Welfare Reform and Work Bill Committee

Written evidence submitted by David Hall (WRW 71)

Summary

1. This is a personal submission written on behalf of myself, David Hall, providing evidence for the Welfare Reform and Work Bill (the ‘Bill’) currently going through parliament.

2. My submission focusses on Section 19 of the Bill and in particular the impact of the rent reductions in light of the Council Housing Reforms introduced in 2012 and the debt redistribution formula introduced in the Localism Act 2011. My proposed amendment is included at paragraph 33 and suggests that the Secretary of State should be required to re-open the debt settlement in light of the proposed rent reductions being enforced through the Bill and gives reasons for this. It also explores other alternatives to the current proposals in sections 34 - 37

My experience

3. By way of background I am a CIPFA accountant, now self-employed, but with around 32 years’ experience working in the local authority and social housing sectors, mostly as a consultant.

4. Amongst the variety of projects I have been involved with, I worked with the DCLG on the Housing Revenue Account (HRA) Reforms and produced the original proposals on the redistribution of HRA debt as part of the HRA Review in 2008 / 2009. This eventually led to the introduction of ‘self-financing’ implemented by the last Government through the Localism Act 2011 (Chapter 3 sections 167 – 175).

Key Area of Interest

5. My key area of interest in the Bill is the proposed reduction to social rents over the next 4 financial years starting in April 2016, as suggested at sections 19-22 and referred to in section 41 of the Explanatory Notes.

6. Whilst the proposal to reduce social rents by 1% in cash terms per annum will be welcomed by tenants and the reduction will have a direct impact on the overall welfare bill my main concerns are the indirect impact of the proposals, in particular on the local authority sector.

Benefit savings arising from change to previous rent policy

7. As highlighted in the Explanatory Notes, previous policy (from 2001) was to increase rents by RPI + 0.5% or a maximum of RPI + 0.5% + £2 towards a ‘target’ or ‘formula’ rent across both the local authority and housing association sectors, the formula having previously been defined with reference to local capital values and earnings indices. This was then changed in 2014 to CPI + 1% (and first implemented in April 2015). The new policy was planned to last for 10 years.

8. The ‘Impact Assessment of Social Rent Reductions’ published on 28 September estimated that the Bill’s proposals would make savings in housing benefit costs across both local authority and housing association sectors of around £6.0bn over the next 5 years compared with the previous policy.

Impact on housing associations

9. Since the proposed rent reduction was announced in the Chancellor’s Budget of 8 July, the Homes & Communities Agency has provided guidance to the housing association sector inviting organisations to respond where they face financial difficulty.

10. Housing associations vary in size, complexity and national spread. Whilst a number have evolved organically over the last 25 years (and before) about half of housing association stock (around 1.2m dwellings) has come from local authority stock transfers. Many of these associations will have negotiated their transfer price and developed their business plans predicated on the previous policy.

11. The overall loss of rent to housing associations has been estimated in the Impact Assessment published on 28 September at around £5.2bn over the next 5 years. The response to the proposed change has been mixed. A number of housing associations (particularly the larger ones) are seeking to accommodate the increase and will work with the Government on its wider strategy for delivering more housing and creating more home ownership. Others will find it more challenging.

Impact on local authorities

12. Local authorities currently own around 1.6m of tenanted social housing stock spread across 164 authorities.

13. The effect of reducing rents by 1% in cash terms, depends to some extent on the assumption of inflation over the next 4 years. The Explanatory Notes suggest this will be around 12% which implies an average CPI of 1% per annum during that period.

14. Whilst the Impact Assessment published on 28 September identifies the savings in housing benefit arising from the reduction in local authority rents, it does not mention the loss of income to local authorities. Based on the same assumptions as used in the Impact Assessment for associations this could lead to a loss of around £3bn over 5 years.

15. On this basis the combined loss of rent across both sectors is around £8.2bn compared with savings of £6bn in housing benefit costs. This represents a net economic loss of around £2.2bn over 5 years with a further annual net loss thereafter of around £0.6bn.

HRA Reforms

16. In April 2012, following the enactment of the Localism Act 2011, a new era of ‘self- financing’ was introduced for local authorities (see note 1).

17. As part of the self-financing settlement authorities agreed to manage an agreed level of HRA debt without further recourse to revenue subsidy.

18. The debt settlement ‘determination’ was based on a discounted cashflow formula which assumed rents would increase by RPI + 0.5% per annum. Overall HRA debt nationally increased following the settlement by around £8.5bn (or around £5,000 per dwelling) from around £18.8bn to £27.3bn.

19. If the settlement was done now based on the rent reductions in the Bill (and depending on the inflation assumptions used) the level of debt would be considerably lower – possibly around £10bn lower (ie £17.3bn instead £27.3bn). The exact number would depend on future inflation and rental growth assumptions.

Reopening the HRA Settlement

20. A key provision in the Localism Act (section 169 (2a)) enables the This section has no associated Explanatory Notes

Secretary of State ‘from time to time make a determination that a further payment calculated in accordance with the determination must be made by the Secretary of State to the local housing authority’.

21. Subsection 3a goes on to say that the ‘Secretary of State may make a determination under this section only if there has been a change in any matter that was taken into account in making the determination relating to the settlement payment or a calculation under that determination’.

22. I would suggest that the proposed rent reduction of around 12% (as based on the Government’s own assessment) is a material ‘matter’ given that rents were a key item ‘taken into account in making the determination’ and that therefore a further payment should be applied to all authorities affected.

