1 February 2012 | By Gary Porter
The good news is that the government is scrapping the much-hated Housing Revenue Account from April. The less good news is that the Treasury, not councils, could still end up in the driving seat
10am, 30 June 2009: members of the Local Government Association’s environment board were gathered in Harrogate. It was the day before the LGA conference, and we had an urgent phone call from a member of our policy team back in London.
There was a rumour that Labour’s housing minister, John Healey, was going to use the conference to announce an end to the Housing Revenue Account subsidy system. By midday we were able to confirm this, and the atmosphere was electric. We had been campaigning for this for years. Although everybody agreed the system was corrupted, very few believed that a minister would be strong enough to take on the Treasury civil servants and kill it off.
However, our euphoria was to be short-lived. When the minister did make his announcement, we got more information about how the death of the HRA would be played out. Those clever Cambridge firsts in the Treasury – who know the price of everything and the value of nothing – had decided it would be a wicked wheeze to tax most landlord councils for the failure of central government housing policy. They had created a cunning system for costing the proposed buy-out of notional debt, the upshot of which was that councils would need to find between £13bn and £21bn to gain their freedom.
Switch to one year on and the scale of the financial crisis created by the last government had become clear. Most of us doubted that an incoming Conservative minister would drive a stake through the heart of the HRA.
Much to his credit though, housing minister Grant Shapps has been able to do almost exactly that, albeit the civil servants have now upped the buyout price several times to approximately £27bn.
The passing of the Localism Act in November 2011 could finally sound the death knell for the old complex centralised system of rent pooling and subsidies. In its place from April 2012 will be a local model of self-financing for council housing. As positive as this news is for all stock-owning councils, it needs to go further still to provide the housing the country needs and to build our way out of recession.
Not only was the old system hugely complex and opaque, it was unfair. It effectively involved an ever-increasing proportion of rents disappearing into Treasury coffers, leaving council landlords with inadequate funds to maintain, improve and replace their assets. With the settlement calculated on an annual basis, councils could have no certainty about income and could not therefore make long-term plans to invest in decent, well-managed, affordable homes.
Ministers have listened to councils’ calls for change, and rents will now be retained and invested in local housing. Councils will be able to make long-term investment plans to meet local housing needs. Better homes mean better opportunities for the people who live in them and can save the public purse significant costs down the line. In short, the reforms will give taxpayers and tenants a better deal.
That is not to say that the government has got it completely right. The reforms have come at a price, with councils taking on debt that could, by the new financial year, total almost £30bn. The LGA has argued that this level of debt is too high – every pound spent servicing debt under the new system is a pound less spent on laying bricks. The price grew larger for some authorities when the revised settlement was published alongside the Housing Strategy in November.
Despite these challenges, councils remain largely confident that, with sensible plans in place for their housing business over the next 30 years, they will be able to manage the debt. There remain, however, other elements of the policy that will inhibit councils’ flexibility to be creative and ambitious with those business plans. They will also result in a huge missed opportunity for investment in housing, particularly for building to meet the growing need for affordable homes.
The first of these issues is the cap imposed on the amount each council can borrow for their housing business, which will seriously constrain their ability to mobilise investment locally. There is no clear rationale for capping councils’ borrowing for housing purposes, when no such restriction applies to borrowing for other purposes.
Councils have a strong record of sound financial management, unlike central government in the past. They adhere to CIPFA’s Prudential Code, which has proved to be an effective approach to managing borrowing. The cap will effectively switch off access to funds that could be available to build the homes the government has agreed we need.
Secondly, the principles of self-financing would logically mean that when a council house is sold under the tenants’ right-to-buy scheme, the money from that sale should be reinvested locally to meet local housing needs. However, that principle has not been translated into practice. Currently, councils must hand more than 75% of the income from right-to-buy sales to the Treasury. That is due to continue under the new system, much to the concern of councils.
Recent announcements about reinvigorating the right-to-buy scheme make it more important than ever for the money to be retained locally. They also give government an opportunity to rethink the policy. Ministers have said that the new policy will result in a like-for-like replacement of affordable homes lost through the scheme. Allowing councils to retain the full sales receipts would mean the money could go directly into development and construction projects.
I would argue that having a centralised bidding process would waste time and money on unnecessary bureaucracy, as well as being contrary to the principles of localism. It also runs the risk of recreating a national system of pooling and redistribution of subsidy that sounds horribly like the one we are about to succeed in abolishing.
There are a number of ways councils could innovatively invest to bring forward new affordable housing quickly, making use of pockets of public land and redevelopment sites that would not be unlocked through other means. But this requires councils to have access to the full sales receipts. Combined with the cap on borrowing, any creaming off of RTB proceeds will severely constrain councils’ ability to make significant changes in the provision of decent, affordable social housing.
Self-financing should be an opportunity to give councils the freedom they need to be innovative and ambitious in how they manage, maintain and improve the existing stock, and to invest in new homes.
If there is an increase in RTB sales and receipts are clawed back, councils will find themselves presiding over a fast dwindling supply of housing. This could undermine the very premise of self-financing, because they will not have sufficient resources to invest in new housing stock and related regeneration projects.
Of course, the reforms to the housing finance system are not taking place in isolation from the wider housing and economic context. To meet current ambitions for economic growth, we need more jobs, more houses and more infrastructure. That is why housing is emerging again as a priority for this government. November’s Housing Strategy included policies aimed at tackling the housing shortage: such as helping builders and first-time buyers and setting out ambitious plans for more affordable housing. Councils have a major part to play in the success of most of those policies, whether through their planning role, by putting in land, bringing empty properties back into use, or providing expertise and advice.
However, the government is missing a trick by not recognising that councils have the appetite and the capacity to play a greater role in building new homes. Councils understand local housing markets and needs far better than central government officials, so it makes no sense that decisions about funding for housing are made in Whitehall.
Councils have also shown they can provide excellent value for money in building new homes – about £10,000 less per home than housing associations. In addition, they recognise the importance of working in partnership with developers and housing associations to make the best use of resources, expertise and opportunities for development locally.
We have seen a lot of positive steps that will promote housing development: the New Homes Bonus provides a powerful incentive to councils to facilitate new housing; the government’s planning reforms will give local areas more control over development locally; the Community Infrastructure Levy will help bring forward the infrastructure we need to support new homes.
All of these will require councils to provide strong local leadership. We are up for that challenge. Government must allow us the freedom to rise to it.
Gary Porter is leader of the Conservative group at the Local Government Association and leader of South Holland District Council. This is an edited version of an article that first appeared in A new era for council housing, part of the Localis Policy Platform series www.localis.org.uk
