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Ending the ‘tenants tax’?

By Monimbo
We’ve got used to the housing minister trying to have his cake and eat it, but even he doesn’t usually manage to do it with several cakes in the same mouthful.  This week though, he announced the end of the ‘tenants tax’ and ‘gave councils the freedom they need to build homes in their area’.  Both of these would be good moves, but is this actually what he’s doing?
First of all, his ‘freedom’ is of course circumscribed: when self-financing of council housing starts on 1st April, all councils will be subject to a cap on their borrowing.  So they won’t have the freedom to borrow to the levels that the prudential borrowing rules – that apply to all council finances – would allow.  Some councils will still have enough ‘headroom’ to borrow and build more, but by no means as much as they could do if they were simply allowed to follow the normal rules.
Regular readers of Red Brick will know that this is because council housing is still included in the government’s main public sector borrowing measure, when it doesn’t need to be.  Real ‘freedom’ would mean removing the caps – and council borrowing would still be limited to what they could repay from their income under prudential rules.
The ‘tax on tenants’ is Mr Shapps’ recognition of arguments long put by Defend Council Housing and many others, that when council housing makes a surplus (as it has since 2008) tenants are effectively paying a tax, because their rents are higher than they need to be and money is being skimmed off by the Treasury.  Working tenants who don’t get housing benefit, in particular, really have been paying a tax.
Now it’s true that under self-financing any spare rental income will no longer go to the Exchequer and will be kept by councils, but that’s because the very same Exchequer has loaded councils with extra debt, which will go across to government on 1st April, as the price for self-financing.  This is to compensate the government for the massive revenue the ‘tenants tax’ would have produced had it remained in place.
To be fair to Mr Shapps (as Red Brick always is), this was going to happen under Labour’s plans too.  Rents are assumed to grow with RPI, with rents set every April based on inflation in the previous September plus an extra amount to bring them closer to HA rents.  It just so happens that last September inflation was exceptionally high. This has enabled the Treasury to jack up the extra debt to a whopping £8bn, and has created headlines about massive rent increases, especially inLondon.
Given that the government is determined to reduce the deficit, it’s perhaps not surprising that it has grabbed the money. Because while on Treasury definitions this debt is only moving within the public sector, on international measures the £8bn will reduce the ratio of General Government Debt to GDP, which is a key measure in determining things like the UK’s credit rating (for a more detailed explanation, see the UK Housing Review).
There is of course an alternative, if the government had really wanted councils to have more freedom.  Instead of taking the money, it could have increased the headroom given to councils.  This would have had two advantages for beleaguered councils.  One is that they could plan to borrow and invest more. The other is that they could have reduced their rent increases.  Or indeed a mix of the two.  Either way the benefits would have stayed at local level.  Instead, rather than abolish the ‘tenants tax’, Mr Shapps has actually increased it.
Back to those cakes.  If the minister agrees that tenants have been paying a ‘long-standing’ tenants tax, how come that at the same time he can argue that councils tenants are ‘fantastically subsidised’?

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The build up to HRA reform

Monimbo
With self-financing for council housing just 139 days away we can expect a plethora of reports and advice to councils on what they can do to maximise the benefits.  The latest has been produced by Navigant for London Councils, which adds to an earlier one by PwC for the Smith Institute.  CIH has been producing bulletins for members and has teamed up with CIPFA to create an online resource on self-financing.  What are they all saying?
As everyone knows, the big prize from self-financing is that councils get to control their rental incomes for the first time (or, at least, for the first time in recent memory).  PwC emphasises the magnitude of this by assessing the total income as being more than £300bn over the next thirty years, though of course the real figure could be very different from this.
However, as everyone also knows, the big snag is the cap that will be imposed on each council’s borrowing, which will vary in its effects: some councils will have very little ‘headroom’ above the cap for extra borrowing on top of the new level of debt they have to service, others will have quite a lot.
For the first time, there are real political decisions to be made about setting rents and using the revenue they generate.  Not surprisingly, this is also causing real tensions. First, do you put rents up to maximise income and borrowing, or do you keep them down to reflect tenants’ difficult financial circumstances, particularly those who pay rents from their own incomes?  There is no formula that can give an answer to that conundrum and each council will have to decide for itself, hopefully in full consultation with tenants.
The second tension is how to spend the spare cash.  There are multiple choices here too:
completing decent homes programmes where there is still a shortfall, doing works to improve the security of and amenities in estates, starting to make the stock energy-efficient through retrofit programmes and – of course – new build.
A common feature of all the advice being published is that the key to maximising resources is creative asset management.  Until now, council haven’t had the same incentives to manage their assets constructively as housing associations have had, and there are still limitations on what they can do, but for example it might make sense to demolish some stock that is no longer in the highest demand and is costly to improve.  It is also going to be vital to reconfigure planned maintenance programmes so that they take account of the need to radically improve energy efficiency, factoring in outside resources such as the Green Deal.
These are demanding tasks, and the key question is whether or not the resources expected to be available from April onwards will be enough to satisfactorily manage and maintain existing assets, before even contemplating new build.
The London Councils report suggests that some boroughs (the public document doesn’t say which) will struggle to balance their business plans, ie. both meet the new debt costs and effectively invest in and maintain their assets.  Most, though, will have some headroom, limited of course by the cap.
What is clear though from the various reports is that no one has yet come up with an idea for adding to councils’ resources beyond the basic options that have always applied, which are:

