued extensively by a galaxy of counsel
appearing for the different authorities, first before the Divisional
Court of the Queen's Bench Division (Leggatt L.J., McCullough and
Roch JJ.) who gave judgment dismissing the applications on 15
June and secondly before the Court of Appeal (Lord Donaldson of
Lymington M.R., Ralph Gibson and Taylor L.JJ.) who dismissed the
authorities' appeals on 27 June but gave leave to appeal to your
Lordships' House. The Court of Appeal gave reasons for their
decision in a reserved judgment on 3 July. Only 16 authorities, all



but one now represented by the same counsel, availed themselves
of the leave to appeal which had been granted. Your Lordships
were able to report to the House on 16 July your unanimous
opinion that the appeals should be dismissed so that an order to
that effect might be made without delay, but then indicated that
reasons for the decision would be given later.

I would like, if I may, at the outset to express my
unqualified admiration for the thoroughness and the speed with
which both courts below adjudicated upon the issues raised before
them in these proceedings. The importance of an early
determination was obvious. Both courts had to consider a
formidable volume of documentary material and heard many days
of oral argument, but were able within a very short time following
the conclusion of the argument to deliver lengthy reserved
judgments dealing comprehensively with every issue raised. I agree
entirely with the conclusions which they reached and, in large
measure, would be content to indorse the detailed reasoning in
both judgments. Some of the points argued below were not
pursued in your Lordships' House and of the many points which
were argued I shall find it neither necessary nor useful to examine
every one in detail. But having the opportunity, which the courts
below were denied, for reflection at leisure in the formulation of
my reasons, I hope it may be possible to examine from a rather
broader perspective the legitimacy of the grounds upon which the
local authorities seek to challenge the action taken by the
Secretary of State.

It is necessary first to consider the broad scheme of the
legislation. In the explanations that follow I acknowledge my
indebtedness to the helpful guidance through the complexities of
the Act of 1988 provided by the affidavit of Mr. Paul Rowsell, an
Assistant Secretary in the Department of the Environment and the
Head of its Finance Local Authority Expenditure and Revenues
Division. Local authorities are divided into charging authorities,
who are also referred to as receiving authorities, and precepting
authorities. Among the appellants the charging authorities are
either district councils or London borough councils and the
precepting authorities are county councils. The income of both
classes of authority is derived from three main sources, the
revenue support grant, non-domestic rates and the community
charge. It is the responsibility of the charging authorities to set
and collect the community charge. Charging authorities also
receive from central government their share of the revenue
support grant and of the national pool of non-domestic rates.
From this income charging authorities must fund the services they
provide and meet the precepts of precepting authorities.
Precepting authorities derive their income from the precepts they
serve upon charging authorities.

The amount of the revenue support grant for any financial
year is determined by two reports required to be made by the
Secretary of State to, and approved by, the House of Commons.
The first, under section 78 of the Act of 1988, determines the
global amount of grant, the second, under section 80, determines
the amounts to be distributed to individual receiving authorities.
The Act provides for consultation with representatives of local
government before the Secretary of State determines the amount
of the global grant.

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Non-domestic rates are payable by occupiers of non-domestic
property according to a national rate poundage set by the
Secretary of State. The rates are collected by charging
authorities but accounted for entirely to the Secretary of State
and then distributed by him to receiving authorities in proportion
to their relevant population.

Thus it will be seen that the amount of income which a
local authority will receive in any year from these two central
sources is directly determined by the central government and in
the case of the revenue support grant is subject to the approval of
the House of Commons.

It is through the community charge alone that a local
authority is able in some degree to determine its own local
expenditure and taxation policies. Again as is now well known, at
whatever rate the community charge is set by the authority it is
payable, subject to reliefs and exemptions, at that rate by each
adult resident in the local authority's area, representing broadly
speaking the local electorate. As explained in the affidavit of Mr.
Rowsell, the political thinking which underlies the new system is
that it will operate to secure that local authorities are properly
accountable to their electorate.

At the centre of the budgeting process prescribed for
charging authorities are the calculations required to be undertaken
for each financial year by section 95 of the Act of 1988, as
amended by paragraphs 1 and 63 of Schedule 5 to the Act of
1989. Section 95(2) lists the main heads of revenue expenditure
and certain other items for which funds must be provided on
revenue account. Section 95(3) lists certain sources of funds
available to meet the requirements under section 95(2), not
including the three main sources of income. Having estimated
these amounts, a charging authority must then calculate the
difference between them under section 95(4) which is, in substance,
the aggregate of estimated expenditure falling to be met out of
the three main sources of income, revenue support grant, non-
domestic rates and the community charge. I shall refer to this
for brevity and convenience as the authority's annual budgeted
expenditure. A parallel budgeting process is prescribed by section
68 for precepting authorities. A precepting authority's annual
budgeted expenditure represents the amount it requires to raise by
precepts which will reflect its own share of the revenue support
grant and non-domestic rates included in the sums allocated to
receiving authorities and also the additional amount which charging
authorities require to raise by their community charge to meet the
balance of the precepting authority's annual budgeted expenditure.

