Tag: Housing revenue account

Categories
Blog Post

How to increase investment in council housing and capitalise on the economic benefits

The Prime Minister has made clear his ambition: to “oversee the biggest council house building programme since the post-war period”. This is a hugely positive step forward for the Government’s housing policy; it marks a generational break with 45 years of housing policy that failed to articulate a clear aim beyond merely maximising overall output – with little regard to affordability for people on low incomes or at risk of homelessness. And, crucially, it will help to capitalise on councils’ knowledge of local housing need, significant land value capture powers, and masterplanning capabilities.  

Yet the decline of council housing was driven not only by housing policy, but by the rise of restrictive fiscal policy that actively constrains government investment in social homes and has pushed Housing Revenue Accounts (HRAs) into existential financial jeopardy. Despite being justified under the guise of ‘fiscal responsibility’, debt-to-GDP spiked sharply during austerity while investment in public assets like social housing collapsed and vital services were cut – demonstrably impoverishing both people and the state.

At the Autumn Budget, to realise its ambitions on council housebuilding, the Government must reconnect political ends with economic means and drive a change in economic consensus that places social housing investment at the centre of national renewal. In an upcoming report on council house building, we argue the Budget marks a clear opportunity for the Government to cancel £31.8bn in HRA debt to unlock councils’ capacity to build, covered in detail here, and do more to bring forward and increase funding – ensuring its fiscal framework supports rather than hinders greater investment in council and social homes.

Sign up to Red Brick’s free newsletter

The financial and economic case for cancelling HRA debt and increasing investment

Modelling commissioned by Shelter and undertaken by Pragmatix sets out an ambitious scenario for the Government to cancel HRA debt and provide the necessary investment to deliver 284,000 social rent homes within a 10-year trajectory – in addition to those already expected to be delivered through the Social and Affordable Homes Programme. Pragmatix estimates that the economic benefits of the policy would outweigh its costs within twenty years, around a decade after the final homes are built. Over the report’s 60-year appraisal period, the modelling estimates a net economic benefit of £141.5 billion, including substantial savings to the public sector from reducing reliance on more expensive forms of housing. Government departments are estimated to save £64.7 billion over the period, including £26.3 billion for the Department for Work and Pensions, while savings to councils from reducing the number of households in temporary accommodation eventually reach £672 million a year.

Cancelling HRA debt is broadly fiscally neutral; the majority of debt is owed to Treasury, meaning it is largely a series of inter-government transfers, involving cancelling debt that the public sector owes to itself.

The fiscal framework should support rather than hinder investment

Within this Parliament, debt cancellation and delivery, as outlined above, is also compliant with the Government’s ‘investment rule’, using around 56% of the current ‘headroom’ as of the OBR’s 2026 spring forecast. While council and social housing is a more-than-worthy use of investment ‘headroom’, this self-imposed restraint on public investment creates artificial trade-offs with other policy areas and reduces the Government’s appetite to increase funding. More flexibility is therefore needed within the fiscal framework to ensure that the long-term economic net benefit of investing in social housing is recognised.

The Government’s fiscal framework disincentivises social housing investment

The narrow and short-term focus of the current fiscal framework discourages social housing investment and hinders the Government’s aim of delivering a council housing revolution. Firstly, the Government’s rolling target (the ‘investment rule’) requires its chosen debt measure to be falling as a share of GDP in the third year of the OBR’s forecast period – but this disregards the longer-term savings and additional revenue social housing generates.

Secondly, the Government’s chosen debt measure – Public Sector Net Financial Liabilities (PSNFL) – fails to value the physical asset created on the Government’s balance sheet when it funds a new social home.

Thirdly, PSNFL creates a two-tier fiscal system that favours social housing delivery through housing associations and for-profit registered providers over public-led social housebuilding from councils and development corporations. Unlike most EU countries that use a general government debt measure, PSNFL includes the entire public sector. It means that our fiscal rules include the debt of our public social housing providers, even though their debts are paid for by rents and other independent income as opposed to taxation or wider government expenditure – i.e. they are classed by the ONS as ‘market producing’.

Finally, because of this public-sector focus in the debt measure, the central government financial asset recorded under PSNFL when investing in council housing (created by loaning money to HRAs via the Public Works Loan Board) is actually netted off by the liability held by the loan recipient (the council or development corporation) in the national accounts. This leaves only the liability on the Government’s balance sheet created from the borrowing it undertook to ‘fund’ the loan. In contrast, liabilities held by private registered providers to pay back loans to central government are excluded from PSNFL, making these loans more fiscally attractive for central government: the asset (the loan) and liability (borrowing to ‘fund’ the loan) held by central government cancel each other out.

