Fixing a hole
First Published 04 November 2015
The recent announcement that the housing revenue account (HRA) subsidy system is to be reviewed presents a long overdue opportunity to assess whether this system for managing local authority housing finance works effectively. Underlying this review is the major issue of central versus local control.
The system is broadly in balance, but forecasts suggest that it is likely to go into surplus if existing government assumptions are continued.
The government expects to generate around £6.4 billion from rent income from the subsidy system in 2015/09, £4.7 billion of which will be redistributed as management, maintenance and major repairs allowances.
How much of the balance, £1.7 billion, will be used to support agreed levels of borrowing and other financing (ALMO and PFI funding) is subject to debate. But it appears that the system breaks even.
Under current arrangements, authorities with low levels of borrowing pay into the system (about 75 per cent of authorities) and those with high levels of borrowing take out (the remaining 25 per cent). But the lack of transparency on the source of funding (where does the 75 per cent from council right-to-buy receipts go, for example?) and how funding is managed remains a problem.
There is a need for clear annual statements detailing housing income and expenditure. There also needs to be a clearer long-term vision on the social housing sector.
Authorities are expected to produce clear strategies and HRA business plans. However, central government is under no obligation to produce similar statements. If government intends to continue running the system from the centre, its plans and proposed use of resources need explaining with greater clarity.
One option is to give more control to local authorities. The main reason why authorities transfer stock to housing associations is to escape direct control by government through the subsidy system. The inquiry into self-financing gave an indication that authorities could take on wider responsibility and the HRA review is another opportunity to examine the proposal.
However, the big stumbling block is the opt-out formula. Local authorities are unlikely to find it sufficiently attractive because it suggests that, during the next 30 years, government will recoup an increasing proportion of rent income. This contrasts with the formula for stock transfer valuations, which is more favourable to the councils.
Behind this is the question ‘whose rent surpluses are they, anyway?’ Associations can plan ahead, because they control surpluses and can use them to reinvest in the stock, cross-subsidise newbuilds, or provide additional services to tenants.
Local authorities are prevented from similar action as they do not control the future income stream. This is despite the level of borrowing in the association sector being around twice what it is in the local authority sector (around £19,000 per unit compared with around £9,500 per unit).
One solution which may yet present itself as part of the HRA review is to redistribute housing debt across stock-owning authorities so that it is in proportion to the current revenue surplus -excluding debt.
As the current system broadly breaks even, the net impact on the Exchequer in year one would be more or less neutral. But it would give every authority the opportunity to control future rent surpluses.
There would be some technical issues to address, including the treatment of receipts and the extent of the ring fence within the council -but this would enable authorities to properly utilise prudential borrowing by supporting investments, including new build, from their future income stream without the need to apply to the secretary of state for every project.
David Hall is a director at Tribal Group.