The amounts of the annual budgeted expenditure of
precepting and charging authorities are the focal points of the
whole system. It is by reference to these amounts that the
Secretary of State's powers of capping are exercisable and it is by
reference to these amounts that community charges are set. The
statutory programme is such that before authorities set their
budgets they will know how much they are to receive by way of
revenue support grant and non-domestic rates and thus what is the
balance required to be raised by way of community charge.
Precepting authorities set their budgets before charging authorities,
who therefore also know how much they require to raise to meet



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precepts. Thus when a charging authority sets its community
charge it is determined by the amount required to meet precepts
made upon it, so far as that amount exceeds the precepting
authority's relevant share of revenue support grant and non-
domestic rates and the amount by which the charging authority's
own annual budgeted expenditure exceeds its own share of revenue
support grant and non-domestic rates.

I have not included in this very much abbreviated and
necessarily over-simplified account of the main provisions of the
Act any reference to transitional arrangements or to the so-called
"safety net" which are complex and do not, I think, throw any
light on the issues falling for determination in the appeals. But
before turning to the capping provisions themselves I must
summarise, as briefly as I can, the steps taken by the Secretary of
State in the operation of the statutory machinery generally which
form the essential background to his subsequent operation of the
capping machinery in relation to the appellant authorities.

The Secretary of State announced in July 1989 that the
amount the Government considered appropriate as the global total
of local authority revenue expenditure on services in the year
1990-91 was £32.8 billion. This becomes the figure referred to in
various reports as total standard spending (T.S.S.) which plays a
key role in determining the amount to be distributed by way of
revenue support grant, the amount to be raised from non-domestic
rates and the amount considered by the Secretary of State as
appropriate to be raised by the community charge. The other key
concept which features in the Secretary of State's calculation of
these amounts and in the breakdown of T.S.S. is the standard
spending assessment (S.S.A.). A local authority's S.S.A. is the
amount which it is estimated that the authority would require to
spend in the year to maintain a level of services to a common
standard determined by reference to T.S.S. as the total available
for spending by all authorities. The calculation of S.S.A.s is a
matter of great complexity in detail but the basic principles which
govern it are simple. The services which local authorities provide
are divided into seven major blocks as follows: education; personal
social services; police; fire and civil defence; highway maintenance;
all other services; capital financing. Each major service block is
allocated a control total representing the share of T.S.S. available
countrywide to fund that service or those services. A local
authority's individual S.S.A. is built up from separate elements
calculated for each of the major services for which that authority
is responsible. Each separate element is calculated by a formula
reflecting the physical, social and demographic characteristics of
the authority's area in so far as they are relevant to the cost of
providing the service concerned. The objective is that an
authority's S.S.A. should provide a benchmark of the level of
expenditure appropriate to enable the authority to provide services
to a common standard consistent with authorities in total spending
to the level dictated by T.S.S.

The detailed basis on which S.S.A.s were eventually
calculated was the outcome of extensive consultation throughout
1989 between officials of the Department of the Environment and
officers of the local authority associations. On 6 November 1989
the Secretary of State issued a consultation paper setting out his
proposals for grant determination and a draft of his proposed



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distribution report, indicating a proposed calculation of S.S.A.S, to
the English local authority associations and local authorities,
inviting the comments of the associations and indicating that he
would consider any representations made by individual authorities.
In a statement to the House of Commons announcing the
consultation paper the Secretary of State made clear that his
principal objective in the proposed grant distribution was to ensure
that, in general, if each authority spent so as to provide a
common standard of services, the community charge could be set
at the same level in every area before allowing for the
transitional arrangements.

After considering comments and representations made in
response to the consultation paper relating, inter alia, to the
proposed total of the revenue support grant, the proposed control
total for different services and the proposed methodology for
calculating S.S.A.s, the Secretary of State submitted his definitive
proposals to the House of Commons in the Revenue Support Grant
Report (England) 1990/91 and the Revenue Support Grant
Distribution Report (England) under sections 78 and 80 of the Act
respectively. These reports were approved by the House of
Commons on 18 January. The report under section 78 determined
the total amount of the revenue support grant at £9.647 billion
and determined the rate poundage for non-domestic rates at a
level estimated to yield a distributable amount of £10.428 million.
The report under section 80 set out the definitive basis on which
S.S.A.s were to be calculated. The opening paragraph of the
section of the report headed "Distribution of Grant" states that
the revenue support grant is to be distributed so that if each
authority were to spend at the level of its S.S.A. then, subject to
certain qualifications, all charging authorities could set the same
personal community charge. During January 1990 local authorities
were notified individually of the amounts of their S.S.A.s, the
amounts they were to receive in revenue support grant and of
their relevant population (determined as required by Schedule 12A
to the Act) which would determine their share of non-domestic
rates and were thus furnished with all the information they
required to set their budgets and their community charges.

I turn now to the capping machinery in Part VII of the Act
under the heading "Limitation of Charges etc." and set out the
relevant provisions of sections 100-102:

"100 Power to designate authorities

"(1) As regards a chargeable financial year the
Secretary of State may designate a charging authority if in
his opinion -

(a) the amount calculated by it in relation to the
year under section 95(4) above is excessive, . . .

"(2) As regards a chargeable financial year the
Secretary of State may designate a relevant precepting
authority if in his opinion -

(a) the aggregate amount of precepts issued by it for
the year is excessive, . . .