  • fully use the funding you will have in the self-financed HRA – including potentially build new homes with grant from the HCA if you are willing to go for ‘affordable’ rents
  • lever more funds into the existing stock through PFI
  • transfer the stock
  • use land and other assets to bring in affordable housing through other routes, mainly via housing associations.

Even the new options for ALMOs, which I blogged about in June, involve transfer, albeit to a community-led body and maintaining a close link to the local authority.  The London Councils report suggests transfer as an option, too, but focuses on the merits of using it for parts of the stock – either good stock that will bring in some money, or poor stock that will remove a liability.  But will partial transfer be attractive either to councils or to tenants?
My conclusion from reviewing this material is that the choices largely remain as they were when the current self-financing deal was put on the table.  Given that the government (like
the previous one) insists on sticking to the current borrowing rules, the options for bringing in resources that are ‘off balance sheet’ are essentially the same ones, with their respective pros and cons.
Councils without ALMOs are well-advised to concentrate on making the most of what they have already got, and be as well prepared as possible to finalise and start to implement their business plans when the final debt levels are known in the New Year.  For councils
with ALMOs the advice is the same, but those who are planning to close their ALMO down should be aware that – whatever the other arguments – they are foregoing options that just might be attractive once self-financing gets underway.

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A decent result for council housing

It has been a long time coming, but the end of the national HRA (housing revenue account) subsidy system for council housing is now in sight.  A new government paper Self financing: Planning the transition clarifies some of the detail, updates the figures that will be used, and crucially sets the timetable for implementation – 28 March 2012 will be the day on which many billions of pounds will move around between CLG, the Public Works Loans Board and individual local authorities to implement the scheme.
Although the technicality of the new paper will give anyone except a public finance accountant and a few experts a headache, the core proposals are still much the same as
proposed by the Labour Government. Radical change has been made possible due to the fact that the council housing system as a whole has moved into significant surplus, surpluses that are projected to grow in future.
The current system involves central government notionally collecting all rents and
redistributing the income between councils with housing stock according to
increasingly complex formulae.  The system has become unsustainable, with some councils losing 50% of their rent income to the national pool, and volatile, with annual determinations making longer term planning very difficult.  The central problem was the bad distribution of historic debt – councils that have built most in the past had large debts they couldn’t sustain from local rent income.  The new system redistributes the debt permanently between councils, according to their ability to support it within 30 year business plans, removing the need for annual redistribution.
‘Self-financing’, as it is called in the jargon, is a genuinely localist move, supported by all
of the political parties and by the vast majority of councils with stock. It is a major success for the housing lobby, and especially CIH, who have argued for this change for many years to give council housing a sustainable future and to bring key decisions over finance and services closer to tenants.
Of course there are still risks and there are elements of the package that could be improved.  There may be dangers in the detail of the redistribution formula that I wouldn’t be able to spot with binoculars, but some others will.  One change made by the current government has been to retain the rule that 75% of capital receipts from the right to buy will go to central government rather than stay locally as Labour had decided.  They also imposed a cap on borrowing, limiting the scope for councils to use their surpluses to build new homes, and spiking the ambitions of some councils to become major builders again.
The funding arrangements to complete the decent homes programme also do not seem to be adequate for the job.
It must be said that there are dangers as well as opportunities arising from local control of the housing revenue account. The ring fence is retained but, given that the general fund at most councils is under severe strain, some Directors of Finance and politicians will look avariciously at the HRA and seek to move funds across.
Tenants will need to be vigilant and alert to the many tricks of the trade, and scrutinise carefully all arrangements such as recharging of overheads and central council costs and service level agreements.   If council housing is to be a self-financing business in future, the core principle must be that rent income is used for the benefit of tenants and not
council taxpayers generally.
The long-predicted total demise of council housing has been averted. Campaigning tenants and a few councils who were determined to hold on to their stock can take much of the credit for that.  Councils with stock should now be able to adopt a sustainable business plan for the future, making decisions locally, with their tenants, to improve their management and performance.  Some councils are building again, admittedly in small numbers, and more have the potential to do so.
Given the politics of council housing over the last 30 years, this is a good result.