The consequences for social and council housebuilding are stark

Rather than seeing good growth and healthy public finances as the outcome of social housing investment, the current framework forces housing policy towards day-to-day spending on housing benefit and expensive temporary accommodation – which flows outwards from the public sector to private landlords. Investment remains far below what is needed:

  • Social and Affordable Homes Programme grant, while welcome, only enables the delivery of 18,000 social rent homes a year on average – we need to deliver 90,000 a year for 10 years to end the housing emergency.
  • Interest rates from the Public Works Loan Board available to HRAs remain far too high with 50-year maturity lending at around 6%.
  • HRAs and public development corporations are excluded from £2.5 billion in 0.1% interest loans recently provided to housing associations and for-profit providers, a distinction that reflects their different treatment within the fiscal framework.

Fiscal reform is needed to support the scaling up of council housing delivery

To deliver its promise of a council housing revolution, the Government must scale up current grant funding and available low-cost finance to much higher levels. In doing so, it must ensure that councils and development corporations, who were the key players of the post-war social housing boom, are empowered to support the Government’s social housing ambition. In an upcoming report later this month, we argue that, if the Government remains committed to not change the current fiscal rules, it should instead exclude HRAs and development corporations from PSNFL. This would finally end central government incentives to limit their borrowing, devolving power to HRAs and development corporations, and support the Government to provide them with the low-cost loans needed to deliver social housing at scale.

Email your councillor today and ask them to add their name to a letter to the chancellor, urging him to knock down the barriers to getting councils social homes again.  https://campaigns.shelter.org.uk/tell-your-cllr-fight-for-social-homes

Sign up to Red Brick’s free newsletter

Would you like to write for Red Brick? Email rose.grayston@gmail.com to pitch your piece (c.600-900 words)

Categories
Blog Post

If Andy Burnham is serious about a council housebuilding revolution, what does he need to know about the self-financing settlement for the HRA? 

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. 

Sign up to Red Brick’s free newsletter

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.

Sign up to Red Brick’s free newsletter

Would you like to write for Red Brick? Email rose.grayston@gmail.com to pitch your piece (c.600-900 words)

Categories
Blog Post

The secret of council housing self-financing

On a cold January morning local councillors, tenants’ reps and Stephanie Cryan, Southwark’s lead councillor for housing, are walking around the Longfield estate in South Bermondsey. The estate was built between 1930 and 1950. Next to one of the old blocks are steps down to an air raid shelter, bricked-up when the war ended. There is a big archway built into one of the blocks for coal horses to pass through and the older blocks are only four floors high so the coal man would not have to walk up too far. The kitchens are small because middle class architects thought working class families spent too much time in the kitchen and should spend their time together in the living room.  

The councillors are asking for the communal staircases to be painted. Stephanie runs through the major works needed across the borough. The cost of keeping Southwark’s communal heating systems working, plus decarbonisation is £350m. On top of this is the cost of fire safety works, keeping lifts working and buildings watertight.

Walking around the estate, it is as well-kept as it can be without major investment, with no signs of any vandalism. The active Tenants and Residents Association has successfully campaigned for an outdoor gym and children’s play facilities. It is typical of thousands of estates across the country. If we can understand why residents on the Longfield estate are having to wait for their estate to be decorated we will understand the way council housing is funded, or rather underfunded.

The trail quickly gets tricky. The estate built by the old Bermondsey Borough Council, would have been funded by a mixture of government subsidy and local authority rates (now council tax) and borrowing. Where we are on firm ground is the knowledge that if the rents paid over the years by Longfield estate tenants had been ring-fenced between when the estate was built and today, the debt would have been paid off, the management and maintenance costs covered and there would be a substantial surplus to pay for the extensive modernisation of the estate. Unfortunately for many years the money paid by Longfield estate tenants and the costs of running the estate have been swallowed up by local and national rent and cost pooling. So more investigation is needed.

There is income pooling within the council. Over the years Southwark has had, exactly what Stephanie is describing today, more problematic estates that have demanded more extensive works to keep them liveable.

However the bigger picture is more significant. Historically council tenants’ rent money has leaked away to pay for other national and local commitments, such as keeping the rates bill down. A detailed history is provided by Martin Wicks, Labour Campaign for Council Housing in his blog: 

https://thelabourcampaignforcouncilhousing.files.wordpress.com/2021/02/caseforcancellingchdebt.pdf

In the 1980 Housing Act the notion of a ring-fenced Housing Revenue Account was introduced. The idea was that within each council area tenants’ rents should be spent on paying off historic debts and the management and maintenance of their housing. As Wicks demonstrates, this turned out to be a fiction, with council tenants not on housing benefit paying towards the housing benefits of council tenants who needed support. Also, the Conservative Government imposed the Right to Buy on local councils, which still represents this country’s largest privatisation with 1.8m council homes being sold with an estimated value of £6.4m.

