The Local Government Finance (Supplementary Credit Approvals) Bill, which allows the phased release of capital receipts, repeals the present seven-year maximum 'amortisation' period for capitalised revenue expenditure.
But Tory frontbencher and Croydon LBC member Lord Bowness argued in a committee stage amendment on Tuesday that there should be a 12-year limit instead.
He told peers: 'The less a local authority is in debt the better, and certainly it ought not to be in debt for the purpose of financing revenue spending.'
Junior environment minister Baroness Hayman defended the discretion as 'quite a limited and useful' provision. She said the Tories' proposal would not give ministers the flexibility they wanted.
The present limit was 'quite simply too inflexible in some circumstances'. There is quite simply no point in imposing on a local authority an unrealistic revenue burden,' she said.
Another Conservative bid, to require an annual report on the Bill's effects on public borrowing, was later rejected by 125 to 99.
The Bill, which has already cleared the Commons, completed its committee stage unamended.