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Self-financed council housing – will it do what it says on the tin?

Monimbo
Monimbo

Senior housing policy expert writing under a pseudonym.

I hesitate to say that the government has published its final proposals for the self-financing of council housing, since they’ve made so many announcements about it they are rivalling the quantity issued by the previous government.  And strangely enough, despite this the broad shape of the package is pretty much the same as that put forward by John Healey when he offered his ‘prospectus’ last year.  One key difference, of course, is that a prospectus implies choice, whereas the current package will – after a bit of negotiation around the edges – be imposed by statute from April 2012, on all 171 councils that still have housing stock.

On the face of it, the figures involved look alarming, and no doubt some on the left will use them to oppose self-financing outright, as they did when Labour put it forward.  The headline figure is that councils will take on around £19bn of new debt, to enable them (in effect) to buy their way out of the system.  While the LGA originally demanded that all ‘historic’ debt be written off, this was always an unlikely call on public funds, even more so with Mr Osborne in charge at the Treasury.  More recently, among local authorities there has been gradual and – almost – universal acceptance of the principle that extra debt would have to be taken on as the price for escaping from the so-called ‘subsidy’ system. (The word ‘subsidy’ increasingly means, of course, that tenants subsidise the Exchequer, not the other way round.)  And the other side of the coin is that a minority of councils will have part of their debt paid off.

Inevitably, the Treasury had its fingers in this pie well before the general election.  The cap on each council’s borrowing, which restricts them to the levels to be included in the settlement itself, was already envisaged in Labour’s prospectus.  Not only that, but it was always likely that the Treasury would ensure that it kept the surpluses the government would have earned from council housing in the future, however much these are correctly argued to amount to ‘daylight robbery’ from tenants. 

In terms of the arithmetic, the spreadsheet experts have so far concluded that the current deal is similar to, and perhaps even a bit better than, the one in John Healey’s prospectus.  However, whatever the overall deal, what will matter to authorities is how their individual figures work out. Given that there is a fair amount of local detail in the latest paper, this is where the focus of interest on the figures is likely to shift.

There is already a danger, of course, that hard-pressed councils whose revenue support grant has been cut are looking at their housing revenue accounts to see if they can help make up the shortfall.  Labour was alive to this, and included updated guidance about maintaining the ‘ring fence’ around the HRA in its prospectus.  In the current document, the guidance has been dropped and there is only a brief reminder that the ring fence needs to be kept.  It seems to me that it’s always been down to tenants to be vigilant on this issue.  Their vigilance needs to be even greater when, after April next year, the only income to the HRA will be their rents.  The first call on rents will be to pay the debt charges, then maintain the stock, then run the landlord service.  Councils and tenants can’t afford to let any of their rental income be siphoned off to make good cuts elsewhere.

There remain several points of contention about the caveats in the overall deal the government has put on the table, and all of these are a result of those greedy Treasury fingers looking for the meat in the pie.  The new one to emerge as part of Mr Shapps’ package is that councils will have to continue paying three-quarters of right to buy receipts back to government.  Labour can hardly rail against this iniquity, since they introduced it, but credit was due to John Healey that through his package it would have been brought to an end.  The Treasury have locked their fingers round this tasty morsel, and must now somehow twist the settlement so that it reflects 30 years of future stock losses through right to buy.  This introduces a high and unnecessary degree of uncertainty, since predictions of right to buy sales are invariably wrong.

The Treasury also wants the facility to reopen the settlement if circumstances change.  One of these might of course be a wayward forecast of the effects of the right to buy, but the very prominence of this caveat is making councils think that ‘self-financing’ might be maintained only as long as it suits the Treasury.  This is not what the deal is supposed to be about.

However, it’s the debt cap that really grates with councils, in part because of the context of overall spending cuts.  If it was a bad idea under Labour, it’s a far worse one when grants from central government and other sources of finance apart from borrowing are likely to be extremely scarce, to put it mildly.

The debt cap, the continued repayment of receipts and the constant threat that the settlement might be reopened are all eroding councils’ supposed autonomy.  Interestingly, as was revealed last month, councils have an unlikely ally in the deputy prime minister, who is said to have asked for councils’ borrowing powers to be reconsidered in a letter to Eric Pickles about the imminent local government finance review. 