The financing of council housing was under the control of central Government, with councils only finding out what their annual allocation would be three months before the start of the financial year. The effect was that councils who were the custodians of a housing stock with a combined value of billions could only plan a year ahead, when a long-term asset management strategy was needed.

The last Labour Housing Minister, John Healey, listened to campaigners and decided that housing should truly be self-financing, at least in future. The idea of self-financing Housing Revenue Accounts was entirely sound, even in the context of historic injustices. Councils for the first time could implement a proper asset management strategy, over 30 years. Councils had certainty over their income, rents would increase with inflation and they could predict income from leaseholders’ service charges. On the expenditure side, councils could assess their stock and have a long-term plan for major works and management.

The problem with Healey’s sound policy was that the level of debt inherited by councils was determined by the incoming Conservative Government, committed to austerity. Wicks argues that the Treasury manipulated the debt settlement and imposed a debt settlement of £26bm, far higher than the actual debt. The debt was divided, unevenly, between the 169 English councils who still owned council housing. A critical assumption was that at least central Government would let councils get on with the running of their council housing.

The concept of self-financing Housing Revenue Accounts was introduced in the 2011 Localism Act and became operational in April 2012. Since its introduction, the financial situation for council tenants has become significantly worse.  There was no legal protection for local councils written into the Localism Act guaranteeing that the debt would be renegotiated or written-off if circumstances changed. However, critically, Part 7, Chapter 3, clause 169, does allow for the level of debt to be reassessed if there is a ‘change in any matter taken into account when making the original settlement’. Councils do not have a legal right to demand a reconsideration, but the door is open to make a reasoned case.

The primary assumption that underpins self-financing is that there would be certainty over income and that rents would increase at least with inflation each year.  However for wider political reasons, George Osborne imposed a 1% per year rent cut for four years, wrecking newly written Housing Revenue Account business plans.

The Grenfell tragedy has raised the profile of fire and building safety, with legislation on its way requiring councils to undertake billions of pounds of work that no one envisaged when preparing their business plans. Also, not written into business plans is the steep acceleration on spending required to decarbonise council housing as a response to the climate emergency.

Councils are now committed to tackling damp and have accepted that a tenant’s lifestyle cannot be used as a reason to avoid responsibility. Damp is an issue for some tenants on the Longfield estate, as the estate is single brick, rather than the more modern cavity wall, with insulation.

Some councils experienced a significant dip in rent and leaseholder income during the pandemic, particularly as there was a moratorium on taking legal action against tenants in arrears. This problem will outlast lockdown, as the county court system has collapsed, meaning that legal action to recover outstanding debts will take years.

It was optimistically hoped that Housing Revenue Account surpluses could contribute towards the cost of building new council homes. However, building costs have spiralled. There is also an equity issue about whether council tenants, on lower than the local average income, should be paying for tackling the societal problems of climate change and homelessness. Even if the outstanding debt disappears councils will still need significant government capital funding to start to address 40 years of underfunding.

Unsurprisingly, the self-financing settlement is imploding.  Wicks reports that the council housing debt bill was virtually unchanged at £25.95bn in 2019/20. One part of the explanation is that councils have to start by paying off the interest before they can start to reduce the principal.  Additionally there is the irony of councils saddled with debt being forced to borrow more to meet their commitments. At least one council with a high starting debt and huge safety requirements has agreed the deferment of debt payments with the Government.

There is the possibility that the historic debt on council housing will become a version of the student loan debt, whereby the Government accepts that the debt cannot be paid back, but it stays on the balance sheet as an asset. Whilst delaying debt repayments provides short-term relief, the problem with this approach is that councils will need to hold sufficient reserves in their Housing Revenue Accounts to pay the government the back-payments if they are demanded. This means that council housing will continue to be denied the investment it needs.

What our investigation has revealed is that residents on the Longfield estate, along with most other tenants are not getting the modernization that council tenants collectively have paid for. This issue is disguised because in much of the country council rents are substantially below private rents. Council rents are sub-market, but this is because they much more closely reflect the actual cost of providing and managing housing. Market rents are high because a substantial profit is being made.

Wicks was instrumental in the drafting of the housing motion passed at the Labour Party’s 2021 conference. Attention has been focused on the commitment to build 100,000 new council houses per year. However another important clause in the motion referred to the need to maintain the council housing we already have and specifically to ‘review council housing debt to address the underfunding of the Housing Revenue Account’.

