On the money

The Chartered Institute of Housing’s policy adviser John Perry recently suggested it would be helpful if arm’s-length management organisations were taken out of the current housing subsidy system. I believe this proposal needs serious consideration.

Since 1981, central government decisions on subsidies have taken into account the revenue resources of councils, namely management and maintenance costs and rental income. This has been achieved through the creation of a notional housing revenue account. The notional account is a paper exercise, as opposed to the real account, which each council uses to work out how much subsidy it needs.

Local authorities in deficit on their notional account receive a subsidy from the government. And for many years, councils in surplus put the extra money into their general fund – the money raised via council tax. Now they pay it to the ODPM to go into the national pot of resources available for housing.

Various refinements have been added to the system over the years. However, what we now have is a complex system where efforts to rectify problems only seem to add to the complexity.

Councils now operate in a new financial environment, the result of prudential borrowing and the removal of rent rebates from the housing revenue account. The authorities still receiving subsidy now find that a substantial part of their management, maintenance and borrowing costs are assumed to be covered by their rental income because rents have risen.

This leads me to the conclusion that radical change is needed to the current subsidy system. True, the current system redistributes resources from wealthier housing revenue accounts to the poorer housing revenue accounts, but there must be more effective ways of doing this.

Councils can only benefit from prudential borrowing if they can be sure the revenue streams to support that borrowing are in place

In a 2002 paper on “blue skies” thinking about housing finance, the ODPM floated the idea of taking certain local authorities out of the subsidy system. In this scenario, the government would repay a council’s debt so that the local authority could borrow prudentially against rents.

Councils can only really benefit from such prudential borrowing for housing if they can be certain that the revenue streams to support that borrowing are in place. As subsidy levels can vary wildly from year to year and the problems that I have highlighted in the subsidy system are not going to deliver that certainty (while rents are much more predictable) I agree with the ODPM that the best way forward is to take councils with debts out of the current subsidy system. Further tinkering with the system itself seems unlikely to improve matters.

There might be issues concerning wealthier authorities that currently have to pay surplus money over to the ODPM. If those payments could somehow be fixed, this might give them a degree of certainty about longer-term planning. For the future, councils could be allocated a fixed amount for capital works similar to their fixed social housing grant. It would then be up to them to make the best use of their resources.

Initially the government may only want to take high-performing councils that have established ALMOs out of the subsidy system. But even so, I believe those councils would then have genuine choice in using their resources for the longer-term benefit of their tenants.