Of course, if the Treasury were to listen, at last, to the case for taking council borrowing out of the main national accounts, they could use self-financing to get council debt off the government’s books completely.  Council housing is anyway now classified as outside government by the Office for National Statistics. Because most of its income comes from charges (rents).  Where councils have ALMOs, these are considered separate public corporations (like, say, the BBC). Taken together with likely changes to the accountancy rules about housing revenue accounts and the separating out of housing debt, this could be the moment for the Treasury to take a step towards giving council housing – like housing associations – real autonomy.  However, none of us will be holding our breath.

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One cheer and one HuRrAh

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

Editor and 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.

In trying to look beyond this government’s irksome habit of claiming credit for things agreed before the Election, at least it can be said that the snail’s pace move towards the abolition of the housing revenue account national subsidy system continues in vaguely the right direction. 

Having announced already that he planned to stick with most of John Healey’s proposals, announced it again as part of the November consultation on the reform of social housing, and announced it yet again as part of the Localism Bill package, Grant Shapps has now announced a ‘route map’  towards reform – in advance of a more detailed announcement next month!  The route map makes it clear that more detail will emerge over the next year before implementation in 2012, no doubt offering Mr Shapps further opportunities to announce his great, but inherited, reform.  Who said spin was dead?

Brought up on a council estate in Kenton, Newcastle, I have always had an emotional belief in council housing, and have often been outraged at the stigma attached to the tenure, the appalling media misrepresentations, and the snobbery.  Although what Thatcher did to council housing was unforgiveable, I was hugely disappointed that it turned out to be not very New Labour either.  But the rationale for council housing is not just emotive.  Based on a system of rent pooling, so that surpluses from older homes cross-subsidise the cost of new ones, it was also a robust financial model.  It could have provided hundreds of thousands if not millions of extra homes if it had been managed properly over the past 30 years.   

The Tories’ failure to invest in managing and maintaining the council stock left Labour with a huge problem in 1997, including a backlog of disrepair estimated at around £19billion and an incoherent rent policy.  Labour made some well meaning attempts at reform, such as the introduction of rent restructuring, the Major Repairs Allowance and the Decent Homes Programme, but funding for the latter carried the clear political price tag that direct management of the stock by councils was unacceptable to the government. 

As some councils in the national HRA subsidy system had large historic debts and others had none, the system was unbalanced and rent pooling became unmanageable.  It also became increasingly unpopular with tenants and councils in those areas where a third or even a half of local rents were taken for distribution elsewhere.  Despite producing growing surpluses nationally, all of the participants were unhappy with the outcome, even those that gained from redistribution.  As an annual system, there was no certainty about income and it was impossible for councils to plan long term and improve efficiency.  Tenants simply could not engage with the key decisions that affected their homes and communities because they were only understood by a tiny number of civil servants and professionals.  In its latter years, the Labour government became less hostile to the idea that council housing should have a long term future, and understood that a more local system suited the times.  It embarked on the hugely complex exercise of unravelling the system.

The Localism Bill contains powers to implement the local system proposed by Labour.  In future, councils will keep their rental income and use it locally to manage and maintain their own homes and service their debt.  To get to the point where all councils have sufficient income to meet these costs, there will be a one-off payment between central government and each council, which will reallocate existing housing debt between councils in a final settlement based on 30 year business plans for each landlord.  This is possible because the national system is in surplus – ie tenants are paying more in rent than council housing costs to run.

Communities and Local Government department’s task is complicated: they have to incorporate the implications of the new government’s shifting policies, for example on rents, as well as making important assumptions about inflation and the ‘discount rate’ (currently assumed to be 6.5%) used to determine the ‘net present value’ of each council’s housing business. 

I have 2 main concerns.  First, John Healey planned to allow councils to keep their right to buy capital receipts, whereas the Tories will retain the current system that returns 75% of net receipts to the Treasury.  There will also be a cap on councils’ overall housing borrowing.  Hope that HRA reform would trigger a resurgence in council housebuilding has been dashed.  The overall receipt to the Treasury from all the various calculations is currently projected to be around £6.5b, but tenants may come to view this as being paid for out of a large rent increase next year of over 7%.

Secondly, Labour would have localised the HRA within the clear framework of the regulatory regime.  There would have been an external check, through the Tenant Services Authority, and a place for tenants to go if, for example, their council set up backdoor arrangements that took funds out of the HRA to benefit the general fund.  It is still not clear how regulation will operate without the TSA, and this will make tenants in some areas nervous about what their landlords will get up to.   

At least we can look forward to further announcements.