Pluses and minuses of funding

Why is housing finance so complicated? Why are the aims of the housing subsidy systems for councils and housing associations so unclear? Do changes to funding systems change the way services are delivered on the ground?

Questions like these have added impetus as the government considers the housing world's response to the Green Paper. They were thrown into sharp relief in our research for a new book which compares the way funding systems operate for doctors, schools, and social landlords.

These systems use involved formulae like the local authority standard spending assessments which determine how much money there is for schools, or the "York formula" for "weighted capitation targets" for district health authorities. For housing, the equivalents are the rent guidelines and management and maintenance allowances for Housing Revenue Account subsidy for councils, or the grant levels set for Social Housing Grant for associations. For the real funding anoraks, there are the mysteries of the Generalised Needs Index (for councils) and the Housing Needs Index (for associations) which affect the flows of new capital between areas.

These formulae have become far more important over the last two decades as we have moved away from the old "command economy of welfare" with direct central control over services to more arms-length systems. In these, those who deliver the services now have their own budgets to spend. How these budgets are calculated - how Whitehall pulls the purse strings - is now one of central issues in social policy.

Looking back over the last century a striking common feature between all three services was the increasing stress put on geographical needs-based equity, even in the 1980s and 1990s. Labour governments trying to improve provision in under-resourced areas developed needs-led systems like the Resource Allocation Working Party in the National Health Service. But Conservative governments trying to cut back spending also put more stress on the link between needs and funding as they tried to impose tight fixed budgets for efficiency reasons without too much political pain in the places where the shoe was already pinching tightest.

But if equity has become a driving force in all the systems, this has played out very differently between them. In talking to people in the health service - from central officials to GPs in inner city and country areas - there was a strikingly shared view of what equity meant from top to bottom. It was obvious: equal access to treatment for equal need. Differences between fundholding and non-fundholding GPs had breached these equity principles, but the new primary care groups were popular with both groups, keeping devolved budgets, but restoring a uniform system. We saw a national service with clear common values to which everyone we interviewed was signed up, despite the deep divisions of the 1990s over fundholding.

By contrast, the idea of an "equity" objective to funding baffled local housing respondents. As one council chief executive said: "No clear definition exists - no consultation documents in which fairness or equity appears." Another housing department reported, "We did struggle - not only to identify what they were, but what the objectives should be." Similarly a housing association director told us: "The objectives of the social housing sector have never been clearly defined." When we asked about equity, associations' responses were about the distribution of funding between them for new developments, not about the relationship between the rents paid by tenants and the services they received.

Looking at housing finance in detail, it is perhaps unsurprising that the people we interviewed could not identify coherent aims. The combination of inconsistency between councils and associations and within the two sectors - for instance in how rent guidelines underlying subsidy and rent caps controlling benefit costs are set - generate at least seven different ways in which tenants" rents can be determined. On top of this for the council sector, there have been complicated damping arrangements which have left the underlying logic of the subsidy system obscure.

A major challenge for the government as it considers responses to the Green Paper, particularly on its proposals for rent restructuring, is to establish a funding system for social housing whose aims are as clearly understood as those of NHS funding now are.

A second parallel between the three services was the general support we found for the Conservative reforms which had devolved control over budgets to lower levels, despite controversy when they were first introduced. In education, this meant local management of schools, and more school-level control over budgets. In health it meant the devolved aspects of funding started under GP fundholding which have continued into the new primary care groups (but now for all primary care, not just some GP practices).

For council housing, the big move had been ring-fencing of Housing Revenue Accounts in the late 1980s. For one council housing department it meant: "We could keep our own income. It made us more aware of our income and costs." Another said: "We saw it as a way of controlling our own destiny." And for a third, while seeing it as part of cuts at the time, "Thinking about our own costs and having to stand on our own two feet has made us feel stronger." Outright transfer was seen in even more dramatic terms. A council which had transferred its stock told us "after transfer they certainly sharpened their pencils", while the corresponding association's chief executive said: "There's much more feeling that the buck stops with someone. Before transfer I had the naive view that I would be able to sit back - it was only housing. In practice, I have never worked so hard." For associations in general, the funding changes of the early 1990s had forced long-term planning to secure both new development and stock reinvestment. For one association: "We hadn't a clue about running a business ten years ago. We didn't need to think further than a year or two down the line. That all changed pretty quickly. We had to buck our ideas up or we would have lost out on the gold rush."

However, those reforms also decontrolled association rents for new tenants, removing the constraint that had been there through fair rents. As everyone agreed, housing benefit had been left to take the strain, while rents rose to maximise development. "All the political pressure was to make grant competition a success. Nobody cared how that was achieved," according to a London association. For another: "In retrospect I don't know how we thought we could have gotten away with the rent increases we were banking on ... Nobody was stopping us ... Lenders' eyes were popping out of their sockets and the Corporation were quite happy to join on the bandwagon."

It is this which has left the most difficult legacy - some associations have been left with finances built on rents which make little sense in terms of equity between tenants or between regions. Yet simply enforcing a more consistent rent structure on whatever model (unless it is simply tailored to reproduce the status quo) could leave some of them without the resources for the long-term sustainability which is the whole aim of moves towards arms-length companies and transfer for the council stock.

The biggest challenge for the government now will be to untangle the housing purse strings in a way which is both fair between tenants and allows social landlords to operate in a business-like way with finances which are viable in the long-term.