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"(4) A decision whether to designate an authority shall be
made in accordance with principles determined by the
Secretary of State and, in the case of an authority falling
within any of the classes specified in subsection (5) below,
those principles shall be the same either for all authorities
falling within that class or for all of them which
respectively have and have not been designated under this
Part as regards the preceding financial year.

"(5) The classes are -

1. county councils,

2. councils of metropolitan districts,

(c) councils of non-metropolitan districts,

4. councils of inner London boroughs,

5. councils of outer London boroughs,

(f) metropolitan county police authorities and the
Northumbria Police Authority, and

(g) metropolitan county fire and civil defence
authorities.

"101 Restriction on power to designate

"(1) An English authority shall not be designated under
section 100 above as regards a financial year unless the
amount calculated by it in relation to the year under
section 95(4) above or the aggregate amount of precepts
issued by it for the year (as the case may be) is equal to
or greater than £15 million or such greater sum not
exceeding £35 million as the Secretary of State may specify
by order. . .

"102 Designation of authorities

"(1) If the Secretary of State decides under section
100 above to designate an authority he shall notify it in
writing of -

(a) his decision,

(b) the principles determined under section 100(4)
above in relation to it, and

(c) the amount which he proposes should be the
maximum for the amount calculated by it in relation
to the year under section 95(4) above or the
maximum for the aggregate amount of precepts issued
by it for the year (as the case may be)."

It will be appreciated that, in relation to a charging
authority the phrase "the amount calculated by it in relation to
the year under section 95(4)," and, in relation to a precepting
authority the phrase "the aggregate amount of the precepts issued
by it for the year," refer in each case to what I have earlier
described as the authority's annual budgeted expenditure and it will
be remembered that the amount which a charging authority may
set as its community charge is directly determined by its own
annual budgeted expenditure and the amount of the precepts made
upon it by precepting authorities so that the capping of the budget
of either a charging authority or a precepting authority precepting
upon it will result in the resetting of the community charge.

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The procedure which follows the service of a notice under
section 102(1) upon a local authority depends upon the local
authority's response to the notice. The authority has 28 days
following receipt of the notice within which it may give notice to
the Secretary of State either accepting the maximum proposed by
the Secretary of State for its annual budgeted expenditure or
stating an alternative higher maximum and giving reasons for its
belief that the higher maximum is appropriate: section 102(5). If
the authority accepts the maximum proposed by the Secretary of
State, the Secretary of State serves a further notice confirming, in
effect, that the maximum he proposed in his notice under section
102(l)(c) is to be the maximum amount of the authority's annual
budgeted expenditure: section 105. If the authority gives notice
proposing an alternative maximum, the Secretary of State, after
considering any information he thinks relevant, makes a draft order
specifying the amount which is to be the maximum amount of the
authority's annual budgeted expenditure, which may be either
greater or smaller than the maximum amount he originally
proposed in his notice under section 102(l)(c) and this takes effect
when the order is approved by resolution of the House of
Commons: section 104. If the authority makes no response within
28 days to the notice served on it under section 102(1), the
Secretary of State makes a draft order specifying that the
maximum originally proposed in his notice under section 102(l)(c) is
to be the maximum amount of the authority's annual budgeted
expenditure and this again takes effect when the order is approved
by resolution of the House of Commons: section 106. Section 110
provides for authorities to supply to the Secretary of State
whatever information he requires for the purpose of deciding
whether to exercise his powers and how to perform his functions
under Part VII of the Act and, in default, authorises the Secretary
of State to act on the basis of such assumptions and estimates as
he thinks fit. Section 110(8) provides that in deciding whether to
exercise his powers and how to perform his functions the Secretary
of State may take into account any other information available to
him, whatever its source and whether or not obtained under any
statutory provision.

Under the Act precepting authorities are required to set
their budgets before 1 March and charging authorities before 11
March. Community charges are required to be set by 1 April. In
1990 all the appellant authorities except Lambeth London Borough
Council had complied with this timetable and had supplied to the
Secretary of State all the information he required about their
budgets by 18 March. On 3 April the Secretary of State served
designation notices on all the appellant authorities except Lambeth,
whose budget was set late and who was served on 10 April.

In determining, as required by section 100(4), the principles
in accordance with which the decisions to designate were to be
made, the Secretary of State made no distinction between the
different classes of authorities listed in section 100(5) save in
respect of the councils of inner London boroughs. These councils
were to be the subject of special treatment in so far as they had
inherited liabilities from the former Inner London Education
Authority. Subject to this, which has no relevance for present
purposes, all authorities were to be designated in accordance with
the same principles as follows. The first principle was that an
authority was to be designated if its budget exceeded its S.S.A. (1)



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by at least 12½ per cent. and (2) by at least £75 per adult of its
relevant population. The second principle operated by way of
exception to the first in that an authority was not to be
designated if the elimination of the excess referred to in the first
principle, i.e. the reduction of the budget to an amount not
exceeding 12½ per cent. or £75 per adult above S.S.A., or the
reduction of the budget to £15m., the statutory minimum for
designation prescribed by section 101, would effect a saving of less
that £26 per adult of the relevant population. Specifying in his
notices under section 102(l)(c) the amount which he proposed to be
the maximum amount for each authority's annual budgeted
expenditure, the Secretary of State proposed, in the case of eight
of the 16 authorities who were appellants before the House,
reduction by the full amount necessary to eliminate the excess
referred to in the first principle, but in the case of the other
eight authorities, taking account of what he considered that the
authorities could in practice achieve in their individual
circumstances, he specified a less stringent maximum allowing
some expenditure above the level of 12½ per cent./£75 per adult
in excess of S.S.A.