Wicks makes the case that the ‘bogus debt’ should be written off. This is not as outlandish as it may seem. To put the £26bn debt into context, housing expert, Anna Minton, writing in the Financial times on 21.1.22, estimates that the cost of quantitative easing in the 7 years after 2008 was £445bn and the cost of emergency pandemic relief was £455bn. Chancellor Rishi Sunak is estimated to have written off £4.3bn furlough and other business relief payments that were fraudulently claimed. Writing off a bogus debt of £26bn no longer seems such a big ask.

Whilst council housing financing remains so opaque and unfair, the residents of Longfield estate know that they are getting a bad deal, without knowing why.

Andy Bates
Andy Bates

Andy Bates is an Executive Member of the Labour Housing Group.

TWITTER
Categories
Blog Post

HRA ring fence: the need for scrutiny

Rose Grayston

Rose is editor of Red Brick. She has worked to develop and win support for solutions to the UK’s housing crisis as Expert Adviser to Matthew Pennycook, Minister for Housing and Planning, as a Labour activist and founding member of Open Labour, and through roles at Shelter, the New Economics Foundation and Generation Rent.

<strong><span class="has-inline-color has-accent-color">Steve Hilditch</span></strong>
Steve Hilditch

Founder of Red Brick. Former Head of Policy for Shelter. Select Committee Advisor for Housing and Homelessness. Drafted the first London Mayor’s Housing Strategy under Ken Livingstone. Steve sits on the Editorial Panel of Red Brick.

In previous posts we welcomed the Government’s decision to implement John Healey’s proposals to reform council housing finance through ‘self-financing’.  We expressed a couple of doubts about the new proposals, notably that the Government had abandoned Labour’s plan to allow councils to retain all of their capital receipts from council house sales.

One other noteworthy distinction between the two sets of plans concerns the operation of the Housing Revenue Account ‘ring fence’ – ie the rules governing transfers between the HRA, which records income and expenditure on council housing, and the General Fund, which covers the rest of council spending. 

John Healey’s ‘Prospectus’ published a year ago showed the need for gradual reform of the way the ring fence operates to make the system fairer for tenants.  It showed that at least 40% of general management costs are incurred on what it defined as ‘non-core’ services, services that arguably should not be met from rents but from the general income of the council.  This one statistic makes a mockery of any accusation that tenants are ‘subsidised’.  Therefore, over time, it was proposed that non-core services should be regarded as services provided by the landlord but funded from sources other than rent.  The consultation showed virtually unanimous support for the continuation of the ring fence and the Prospectus proposed that new updated guidance should be issued.

In the Tory proposals ‘Implementing self-financing for council housing’ published in February 2011 the ring fence merits a single paragraph.  On the principle it accepts that the system should ensure that ‘council taxpayers do not subsidise services specifically for the benefit of tenants and that rent is not used to subsidise functions which are for the benefit of the wider local community’ – although that statement is open to several interpretations.  My concern is that it states ‘In line with our emphasis on localism we do not intend to issue new guidance on the operation of the ring-fence. We expect local authorities to take their own decisions, rooted in the principle that ‘who benefits pays’.’  The last guidance was issued in 1995 when council housing finance was very different from today.

Although the legal position will not change, the lack of guidance, the dilution of Labour’s plans for independent regulation of council housing, and the message the government is sending out that the operation of the ring fence is down to local discretion, combine to create a real danger for tenants.  Council Finance Directors and local politicians of all hues will look enviously at a fairly well-funded HRA and see opportunities to shift resources to help their beleaguered General Funds. 

The ring fence is easily breached and open to manipulation.  In one council I worked with, there were more than 60 types of transaction between the HRA and the General Fund.  These ranged from recharges for council overheads and democratic costs, to dozens of service level agreements with charges for items like central accountancy and HR, to procurement of office furniture, to rent for council premises.  Then there are age-old practices where council tenants are charged twice, as rent payers and as council tax payers, for a single service – for example paying towards general street lighting but also paying extra for lighting on estate roads. 

These charges have often been set historically with little challenge.  One of the many benefits of ALMOs was that the process of setting up the management agreement required recharges and SLAs to be identified and renegotiated, a process sharpened by the need to obtain 2 stars in the inspection, which led to better services and significant cost reductions.  My fear is that local discretion will reverse this progress and cost tenants dear over time.  The temptation will be just too great – and it will undermine the move towards council housing being run as a self-financed business within the council, with services paid for out of rents in a very transparent way.  The case for central guidance is strong.

Tenants have been vigilant on this in the past – witness the ‘Daylight Robbery’ campaign a few years back.  In future, detailed tenant scrutiny of the local arrangements will be essential, and well-informed campaigning tenants groups could make a real difference.