Thirty years of challenging the public borrowing rules

At a time when the serious media are questioning the wisdom of Rachel Reeves’ fiscal rules, it’s easy to forget that this is a longstanding debate, and that housing has been a key part of it. Back in 1995, with the prospect of a new Labour government that might want to reverse the decline in public housing investment, there was similar interest in how fiscal rules could be changed to make it easier to do this without upsetting the markets. In June that year, a report called Challenging the Conventions aimed to show how it could be done.

Less than a decade earlier, housing association investment had been increased significantly by classifying it as outside the public sector, with only the grant they received counting on the government’s balance sheet. The ‘challenge’ in the new report – written by John Hawksworth of what is now PricewaterhouseCoopers with housing finance expert Steve Wilcox, and published by the Chartered Institute of Housing – was to argue that local authority housing investment should have the same advantage. Essentially, the report said that international accounting rules allowed borrowing by ‘public corporations’ to be kept out of the main measure of government debt, and that the UK was out of line with other countries and should make this change. It argued that council housing operations are ‘public corporations’ because they are financed from their own earnings (rents) and should be able to borrow prudentially without being subject to the restrictions imposed by the Treasury’s ‘PSBR’ (Public Sector Borrowing Requirement) measure, which only the UK used.  At the time it was estimated that the change could allow extra borrowing for investment of over £1 billion, then a transformative figure.

Lobbying around the report, including meetings with the Labour Shadow Treasury Team, revealed that the only real concern was the attitude that would be taken in the City and financial markets. It also won the support of the Observer’s economist Will Hutton. Extensive consultations with city bodies led to a follow-up report, Consensus for Change, in March 1996, which showed little opposition to the measures proposed. However, when Labour was elected in 1997 its immediate concern – just like Rachel Reeves’ – was to reassure the markets, and to not rock the boat any further given the dramatic decision to make the Bank of England independent.

It must be said that the Labour government did not see building council housing as the solution to the housing crisis and relied entirely on housing associations to do that. Some smaller changes, like the decision to ‘release’ capital receipts from right to buy sales, did proceed. Even so it was extraordinary how Challenging the Conventions started a wide debate in the housing and finance worlds – also taken up by the tenants’ movement – to ‘change the rules’ to enablecouncil housing investment. It was slow, but this would eventually bear fruit.

Yet another CIH report, Council Housing: Financing the Future, showed the huge disrepair backlog that had built up in the council housing sector. Rather than changing the rules, the Labour government had followed a policy of only releasing investment if councils agreed to transfer their stock to a housing association. This provoked a huge campaign for the option of retaining stock under council control. Housing minister Nick Raynsford realised that a new mechanism was needed to bring in the required investment and meet tenants’ and councils’ demands to keep their stock.

The answer, in Labour’s housing green paper of April 2000, was arm’s length management companies. ALMOs would enable councils to retain ownership but receive extra subsidy in return for handing management over to more business-like bodies and achieving a predetermined standard in an inspection. They were run by boards made up of council nominees, tenants and independent experts. This would enable the social sector to largely meet the new Decent Homes Standard within the target period of ten years, a success about which Labour was remarkably reticent. During the Labour government the Office for National Statistics (ONS) did, quietly, begin to classify council housing as a set of ‘public corporations’ in the national accounts, although as it stayed in the ‘PSBR’ this made little difference.

The real impact of the Challenging report came later – when John Healey was housing minister. He was keen to put councils’ housing revenue accounts (HRAs) on an independent and localised footing that would reduce Treasury controls. By then, council housing was in surplus. Negotiations led to a complex ‘settlement’ which gave councils operational independence to manage their homes in exchange for taking a share of the debt previously accrued by council housing nationally. The deal was lost when Labour left office in 2010, but it suited the ‘localist’ agenda of the incoming Conservative government who delivered the changes in 2012 (albeit on less favourable terms).

Councils have never, however, escaped the grasp of the Treasury and the disruption caused by central government decisions. Huge cuts to social housing grant under the Tories led councils to look to their HRA surpluses to support new building. Seemingly random decisions – like George Osborne imposing rent reductions for five years to save housing benefit costs – undermined a system which was modelled on gradual rent increases. Occasional high points – like 2018 when prime minister Theresa May ended the ‘caps’ on councils’ borrowing that the Treasury had insisted on in 2012 – have masked a slow slide back into unsustainability.

CIH and Savills showed last year that, as a result, councils can sustain £12 billion less debt than was expected in the 2012 settlement. Nevertheless, as LHG’s 2021 report The Missing Solution: Council Homebuilding for the 21st Century showed, councils are more determined than ever to build new homes but are faced with an increasingly desperate need to invest in their current stock and to improve the quality of management.

Although the seemingly arcane debate about ‘the rules’ has lasted 30 years, and there was never a clear moment when the proposals in Challenging the Conventions were implemented, it has had a profound impact on the council housing sector, enabling it to survive when its death was widely predicted. At one time it was hard to find anyone on either government or opposition benches willing to speak up for council housing, now it is widely perceived as key to solving the UK’s housing crisis. It is an extraordinarily successful model that is capable of delivering high quality homes at genuinely affordable rents. Now, as in 1995 when Challenging the Conventions was launched, it just needs a decent financial framework and real commercial freedoms to enable it to flourish.