At the heart of the appellant authorities' attack on the
Secretary of State's decisions to designate them are two
submissions relating to the construction of section 100 of the Act.
First, it is submitted that in making a decision to designate an
authority under section 100 there are two steps to be taken which
are independent of each other. The Secretary of State must first
form the opinion under section 100(1) that the authority's budget is
excessive. This is to be decided on an ad hoc basis taking
account of all the individual circumstances affecting that authority
and without regard to the principles to be formulated under
section 100(4). It is only after forming the opinion that an
authority's budget is excessive that the Secretary of State is
required or permitted under section 100(4) to formulate the
principles which will determine whether or not that authority is in
fact to be designated. The second submission is that, in taking
the first step and forming his opinion that the authority's budget
is excessive the Secretary of State is not entitled to determine
what the norm of local expenditure ought to be. The norm, it is
said, is what a "sensible" local authority in the particular
circumstances obtaining in its area may reasonably decide to be
the appropriate level of expenditure and the Secretary of State
may only form the opinion that an authority's budgeted expenditure
is excessive if it exceeds that norm as being so profligate and
extravagant that no "sensible" authority could have approved it.

I have no hesitation in rejecting both these submissions.
The decision to designate is clearly a single decision dictated by
the principles formulated under section 100(4), which are to ensure
even-handed treatment of different authorities in the same class
and to settle the norm which will provide the basis of the opinion
of the Secretary of State as to what constitutes excessive
budgeting. This is emphasised by section 102(1) requiring the
Secretary of State to notify his decision to designate and the
principles determined under section 100(4) "in relation to" that
decision. Moreover, if a decision "whether to designate" is to be
made "in accordance with principles" as section 100(4) requires,
those principles can only be directed to the determination of the
question what level of expenditure is to be treated as excessive to



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a degree justifying designation. To construe section 100 as
requiring the Secretary of State to form an opinion ad hoc on a
case by case basis as to what budgets are excessive without regard
to principle would be to defeat the plain purpose of the section.

The second submission is so closely related to the first that
it must fall with it, but even if considered independently it is
fatally flawed. The second submission presupposes that every
decision to designate an authority as having set a budget which in
the opinion of the Secretary of State is excessive is a decision
made ad hoc, having regard only to the circumstances affecting
that authority and having regard to some notional objective
standard of what a "sensible" authority might properly budget to
expend. The aim of this second submission is to bring the
decisions made by the Secretary of State to designate the
appellant authorities within the ambit of a familiar line of
authority of which the leading case is Secretary of State for
Education and Science v. Tameside Metropolitan Borough Council
[1977] AC 1014. That case concerned the exercise by the
Secretary of State for Education and Science of a power under
section 68 of the Education Act 1944 authorising him to give
directions to a local education authority as to how it should
perform its statutory functions if he was satisfied that the
authority was "proposing to act unreasonably with respect to the
exercise of any power conferred or the performance of any duty
imposed by or under this Act." The House held that this did not
empower the the Secretary of State for Education and Science to
substitute his own opinion for that of the local education authority
as to the course of action which it should take, but that he could
only give directions if, on the material before him, he was entitled
to be satisfied that no reasonable local education authority would
act as the authority in question was proposing to act. This was a
decision on different statutory language in a wholly different
statutory context and it has no relevance whatever to the
construction of section 100 of the Act of 1988. If one asks in the
circumstances of an individual case whether a local education
authority has acted unreasonably in the discharge of its statutory
functions, this is clearly a question which admits of an objective
answer. If one asks, however, even in the circumstances of an
individual case, whether a local authority's budgeted expenditure
for a year is excessive, it is plain that there can be no objective
criterion by which to determine the answer. What is the
appropriate level of public expenditure and public taxation is, and
always has been, a matter of political opinion. At one end of the
political spectrum it may be thought proper for 90 per cent. of
the national income to be levied in taxation and redistributed to
the citizens in the form of free services designed to meet nearly
all their needs. At the other end it may be thought that taxation
should be kept to the barest minimum level necessary to provide
minimal public services. Differences of political opinion within
this spectrum obviously apply at local as well as at national level.
Thus there can be no objective norm by which it would be possible
to determine that a local authority's budget was excessive. If the
Secretary of State's powers under Part VII of the Act were limited
to restraining excesses in budgetary expenditure beyond what any
"sensible" authority might determine to be appropriate to its own
circumstances, they would, in effect, be wholly nugatory. The
setting of a norm for local government expenditure is essentially a
matter of political opinion. That is precisely why the Act, in



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entrusting to the Secretary of State the function of determining
the norm and imposing a ceiling level of expenditure to which
local authorities must conform, does so by requiring him to spell
out the criteria of excessive expenditure in terms of principles of
general application, which is the very antithesis of subjecting the
budgets of individual authorities to the ad hoc review which is
suggested to be the basis of the capping power in the submissions
made on behalf of the appellant authorities.

