Housing revenue account (HRA) subsidy is based on a notional measure of authorities’ income (which is mainly rents) and expenditure. If need to spend is assumed to be greater than assumed income, then the authority is assumed to have a deficit and HRA subsidy is paid to the authority to make up that shortfall. If the assumed income is greater than the assumed need to spend, this negative subsidy is captured, recycled within the HRA subsidy system and used to help pay for the subsidy entitlement of the deficit authorities. Even with this recycling, in the most recent year for which audited data are available (2005-06), the Exchequer still made an annual contribution of over £200 million.
Surpluses (and deficits) are not related to the efficiency of a council in operating its HRA. Surpluses rarely, if ever, occur where the need to spend is greatest; if we were to allow those authorities that make surpluses to retain them this would, within the total funding levels agreed, mean reduced subsidies and therefore higher rents, for all those authorities with a deficit. The alternative would be higher taxes or cuts in services. We also need to recognise that the surpluses that are being generated by some authorities come from housing that has largely been funded by central Government.
The Department is currently working with a group of local authorities to investigate the potential benefits, in terms of asset management, efficiency and better outcomes, of allowing some councils to leave the subsidy system. Self financing would involve a one-off settlement to replace future subsidy or surplus payments. As such, it would not be a means for surplus authorities simply to retain a larger share of overall housing resources.