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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