Councils need government grant to fund large scale council house building programme

This is an article published on the Labour Briefing website

 

Raising the ‘borrowing cap’ is not a solution to the council housing shortage

There has been much talk of late about councils being able to “ borrow to build” new council housing. They are each currently subject to a borrowing cap/limit. Calls for raising the cap or ending it are based on the premise that this would enable councils to significantly increase council house building. Shadow Housing Minister John Healey recently suggested that lifting the cap would enable councils to build “tens of thousands” of new council homes, though he offered no evidence.
It’s the contention of Swindon Tenants Campaign Group that the funding crisis which local authority Housing Revenue Accounts (HRAs) suffer precludes building again on a large scale by means of taking on more debt. To test out this view we have analysed government data on local authority HRAs. What we found undermines the idea that more borrowing can open the way to re-launching a large scale council house building programme.

When ‘self-financing’, the new council housing finance system, was introduced in 2012 councils were given a borrowing limit of £2.856 billion. You might imagine that they must have used up their borrowing capacity for the demand to take on extra debt to be raised. In fact, what we find in the data (COR4 data set, 2017) for the 2016/17 financial year, is that borrowing capacity had not decreased as a result of councils borrowing more money. It had risen to £3.592 billion; an increase of £736 million.

If councils pay off debt their borrowing capacity rises. If they take on more debt it falls. There are 166 local authorities with an HRA but just 49 of them have a lower borrowing capacity than they were given in 2012. Leave aside ones with a negligible borrowing capacity (some were given as as little as £1,000), of 44 that have used some of theirs 26 have used less than half of it, of those, 17 less than a quarter.

Of the authorities that have increased their debt the scale of borrowing cannot be very great. Of 59 councils with higher debt than in 2012, 32 have raised it by less than £5 million in 5 years. Of £834 million increased debt overall, four authorities alone are responsible for £420 million of it.

Whilst the overall debt has fallen from £26.933 billion to £26.019 billion, just over £500 million of this is accounted for by the transfer of the housing of 5 local authorities to housing associations since the new system was introduced. That debt was written off; one of the inducements to tenants to vote for transfer to housing associations. So only £413 million debt appears to have been paid off in 5 years.

The reluctance of councils to take on more debt is understandable given the financial crisis they find themselves in as a result of the burden of servicing the debt and the loss of income owing to government policies such as the four year rent cut of 1% a year. The rent cut, combined with increased Right To Buy sales, is having a significant impact on rental income. Local Government Financial Statistics, England 2017 show that in 2016/17 council rent income fell by £124 million, or 1.7% compared to 2015/16. Overall income fell by £312 million or 3.5%. Debt and interest charges remain at around 25% of annual income, at £2.097 billion.

Fundamentally councils have insufficient funds for the renewal of their existing council housing stock, never mind building new stock. To propose in this situation that they take on more debt is absurd. Whilst new building would obviously bring in more rent councils have to service new debt on top of their current £26 billion. It is tenants’ rent which pays for it. Most councils simply cannot afford to borrow more at the same time as they are cutting back on planned work as a result of collecting hundreds of millions of pounds less rent than estimated in 2012.

There is ultimately no substitute for central government grant to fund new council house building on a large scale. The Department of Communities and Local Government suggested that the extra £2 billion which May announced for ‘affordable housing’, could build 25,000 ‘social rent’ homes with a grant of £80,000 per property over five years. There is as yet no indication that’s what it will be used for. In any case 5,000 homes a year is less than than half the number of homes being lost under RTB. As the maths indicates, at that level of grant, 50,000 council homes a year would need £4 billion, £8 billion would help fund 100,000.

Labour could hardly call on the Tories to cut debt without making a commitment to do likewise. This is perhaps what explains Shadow Housing Minister John Healey’s silence on the funding crisis of local authority HRAs. Labour’s housing programme is far from the radical programme of action Jeremy Corbyn favours. If Labour is not prepared to demand the Tories write off some of the debt to compensate councils for loss of rental income, then it will not commit to cancellation itself.

Resolving the housing crisis requires Labour to tackle the funding crisis of local authority HRAs, and to commit to offering grant at the level of £80,000 per property. This is the only way that councils will build tens of thousands of new homes. Expecting cash strapped councils to take on more HRA debt is no solution. Even if the debt cap was lifted that does not mean that councils are stupid enough to take on more debt when they have insufficient resources to maintain their existing stock. The fact that the borrowing capacity has increased since 2012, rather than fallen, is proof of this.

Martin Wicks

Secretary, Swindon Tenants Campaign Group

To read a more detailed analysis visit STCG’s website at

http://keepourcouncilhomes.wordpress.com/2018/01/18/borrowing-to-build-is-no-solution-to-the-council-housing-shortage/

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