As an alternative to the submissions directed to the
construction of section 100, it was submitted that various
pronouncements by the Secretary of State and other Government
Ministers in the House of Commons and elsewhere had induced in
local authorities a "legitimate expectation" that the Secretary of
State's powers of capping would only be exercised to restrain
excesses going beyond the limits of such budgets as a "sensible"
authority might properly set and that this legitimate expectation
could, if necessary, be relied on as imposing a limitation on the
power otherwise exercisable under section 100 to the same effect
as that which would follow from acceptance of the authorities'
submissions on the true construction of the section. I need only
say that, in my opinion, this submission is plainly misconceived.

The appellant authorities next submitted that the Secretary
of State's designation notices did not comply with the Act because
the principles determined under section 100(4) were not the same
for all authorities in the same class. The basis of this submission
is that the principle determining that an authority's budget shall
be treated as excessive only if it exceeds the authority's S.S.A.
both by 12½ per cent. in the aggregate and by £75 per adult of
the relevant population is a principle which can only apply to
those authorities whose S.S.A. divided by the relevant adult
population is at least £600. This is, of course, factually correct,
but the fallacy in the submission is that it confuses a requirement
that the principles shall be the same for all authorities, which the
statute imposes, with a requirement that the principles shall be
capable of application to all authorities, which the statute does
not impose. In the nature of the case the principles designed to
govern the determination to designate will discriminate between
authorities according to whether their budgets are or are not to be
treated as excessive. The principles to be applied are the same,
but to require that every principle should be capable of application
to every authority would defeat the whole purpose of the exercise.
Accordingly this submission also is without substance.

I have now referred to all the grounds relied on by the
appellant authorities to impeach the Secretary of State's action as
contravening the Act either on its true construction or as falling
to be applied in the light of the authorities' legitimate
expectations. Adopting Lord Diplock's threefold classification of
the grounds on which administrative decisions may be challenged as
illegality, irrationality and procedural impropriety (Council of Civil
Service Unions v. Minister for the Civil Service [1985] AC 374,
410) the grounds of challenge so far considered would, if they had
succeeded, have fallen under the head of illegality. The remaining
grounds of challenge fall under the heads of irrationality or
procedural impropriety. Before turning to these grounds it is
appropriate to consider whether any limitations upon the scope of
judicial review are imposed by the subject matter of the
legislation. In this we are not without authoritative guidance.

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In Reg. v. Secretary of State for the Environment, Ex parte
Nottinghamshire County Council [1986] AC 240, the House had to
consider an earlier challenge to the action of the Secretary of
State under the Local Government, Planning and Land Act 1980
which had this in common with the action here in question that
the "expenditure guidance" which the Secretary of State had there
issued to local authorities and which the authorities sought to
challenge had a directly restraining effect on the authorities'
conduct of their financial affairs but before it could take effect
required the approval by resolution of the House of Commons.
The appellant authorities in that case had challenged the Secretary
of State's statutory expenditure guidance on the ground, inter alia,
that it was unreasonable as contravening the principles expounded
in the judgment of Lord Greene M.R. in Associated Provincial
Picture Houses Ltd. v. Wednesbury Corporation [1948] 1 KB 223,
229, which is the classic statement of the basis for a challenge to
an administrative decision on the ground of irrationality.
Adverting to this challenge in the Nottinghamshire case, Lord
Scarman said [1986] AC 240, 247:

"The submission raises an important question as to the
limits of judicial review. We are in the field of public
financial administration and we are being asked to review
the exercise by the Secretary of State of an administrative
discretion which inevitably requires a political judgment on
his part and which cannot lead to action by him against a
local authority unless that action is first approved by the
House of Commons. . . .

"I cannot accept that it is constitutionally appropriate, save
in very exceptional circumstances, for the courts to
intervene on the ground of 'unreasonableness' to quash
guidance framed by the Secretary of State and by necessary
implication approved by the House of Commons, the
guidance being concerned with the limits of public
expenditure by local authorities and the incidence of the tax
burden as between taxpayers and ratepayers. Unless and
until a statute provides otherwise, or it is established that
the Secretary of State has abused his power, these are
matters of political judgment for him and for the House of
Commons. They are not for the judges or your Lordships'
House in its judicial capacity.

"For myself, I refuse in this case to examine the
detail of the guidance or its consequences. My reasons are
these. Such an examination by a court would be justified
only if a prima facie case were to be shown for holding
that the Secretary of State had acted in bad faith, or for
an improper motive, or that the consequences of his
guidance were so absurd that he must have taken leave of
his senses."

