Housing Revenue Account reform ‘has not been good for councils’

14 Jul 16

The self-financing settlement offered to councils by government in order to increase council house construction has failed to live up to its promise, CIPFA and the Chartered Institute of Housing have found.

According to a joint report by CIPFA and CIH, launched today at the CIPFA conference in Manchester, the £13bn in additional debt taken on by councils under the settlement has not increased construction capacity, has led to considerable financial uncertainty and has reduced councils’ incomes and ability to invest.

In the report’s foreword, Rob Whiteman, chief executive of CIPFA, and Terrie Alafat, chief executive of CIH, explained that government decisions over the four years since the settlement was established have “critically reduced” its success.

“Long-term investment solutions require a stable operating environment. Policy changes such as rent reduction and the widening of Right to Buy have very materially affected councils’ plans to build new homes and maintain existing ones.”

The settlement, agreed in 2012, was intended to hand control of council house finance from the government to councils, so that councils could invest in more new homes. The deal was intended to last over the long term.

Because the viability of the settlements would be threatened if there were unexpected or significant loss of income, assets or the ability to maintain service levels, the coalition government made a number of promises to convince councils to take on the additional risks.

The majority agreed to shoulder £13bn worth of extra debt in order to become ‘self-financing’.

But in the subsequent four years, rent reduction schemes led to substantial decreases in expected rent, the expansion of Right to Buy led to the quicker-than-expected sale of assets, and welfare reforms made rent collection increasingly difficult.

Self-financing originally offered the potential capacity to build more than 550,000 new homes over 30 years. Inflationary changes already reduced this to 160,000. The rent reduction policy brought this down further, to 45,000 – no higher than levels currently being achieved.

The report warned that government proposals on higher-value sales were likely to have a further impact without appropriate compensation for any reduction in cash flows.

A survey of local authorities conducted for the report confirmed that many see considerable challenges from the reduction in rental income over the next four years.

Some are investigating alternative approaches to increase construction, but many have reduced or abandoned growth ambitions altogether.

Legislation only allows for the settlement to be reviewed by central government. The report said that if local government were able to trigger review, it would have a compelling case to do so.

As it stands, local authorities have only limited options to protect their viability. The report recommended avoiding new borrowing, seeking revenue savings, and considering new offers on house building for central government in return for commitments that would deliver more stable futures.

Only central government is able to restore viability to the overall settlement, the report said. It made a number of recommendations, including methods to mitigate the effect of policy changes, ways to compensate authorities’ business plans in light of proposals related to higher-value sales and offering refreshed deals to stock-holding councils.

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