Raising the HRA borrowing cap is long overdue – but is it enough?

November 26, 2018   By Joe Wills, Research Intern

The announcement in the recent budget that the Government will be lifting the borrowing cap on Local Authorities’ Housing Revenue Accounts has been much welcomed and is long overdue. The policy will remove one of the barriers to councils building at scale, which should form part of a root and branch attempt to tackle the housing crisis.

Yet is important to see this reform as part of a suite of required measures, rather than a silver bullet. There are a range of barriers which still exist and need to be addressed by Government if the reform is to reach its full potential. A quick recap on the history of the cap and its relationship to broader housing issues shows why.

The HRA is the account in which the revenue from council tenant’s rents and housing costs such as maintenance are kept. It is separate from the ‘General Fund’ in which most other council income and expenditure is kept. Initially introduced in 2012, the cap on borrowing formed part of the Coalition government’s wider fiscal tightening. As capital expenditure funded by borrowing within the HRA counts towards total public sector borrowing figures, the Government was keen for councils to have their borrowing powers limited, in order to meet their (self-imposed) deficit targets. Coupled with a significant reduction in grant funding for affordable housing in 2011, in practice it meant stymieing the ability for local authorities to invest in new and existing stock.

The removal of this restriction on borrowing will give stock-retaining councils the freedom to invest in capital expenditure at a level which has been denied to them for years. However, a consideration of the scale of the UK’s housing deficit shows that councils cannot be expected to do it all on their own, and that the private sector and housing associations also have a crucial role in delivering the numbers and diversity of tenure types needed. Estimations of the total number of new units which could be built as a result of the policy range from 10,000 to 27,000. In contrast, the total number of units required nationwide has been recently estimated as high as 340,000 per year.

Even when considering the role of local authorities in delivering social rented units, frequently argued as playing a key role in tackling the crisis of affordability, there are several other major constraints which can’t necessarily be fixed by the raising of the HRA borrowing cap. These could be categorised in turn as practical, financial, and policy-related.

Firstly, the lack of available land. RTPI research has found that lack of available land is actually considered to be more of a barrier to direct housing provision than lack of funding. Many local authorities have engaged in rationalisation of their corporate estates since 2010 as a response to cuts in Government funding, and simply don’t have easily developable sites. In the areas of the country where there is the highest need (London and the South) the cost of acquiring land will frequently prove prohibitive. In order to allow local authorities to assemble sufficient land to build at the scale required, reforms to planning law are much-needed, as called for recently by the HCLG Select Committee.

Secondly, local authorities face significant capacity challenges as a result of austerity. As a response to post-2010 funding cuts, local authorities have reduced their spending on planning and development services by over 50 per cent and housing by over 45 per cent. This means that councils will need time and resources to be able to develop the organisational capacity to become large-scale builders again. Another consequence of the legacy of funding cuts may be that councils have not been able to invest in their existing stock as much as desired. It is important to remember that the HRA is used to fund all capital works, and therefore if councils choose to invest in improving their existing stock as a local priority, they shouldn’t be penalised by a government with a focus on ‘additionality’.

Thirdly, in addition to a highly constrained financial context, local authorities also operate within an extremely uncertain policy context, which can undermine investment. There are several examples of impositions from Westminster which make it hard for local authorities to engage in prudent long- term planning. Unilaterally imposed rent cuts have introduced uncertainty into business planning, acting as a brake on investment. Similarly, there has been an increase in arrears reported in Universal Credit pilot areas, which will further complicate local authorities’ ability to plan for future revenue.

Finally, perhaps the most significant barrier to Government’s aspirations is Right to Buy. The question of why councils should invest significantly in building homes which could be sold off at a large discount after 3 years, and be prevented from keeping the entirety of the sale receipts, is seemingly not being asked yet by Government.

The details of any conditions attached to the raising of the cap are yet to be released. But recent history requires us to take a cautionary stance. If the measure is truly to form part of a concerted attempt to fix the housing crisis, it is crucial that Government address the factors that continue to hold back local authorities from building and delivering housing in the way that they see fit.

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