Later he added, at pp. 250-251:

"To sum it up, the levels of public expenditure and
the incidence and distribution of taxation are matters for
Parliament, and, within Parliament, especially for the House
of Commons. If Parliament legislates, the courts have their

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interpretative role: they must, if cailed upon to do so,
construe the statute. If a minister exercises a power
conferred on him by the legislation, the courts can
investigate whether he has abused his power. But if, as in
this case, effect cannot be given to the Secretary of State's
determination without the consent of the House of Commons
and the House of Commons has consented, it is not open to
the courts to intervene unless the minister and the House
must have misconstrued the statute or the minister has - to
put it bluntly - deceived the House. The courts can
properly rule that a minister has acted unlawfully if he has
erred in law as to the limits of his power even when his
action has the approval of the House of Commons, itself
acting not legislatively but within the limits set by a
statute. But, if a statute, as in this case, requires the
House of Commons to approve a minister's decision before
he can lawfully enforce it, and if the action proposed
complies with the terms of the statute (as your Lordships, I
understand, are convinced that it does in the present case),
it is not for the judges to say that the action has such
unreasonable consequences that the guidance upon which the
action is based and of which the House of Commons had
notice was perverse and must be set aside. For that is a
question of policy for the minister and the Commons, unless
there has been bad faith or misconduct by the minister.
Where Parliament has legislated that the action to be taken
by the Secretary of State must, before it is taken, be
approved by the House of Commons, it is no part of the
judges' roie to declare that the action proposed is unfair,
unless it constitutes an abuse of power in the sense which I
have explained; for Parliament has enacted that one of its
Houses is responsible. Judicial review is a great weapon in
the hands of the judges: but the judges must observe the
constitutional limits set by our parliamentary system upon
their exercise of this beneficent power."

Lord Scarman's speech commanded the agreement of all members
of the Appellate Committee participating in the decision of whom
I was one. I regard the opinions expressed in the passages quoted
as an accurate formulation of an important restriction on the
scope of judicial review which is precisely in point in the instant
case. There is here no suggestion that the Secretary of State
acted in bad faith or for an improper motive or that his decisions
to designate the appellant authorities or the maximum amounts to
which he decided to limit their budgets were so absurd that he
must have taken leave of his senses. Short of such an extreme
challenge, and provided always that the Secretary of State has
acted within the four corners of the Act, I do not believe there is
any room for an attack on the rationality of the Secretary of
State's exercise of his powers under Part VII of the Act.

This accords with the view expressed by the Divisional
Court, though they went on to examine on their merits and to
reject the grounds relied on by the applicant authorities including
those challenging the rationality of the Secretary of State's
decisions and orders. The Court of Appeal expressed a somewhat
different view. Referring to irrationality as a ground for judicial
review of the exercise of a statutory discretion they said:

- 12 -

"This head is relevant if it is alleged that the
decision taker has had regard to matters which are legally
irrelevant or has failed to have regard to matters which are
legally relevant or that his decision would frustrate the
policy of the Act upon which he relies for his authority
(Padfield y. Minister of Agriculture, Fisheries & Food [1968]
A.C. 997). There is nothing in the judgments in the
Nottinghamshire case [1986] AC 240 to suggest that this
aspect of the jurisdictional head of 'irrationality' has no
application to decisions concerning public financial
administration, whether or not they are also subject to
review by one or both Houses of Parliament and no principle
dictates that this should be the case."

I think there is a danger of confusion in terminology here.
If the court concludes, as the House did in the Padfield case
[1986] A.C. 997, that a minister's exercise of a statutory
discretion has been such as to frustrate the policy of the statute,
that conclusion rests upon the view taken by the court of the true
construction of the statute which the exercise of the discretion in
question is then held to have contravened. The administrative
action or inaction is then condemned on the ground of illegality.
Similarly, if there are matters which, on the true construction of
the statute conferring discretion, the person exercising the
discretion must take into account and others which he may not
take into account, disregard of those legally relevant matters or
regard of those legally irrelevant matters will lay the decision
open to review on the ground of illegality.

The restriction which the Nottinghamshire case [1986] A.C.
240 imposes on the scope of judicial review operates only when
the court has first determined that the ministerial action in
question does not contravene the requirements of the statute,
whether express or implied, and only then declares that, since the
statute has conferred a oower on the Secretary of State which
involves the formulation and the implementation of national
economic policy and which can only take effect with the approval
of the House of Commons, it is not open to challenge on the
grounds of irrationality short of the extremes of bad faith,
improper motive or manifest absurdity. Both the constitutional
propriety and the good sense of this restriction seem to me to be
clear enough. The formulation and the implementation of national
economic policy are matters depending essentially on political
judgment. The decisions which shape them are for politicians to
take and it is in the political forum of the House of Commons
that they are properly to be debated and approved or disapproved
on their merits. If the decisions have been taken in good faith
within the four corners of the Act, the merits of the policy
underlying the decisions are not susceptible to review by the
courts and the courts would be exceeding their proper function if
they presumed to condemn the policy as unreasonable.

One of the main grounds on which the appellant authorities
attacked the basis on which the Secretary of State determined the
principles under section 100(4) in accordance with which they were
designated was that the calculation of an authority's S.S.A. does
not take account of all the factors which come into play under
the terms of section 95, in the case of charging authorities or of
section 68, in the case of precepting authorities, in the



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determination of an authority's annual budgeted expenditure. In
essence this ground complains that in using S.S.A.s as the criterion
by reference to which an authority's budget is judged excessive
under section 100 the Secretary of State is not comparing like
with like. The Court of Appeal examined this complaint on its
merits and rejected it for reasons with which I agree. But I
would reject it also on the shorter ground that the complaint seeks
to assert that the use of S.S.A.S as the basic criterion by which to
determine the permissible level of local government expenditure is
unreasonable in the Wednesbury sense and for the reasons I have
explained I am of opinion that such a complaint is inadmissible.