Further issues to be considered

23. A key reason for the rent reduction as proposed in the Explanatory Notes is that increases in the social housing sector have over recent years ‘become out of kilter with private rents’. This appears to be based on the ONS experimental data which has been collected since 2011. Some ONS data has been tracked back to 2005. Whilst the percentage increase in the social sector may have been higher in recent years this may in part be because of the Government’s affordable rent product which is set at a higher level. In 2014/15 the data also appears to show that private sector rents were similar if not higher than the social sector. In cash terms private rents, particularly in London, continue to increase by more.

24. The rationale for addressing this balance now is also inconsistent with the settlement entered into in 2012 when local authorities entered into the deal in good faith with the Government assuming that Government policy would be maintained for the medium to longer term (and at the very least for 10 years based on the policy change introduced last year). Information on private sector rents was already known by the Government when the HRA settlement was being agreed.

25. As identified above the impact of reducing rents could equate to a loss of around £3bn across the local authority sector over 5 years and around £1bn per annum from year 6.

26. Reducing HRA debt would help compensate for the loss of rent income. Without this adjustment authorities will have to cut back on services. This will include reducing new build, regeneration and other investment programmes which had been commenced following the original HRA Reforms.

27. It could be argued that the effect on HRA finances should have been taken into account in the Impact Assessment. An alternative is that it should, at the very least be reflected in a ‘New Burdens Assessment’ as the net loss of new housing will not only effect the HRA but will also have an indirect impact on local authority temporary accommodation and homelessness costs which fall on the General Fund. It is not clear whether this exercise has been carried out.

Future stock transfer policy

28. A further knock on impact of the rent reduction is that this will impact on authorities’ ability to consider stock transfer, where they consider that appropriate and where that has the support of their tenants through a ballot. Stock transfer has been a part of Government policy since 1988. In the absence of a reduced debt settlement there will be less scope for authorities to transfer their housing to the housing association sector.

29. The combined effect of a disproportionately high level of debt (relative to rent income) combined with the additional costs of VAT (which associations have to pay) could be prohibitive to any organisation considering transfer. In the past authorities have found that transferring their housing has enabled more new homes to be built locally as well as providing other housing investment. Transfer also further enhances the existing economies of scale of the housing association sector generally.

Impact on Government finances

30. I had previously been led to understand that the original £8.5bn increase in HRA debt was neutral to Government finances (ie because the DCLG net receipt matched the increase in local authority indebtedness).

31. The reduction of the HRA debt nationally by a similar amount would therefore presumably also be neutral (or broadly offset the previous change at least). If not it would be useful for the public to be made aware how the two different transactions have been (and would be) accounted for in the public sector finances.

Proposed amendment

32. Given the above it would seem appropriate to require the Secretary of State to revisit the calculation used to determine each authority’s HRA debt and repay the difference arising from the change being imposed through the Bill.

33. This might include a new clause in the Bill (say a new subsection (10) in section 19 – the original subsection (10) would then become (11)). This might read something like:

‘In accordance with section 169 (2a) of the Localism Act, the This section has no associated Explanatory NotesSecretary of State will make a further payment in year 2016/17 calculated [in accordance with the original HRA Self Financing Determination] to all local authorities reflecting the impact of the rent reduction in subsection (1).’

An alternative approach

34. Another approach to the issue would be to treat local authorities differently from housing associations. At present the term ‘registered providers’ is used generically in the Bill to include both sectors. However as has been demonstrated elsewhere in this submission there remain some differences between the two sectors.

35. A key principle of the HRA Reforms was to allow authorities to have similar freedoms to housing associations but within a democratically accountable structure. The original reforms were included in the Localism Act 2011 and were seen as an important way to enable authorities to make decisions about their housing in answer to their local electorate.

36. Local authorities are also still subject to Rent Rebate Subsidy Limitation (known as the ‘Limit Rent’) whereby there is a cap on the amount of subsidy the authority receives on rent rebates up to a centrally determined rent figure. This could therefore be retained if necessary to control welfare costs and public sector finances. The Limit Rent does not apply to the housing association sector.

37. An alternative would therefore be to exclude authorities altogether from section 19 of the Bill and focus that section entirely on housing associations (or presumably ‘private registered providers’ for the purposes of the Bill).

October 2015

Note 1

A key principle of the HRA Reforms was to enable authorities to manage their HRA finances locally based on similar (although not identical) principles to the housing association sector.

The introduction of ‘self-financing’ proposals followed several years of consultation on the termination of the previous unpopular ‘HRA Subsidy’ system. Under the previous system most authorities paid a large proportion of their HRA rent income annually into a national pot held by the DCLG, most of which was then redistributed to the remaining authorities, mostly those with high levels of HRA debt.

The principle of the ‘self-financing’ settlement was to find a level of debt which each authority could manage in its HRA.

The debt settlement was based on a discounted cashflow approach which factored in future rental income less the cost of managing, maintaining and carrying out major repairs to the stock. It followed a similar approach to that used for individual housing association transfers. A key difference was that the self-financing settlement was applied to all authorities and used a formula for expenditure allowances rather than more locally determined cost estimates which are conventionally used to calculate stock transfer valuations.

The calculation of rental income used in the self-financing settlement was based on the previous rent policy of RPI + 0.5%.

The settlement resulted in the majority of authorities taking on more HRA debt with around 32 getting a reduction in their HRA debt. Overall it resulted in a net increase in HRA debt of around £8.5bn from around £18.8bn to £27.3bn. The deal also allowed headroom for authorities to borrow over and above this up to individual specified levels. The total borrowing cap nationally was around £30bn in total.

Prepared 16th October 2015