Requiring governments to run budget surpluses earned the headlines from the Chancellor’s Mansion House speech. But few noticed that he also wants to ditch the principle that borrowing is the best way to fund capital investment.
The reasons for borrowing to invest are obvious: it enables the project to be done now, when it’s needed, and the costs are spread over the project’s life, with accountants following familiar rules to ensure that expected income will more than meet the costs of the debt. Gordon Brown enshrined the principle in the term ‘prudential borrowing’, which has applied in local government since 2003. The rules then encoded by CIPFA have been followed for 12 years without any apparent breach. Any council investment must follow the CIPFA code, with council housing uniquely limited since April 2012 by additional, Treasury-imposed borrowing caps. Nevertheless, the system has begun to produce results for housing. In the three years since that date, 5,640 new council houses have been started. In the previous three years, there were 3,440 starts, and in the three before that, less than 700.
All this is threatened by Osborne. Whatever the merits of legislating to run a budget surplus ‘in normal times’, no past chancellor, and no other modern government as far as I’m aware, has ruled out borrowing for capital investment. If the new rule extends to capital as well as revenue spending, there will be two big consequences. The first is that government (whether central or local) will have to run budget surpluses to build up an investment fund before it can embark on a housing project or infrastructure investment, leading to years of delay. The second is, of course, that governments will turn to private investors to fill the gap, because they won’t be restricted by the daft rules to be imposed on the public sector. To be able to turn rental income into investment, councils will again be tempted along the routes of stock transfer or PFI deals; otherwise they’ll be forced to limit themselves to building the handful of houses each year that can be paid for from revenue surpluses.
Of course we don’t yet know the details of what is proposed and sense may prevail when the full implications sink in (not least because of what it would mean for favoured schemes like new roads and bridges). Nevertheless, it adds to a growing list of threats to council housing in particular and social rented housing in general. My list of the most recent ones is this:
- The new Affordable Homes Programme (AHP) – which precludes building for letting at social rents.
- Conversions – the last AHP (which ended in March) led to 80,000 homes being built but at the cost of converting more than 80,000 existing homes from social rents to ‘Affordable Rents’. Even more conversions will be needed for the new AHP.
- Right to buy sales – council starts (see above) have been vastly exceeded by sales and the gap will grow as discounts are increased.
- Right to buy 2 for housing associations – like RTB1, it will see social rented homes sold and (perhaps) replaced by units at Affordable Rents.
- Planning gain (section 106) – numbers of units delivered will fall as more loopholes open up, allowing obligations to be reduced or avoided completely.
- Estate redevelopment – with encouragement from the housing minister, more homes will be demolished and the new units will be less affordable and fewer still will be let at social rents.
- Welfare reforms – the next wave will hit social housing even harder, making it especially difficult to house larger families and pushing more low-income tenants out of their homes.
- Discretionary housing payments – helping to mitigate the effects of the bedroom tax and other ‘reforms’, are being cut year-on-year.
- High-value council house sales – yet-to-be-defined plans will force councils to sell off their most valuable properties as they fall vacant; if replaced, they will be with homes at Affordable Rents.
If we add the possible end of prudential borrowing to this list, it starts to look like a concerted attack on social housing (and particularly on council housing). At the very least, the combined effects of RTB1, sales of high-value property, welfare reform and the threatened borrowing changes are likely to make most councils think twice about their council house building programmes. Yet only recently the new secretary of state was proudly pointing to the increase in council house building over the last five years, and even Grant Shapps thought he’d unleashed a significant amount of house building with council housing finance reform in April 2012. Who would have thought that those 170 new council housing business plans, drawn up with the encouragement of Conservative ministers, would turn to dust after three short years?
There has been a vigorous debate recently about the threats to social housing, involving bloggers Tom Murtha, Colin Wiles and Joe Halewood being opposed by the more optimistic Hannah Fearn. They’ve rightly focussed on issues like the planned cut in the overall benefit cap and RTB2. The list above shows how the threats are accumulating, and the problem is that it seems any list will soon be out of date. Whether what’s happening is a ‘slow death’ or a ‘killer blow’, talk of the mortuary no longer seems premature.