I was one of the many council housing finance geeks working with councils to influence the self-financing settlement for Housing Revenue Accounts (HRAs) back in 2012.
It was aimed at making council housing finance more accountable and transparent at the local level as well as more business-like and efficient. The process of moving from a national subsidy system to individual self-financed HRAs was also designed to make the finances sustainable in the long term and allow for growth and investment.
It was a hard-won deal between tenants, councils and different governments over a number of years that ended up not delivering on its promise from the outset, only to further suffer from a series of policy and financial setbacks in the years following 2012. These have meant that most councils do not have a sustainable HRA – just 14 years after the original settlement. The sector is now asking the Government to put things right, but there are many options to look at.
Why self-financing replaced the ‘tenant tax’
Before 2012, HRA revenue finance was tightly controlled at a national level within the HRA Subsidy System. The key feature was an annual calculation made to capture surpluses generated by most councils through their rents and redistribute them to others whose rental income did not cover their necessary expenditure. Part of the surpluses also went to the Treasury.
This was dubbed the ‘tenant tax’ by tenant groups who campaigned for change in the years running up to the settlement. They objected to their rents being used to repair homes at the other end of the country when new homes or improvements could have been made in their areas. Councils also objected to the lack of control and uncertainty inherent in the annual determinations, which left them with no ability to plan long term or manage maintenance over multi-year projects.
During earlier years of the subsidy system, the Treasury topped up the pot to ensure that basic management and maintenance could be covered by all councils. But as rents increased and assumed expenditure did not, the overall system went into surplus. By 2008 the vast majority of councils were paying into central government, and the Government was making a surplus on council housing.
This only increased the arguments for a self-financing deal and could have provided for a more generous and sustainable settlement, had it not been for the financial crash and its impact on wider government finances.
How a sustainable settlement became unsustainable
The deal that was finally offered to councils by the Coalition Government in 2012 meant most councils had to take on additional debt and did not build in any allowance for investment in new homes. These councils had effectively to buy themselves out of the system to compensate the Treasury for its loss of annual income. Councils therefore took on debt which the Government calculated would be sustainable for them to hold alongside managing their homes. Collectively, councils took on £8 billion of extra net debt.
This was not an appealing offer to many councillors or tenants, especially where Housing Revenue Accounts started out debt-free, but ultimately, they agreed it was a price worth paying for a more independent future which would allow them the freedom to make local decisions and plan over the long term.
Unfortunately, the assumptions underpinning the self-financing deal did not last long –Right to Buy was immediately ‘re-invigorated’ and many more sales were made than assumed, reducing the rental income the 2012 debt calculation was predicated on.
Rent policy was then changed significantly. Instead of increasing steadily by inflation, rents were reduced by 1% in cash terms each year from 2016 to 2020 taking a significant amount of money out of councils’ budgets.
Alongside that loss of income have been unforeseen drivers of increased costs; the need for increased building and fire safety work and meeting new decent homes and energy efficiency targets, alongside much higher cost inflation than expected. Whilst councils were always prepared for some ups and downs, these pressures have pushed some to breaking point. There is simply not enough money in the system to allow council housing to be run properly.
Why debt write-off alone won’t solve the problem
Shelter has recently published further analysis on debt in the HRA by Savills which builds on work they did for CIH in 2024 to look at an updated debt settlement. Savills conclude that “there is little or no capacity to support the ability for local authorities to contribute meaningfully to the government’s target of 1.5million new homes and therefore to enhance the delivery of social rent homes.” Shelter is therefore calling for the write-off of all HRA debt.
We agree there is an urgent need for HRA debt to be looked at, but councils’ ability to invest in new homes will still be limited by the needs of their existing homes. Due to different original rent levels, the type and age of the homes they own and the level of housing need in their areas, each local authority is in a very different position now compared to 2012. London and other inner-city authorities are facing significantly increased costs in dealing with building safety and the need for wider regeneration, whilst others have lost more homes through the Right to Buy and lack the land to replace them.
A new settlement for a new council housebuilding era
We are therefore calling for the Treasury and MHCLG to be tasked jointly with reviewing these issues to facilitate council house building. The review should meaningfully engage with councils and tenants as well as sector experts at the earliest opportunity to ensure that key stakeholders concerns and aspirations are fully understood and that lessons from the past are learnt.
It took almost a decade for councils, tenants and the government to develop and agree the principles for the original self-financing settlement. We urge the new administration to start this work urgently so that councils can be placed back onto a sustainable footing to invest in both existing and new homes. Tenants have already waited long enough.
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