Local Government Association argues councils could help beat housing crisis if allowed to keep rental income to spend on new local homes

Income from council tenants’ rents should be retained by local authorities to reinvest in their own housing stock, the Local Government Association (LGA) has said.

A new report from the cross-party body claimed that the channelling of such funds to central government for redistribution is unaccountable and is starving councils of cash to improve and build homes.

It argued that allowing councils to reinvest their rental income, amounting to around £1bn in total, would put them on a level with housing associations in their ability to invest in housebuilding.

The report, launched at the LGA's conference, claims that local authorities, which built just 245 new homes in 2006/7, could “easily match” the 22,194 units built by housing associations in the same period if given the same freedom and flexibility.

Paul Bettison, housing spokesman for the LGA, said: “Councils could be using this money to build thousands of new council homes to help solve the housing crisis and to improve the homes of existing tenants.

“The rent that tenants pay to their council should be spent entirely on their housing needs and the needs of local people. None of it should be funnelled through to Whitehall. If this tenant tax continues, there could be serious long-term consequences for the future of council housing."

The proposals are supported by London councils, the Chartered Institute of Housing, the Councils with ALMOs Group, the Association of Retained Council Housing and the National Federation of ALMOs.

Sarah Webb, chief executive of the Chartered Institute of Housing, said: “We firmly believe that in the interests of fairness, accountability, and local responsiveness, the Housing Revenue Account subsidy system must be scrapped. The key thing now is to work out how any replacement financial system can ensure that all local authority housing departments have enough money to meet their tenants’ needs and aspirations.”