The remaining complaints advanced by the appellant
authorities relate to matters of procedure. Before I advert to
these complaints individually, I must try to dispel a
misapprehension which underlay the arguments addressed to the
House on behalf of the appellant authorities on this part of the
case. The arguments proceed from the assumption that, as
between the Secretary of State and any authority which may be or
is the recipient of a notice of designation, the authority, or more
accurately the majority party in control of the budgeting process,
is in the position of a person whose "rights," in the broadest sense,
are liable to be detrimentally affected by any action taken by the
Secretary of State under Part VII of the Act. This is the
necessary assumption on which to base the argument advanced by
the appellant authorities that the court must supplement the
procedural requirements which the Act itself stipulates by implying
additional requirements said to be necessary to ensure that the
principles of natural justice are observed in the procedures both
leading to designation and following designation. The decided
cases on this subject establish the principle that the courts will
readily imply terms where necessary to ensure fairness of
procedure for the protection of parties who may suffer a
detriment in consequence of administrative action. Clearly this
principle applies to decisions whereby citizens may be affected in
their person, their property or their reputation. The principle
equally applies to public bodies or public authorities affected by an
administrative decision which is based upon their having acted, or
which necessarily implies that they have acted, unlawfully or
discreditably. Thus in Durayappah v. Fernando [1967] 2 AC 337,
the case primarily relied on by the appellant authorities, the Privy
Council held that a minister, given power by statute to direct the
dissolution of a municipal council on the ground that it "is not
competent to perform, or persistently makes default in the
performance of, any duty or duties imposed upon it, or persistently
refuses or neglects to comply with any provision of law," was not
entitled to exercise the power without giving the council a fair
opportunity to be heard in its defence.

The administrative decision taken by the Secretary of State
in designating a local authority and setting a maximum amount for
the authority's budget lower than the amount which the authority
thinks it appropriate to raise by way of community charge and to
spend in the provision of local services is in one sense adverse to
the authority, but it does not in any way impinge on the rights of
members of the authority, either as citizens or as councillors, nor
does it impugn their collective conduct as either unlawful or
discreditable. A difference of opinion between the Secretary of
State and the designated authority as to what is the appropriate



- 14 -

level at which their community charge and their expenditure should
be set is purely a political difference. The parties affected by
the capping process are the community charge payers and the
consumers of local services. The payers gain, the consumers lose.
The party in control of the council may be politically frustrated
by the restriction imposed on powers which they might otherwise
exercise freely, but it is only in this sense that the Secretary of
State acts to their detriment and they are perfectly at liberty to
continue to claim that they were right and the Secretary of State
was wrong and to make what political capital they may out of the
dispute. In this statutory context I am very doubtful as to
whether it would be appropriate for the court to imply terms in
the statute derived from the doctrine of audi alteram partem.
But it is unnecessary to consider this point further because at the
only point in the process leading to capping at which it might be
appropriate to insist that, as a matter of fair procedure,
authorities should have the opportunity to be heard in opposition to
the Secretary of State's proposed cap and to make a reasoned case
in support of an alternative and less restrictive maximum for their
budget, the Act itself by sections 102(5)(a) and 104 expressly
prescribes a procedure precisely to this effect. This procedure
was duly followed and in addition all the authorities who had
served notices under section 102(5)(a) proposing alternative
maximum amounts for their annual budgeted expenditure were
given the opportunity to make representations orally in support of
their cases by delegations received by the Minister for Local
Government and Inner Cities and the Parliamentary Under-
secretary.

There are two further points at which the appellant
authorities invite the House to conclude that terms must be
implied in the statute in the interests of fair procedure. First it
is said that the Secretary of State should be held under an
obligation to consult local authorities before determining the
principles on which he will act under section 104 in relation to
designation and, having determined those principles, must announce
them before authorities have set their budgets so that the
authorities may have the opportunity to set them at a level which
will avoid the necessity for designation. So far as consultation is
concerned, no obligation to consult is imposed by Part VII of the
Act. This is in contrast with Part V where section 78 imposes an
express obligation to consult "such representatives of local
government as appear to [the Secretary of State] to be
appropriate." As I have recounted earlier, a very full process of
consultation between the Department of the Environment and
officers of local authority associations preceded the setting of
local authorities' S.S.A.S. I can see no basis whatever on which to
imply a statutory obligation to consult local authorities about the
principles on which the Secretary of State proposed to base his
designation decisions under section 100. The advantages of a prior
announcement of what those principles are to be, enabling
authorities to budget to avoid designation and the administrative
expense and inconvenience necessarily consequent upon designation,
are obvious. Mr. Rowsell in his affidavit carefully explains that
the Secretary of State weighed these advantages against the
disadvantages which he saw in a prior announcement as presenting
a temptation to authorities to budget to spend up to the limit
which the proposed principles would allow and therefore as inimical
to the achievement of economy in local government expenditure



- 15 -

which is the primary objective of government policy. The
Secretary of State concluded that the disadvantages outweighed the
advantages and therefore made no prior announcement of the
principles. Whether or not this was a politically wise decision is
no concern of your Lordships. Here again I can see no basis on
which to imply a term in the Act which would render it an
unlawful decision.

