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Council House Finance

Volume 508: debated on Thursday 25 March 2010

I am publishing today for consultation a prospectus setting out our detailed plans for reforming council housing finance in England. My objective in doing this is to dismantle the Housing Revenue Account Subsidy system which was introduced in 1935 and has operated in its current form since 1989. I want to replace it with a devolved system of responsibility and funding for council housing.

I want to provide more flexibility in finances and more transparency in the operation of the system. I want to devolve control from central to local government. And, in return, I want to increase local responsibility and accountability for long term planning and housing management to meet the needs of local people.

The current redistributive Housing Revenue Account Subsidy system has a long history and a clear rationale. Councils have different spending needs and different capacities to raise income. Without redistribution, some councils would have to charge higher rents or deliver lower quality services. But the annual uncertainty of subsidy decisions has inhibited long-term planning and asset management and it has meant that council landlords are less accountable to their tenants.

On 30 June 2009 I announced the Government’s proposals for replacing the centralised annual subsidy system with a devolved self-financing system. Under this, councils will finance their own housing from their own rents, in exchange for a one-off redistribution of housing debt to make the settlement financially neutral between central and local government. Freeing councils from the annual funding decisions in the current system will enable them to plan long-term, secure greater efficiencies and improve the management of their homes and the quality of service to their tenants. This reform involves 1.8 million homes, 177 councils and a total annual budget of over £6 billion.

The consultation on our broad proposals ended on 27 October 2009. We received 223 responses showing strong support for our proposed system of self-financing, which many in local government have been calling for over many years. Since then we have worked closely with local authorities, experts and representative bodies in a Government-led project group to develop soundly based and detailed proposals. I am grateful to all those who have contributed to this work.

The detailed plans I am publishing today for local self-financing and management mean 4.2 million people living in council homes will have landlords with more money to maintain their homes and neighbourhoods. This reform will guarantee tenants whose homes have been upgraded through the Government’s Decent Homes programme that their homes will be maintained at least to this standard for the future.

I can confirm the detailed principles and terms on which our plan for this self-financing settlement is based. These include:

All councils will have at least 10 per cent. more each year to spend on managing, maintaining and repairing their homes—the equivalent of over £500 million more per year nationally. This deals with the underfunding for maintenance which was identified in the review of Council Housing Finance last year.

There will be a one-off distribution and allocation of debt between local authorities in order to put all councils in an equal position to support their stock from their future income without the need for annual subsidy. The total debt that is supported in the current system will be around £21.48 billion by April 2011. The value of the stock under self-financing using our lead option of a 7 per cent. discount rate is £25.13 billion. This means there will be a net receipt for Government of around £3.65 billion at the point of the self-financing settlement, making this settlement neutral between central and local government.

All rents and receipts from sales of houses and land within the HRA will be retained in full by the local authority. By ending the national pooling of all capital receipts, we will support local authorities in creating full asset management strategies covering both capital and revenue.

No local authority will have a proposed allocation of housing debt which is not sustainable for the long-term.

Rental income assumed in the calculation of debt is based on current rental policy which is designed to keep rents affordable and limit annual increases to tenants.

Funding capacity created for a new generation of council house building.

Since the late 1980s, councils have effectively been unable to build new council houses for their communities. I have now made social housing grant available to local authorities and released funding for two rounds of local authority new build schemes. As a result, we have underway this year, with the first round funding, schemes to build over 2,000 new council houses, the largest council house building programme for nearly two decades. In total over 87 councils, led by all political parties, will start more than 4,000 homes over this year and next.

Today’s announcement and the self-financing reform means we can go much further. My plans set the self-financing settlement with a 7 per cent. discount rate at a level which will give councils, after they have met the spending needs to manage and maintain their existing homes, the capacity to fund 10,000 new council homes each year from 2014-15—a five-fold increase in the council house building programme in the current year; this would generate over 20,000 jobs and over 1,000 apprenticeships. Councils will be able to build new homes without increasing local authority borrowing once the self-financing settlement is in place.

I am looking to establish as part of this consultation whether local authorities have the will to use this funding capacity to build new homes to help meet local housing needs. The response of local government to this challenge in the consultation will help us determine whether our lead option of a 7 per cent. discount rate is appropriate for the final terms of the self-financing settlement.

The Government are totally committed to completing the Decent Homes programme and recognise that £3.2 billion of works are still needed to meet their Decent Homes commitment. Meeting this investment need will therefore be a central element of their decisions on investment priorities at the next spending review.

Self-financing will fundamentally change the relationship between central Government and local authority landlords. It both strengthens local accountability and creates a more strategic relationship between local authorities and central Government. Today’s consultation makes proposals for improving the accounting and financial framework within which self-financing will operate. This will provide assurances that, there will be sufficient safeguards for tenants and local and national taxpayers, under a devolved financing system.

The settlement will provide councils with the resources they need for effective management of their housing without recourse to further borrowing. Because of this, we will set a cap on the borrowing each local authority can service from the HRA, based on the opening debt. The prospectus sets out details for the calculation of this cap. It is a fiscally prudent deal which protects the interests of tenants and taxpayers.

This is a once and for all settlement. Any major future policy changes would need also to take into account the financial consequences as an additional consideration and funding transaction. If this plan and the terms set out in the prospectus are broadly accepted by local authorities, this devolved system of financing and accountability could be in place by 2011-12 through a voluntary agreement between Government and councils. If not, legislation will be required, delaying implementation by at least a year.

I hope local authorities will seize this opportunity for radical reform of the HRA subsidy system which they have long criticized, and this opportunity to build new council homes for their local communities.

In order to assist councils in examining the potential of this self-financing deal for their housing services and tenants, CLG officials will be available to meet and explain the proposals during the consultation period.

I urge all local authorities to examine carefully the plans I am publishing today, and to respond fully to our consultation. The consultation will run until 6 July.