A second point at which it is contended that additional
obligations on the Secretary of State must be implied in the
statutory procedure is in any case where an authority is minded,
after receiving the Secretary of State's designation notice under
section 102(1) to give notice under section 102(5)(a) proposing an
alternative maximum for its budget and giving reasons in support
of that alternative. It is accepted that the Secretary of State is
under no initial obligation when he serves a designation notice to
give reasons for the amount of the cap which he proposes under
section 102(l)(c), but it is said that he must do so on request by
an authority wishing to challenge the cap to enable it the better
to formulate its counter-proposal. I need only say that, in my
opinion, the implication that it would be necessary to make to
sustain this proposition is plainly excluded by the very precise
terms in which the statute lays down the relevant procedure to be
followed. The Secretary of State's notice under section 102(1) is
in terms required to inform the authority of his decision, the
principles determined under section 100(4) in relation to it and the
amount of the proposed cap. An authority wishing to challenge
the cap has 28 days in which to do so and is in terms required to
give reasons in support of its alternative proposal. If it were
intended that the Secretary of State should give reasons in support
of the proposed cap, it is inconceivable that this should not either
be stated in terms as a requirement of the notice under section
102(1) or, if the reasons were only to be given on request, that
the statute should not prescribe a timetable for making the
request and for the time to be allowed to the authority after
receipt of the Secretary of State's reasons for formulating and
notifying its counter-proposal.

Finally it was submitted for the appellant authorities that
the Secretary of State is under a legal obligation before submitting
a draft order for approval by the House of Commons under section
104 to disclose to the authority affected any information which he
intends to take into account received from a source other than the
authority in question and of which that authority might not be
aware. Both courts below accepted the view that the
requirements of fair procedure imposed such an obligation, but the
Court of Appeal rejected the complaint, which only arose after the
hearing in the Divisional Court, that there had been any breach of
the obligation. The position taken on behalf of the Secretary of
State in relation to this submission was that it was the practice to
inform an authority of any factual information on which the
Secretary of State proposed to act which contradicted the case put
forward by the authority, but that the reason for this practice was
simply to ensure so far as possible that the information on which
the Secretary of State proposed to act was accurate. It was not
accepted that there was any legal obligation in the matter.

This is the only point where I take a view at variance with
that of both courts below. As I have pointed out, section 110 of



- 16

the Act in terms provides that in performing his functions under
Part VII the Secretary of State may take into account any
information available to him from whatever source it comes. In
the nature of the case the Secretary of State is bound to receive
representations as to how he should exercise his power of capping
from many quarters. Bodies speaking for community charge payers
and political opponents of those who have set the budget to be
capped are likely to urge one view, political supporters and bodies
speaking for consumers of local services or employees engaged in
the provision of those services are likely to urge another. These
representations may be factual, argumentative or both. Against
this background to read into the statute a legal obligation on the
Secretary of State to disclose to an authority challenging his
proposed cap all relevant information before him and then to give
the authority the opportunity to comment upon or counter that
information (which would be the only purpose to be served by
requiring disclosure) would introduce such delays into a procedure
which is meant to operate with the greatest expedition that I
cannot believe that this is what Parliament intended. Short of
this, I do not think it is possible to spell out, as a matter of legal
obligation, a duty of disclosure confined to a particular narrow
category of factual information which it would be necessary to
define with great precision. Here again it is vital to remember
that the procedure under the Act is not in any ordinary sense an
adversarial one. The important objective of the procedure is that
the information on which the Secretary of State acts should be
both full and accurate. In this respect it is much better, in my
opinion, to leave the attainment of that objective to sound
administrative practice than to attempt to achieve it by nice legal
definitions.

As this is the first year of the operation of the new system
of local government finance it was predictable that there would be
a challenge in the courts to any exercise by the Secretary of
State of his capping power and in the light of the public
importance and sensitivity of the subject matter it was appropriate
that the authorities who wished to do so should be given leave to
bring their case before your Lordships' House. But I hope that
your Lordships' decision will serve to make it clear for future
years that no similar challenge has any prospect of success unless
an authority is in a position to show that the Secretary of State
has acted in bad faith or for an improper motive or can point to
some failure to comply with the procedural requirements which the
Act clearly spells out.

LORD BRANDON OF OAKBROOK

My Lords,

I am in full agreement with the reasons which have been
given by my noble and learned friend, Lord Bridge of Harwich, for
dismissing these appeals.

- 17 -

LORD OLIVER OF AYLMERTON

My Lords,

I am in full agreement with the reasons which have been
given by my noble and learned friend, Lord Bridge of Harwich, for
dismissing these appeals.

LORD GOFF OF CHIEVELEY

My Lords,

I am in full agreement with the reasons which have been
given by my noble and learned friend Lord Bridge of Harwich, for
dismissing these appeals.

LORD JAUNCEY OF TULLICHETTLE

My Lords,

I am in full agreement with the reasons which have been
given by my noble and learned friend Lord Bridge of Harwich, for
dismissing these appeals.

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