Review of Council Housing Finance: Written ministerial statement by John Healey

I intend to publish a consultation document before the summer recess on reform of council housing finance. My intention is to dismantle the Housing Revenue Account Subsidy system and replace it with a devolved system of responsibility and funding. However I can confirm to the House today the principles on which this will be based.

I want to provide more flexibility in finances and more transparency in the operation of the system. I want to devolve control from central to local government. And, in return, I want to increase local responsibility and accountability for long term planning, asset management, and for meeting the housing needs of local people. The current system makes this difficult to achieve.

On 12 December 2007 my predecessor as Housing Minister announced to the House a review of council housing finance to be led jointly by my department and the Treasury. Its purpose was to identify options for a sustainable, long term system for financing council housing that would be fair to both tenants and taxpayers.

The review has been conducted with a wide range of interested and expert organisations through meetings and workshops, calls for evidence, focus groups and questionnaires. Research and analysis were commissioned internally and from external experts.

There is a clear rationale for the current redistributive Housing Revenue Account Subsidy system. Councils have different spending needs and different capacities to raise income. Without redistribution, some councils would have to charge higher rents or deliver lower quality services. By redistributing money, all councils should be able to deliver a similar level of service while charging a similar level of rent.

However, there are significant drawbacks in a national system for financing council housing and in the relationship it creates between central and local government.

Our consultation following this review will propose a devolved self financing alternative to the current system. This would remove the need to redistribute revenue nationally, whilst continuing to ensure that all councils had sufficient resources. With these reforms, councils would finance their own businesses from their own rents, in exchange for a one-off redistribution of housing debt. By freeing councils from the annual funding decisions in the current system, this will enable councils to plan long term and to improve the management of their homes, secure greater efficiencies and improve the quality of service to their tenants.

This would provide councils with a financial framework in which they could plan and manage for the long term in the same way we expect of other social housing providers. It would give councils a greater capacity and more freedom to respond to local needs and, in doing so, increase their responsibility and accountability to local tenants and residents.

Change on this scale is complex and will require primary legislation. The consultation will set out how moving to a self-financing system will require an adjustment of debt levels for most authorities. At present around £17bn of housing debt with annual servicing costs of around £1.1bn is spread across the 202 councils in the system. The self-financing model would enable each council to manage directly and fund their own debt.

In addition to revenue redistribution, councils are currently required to pay Government different proportions of the receipts from Right to Buy sales and sales of other HRA assets. There is a strong case for allowing councils to retain all of their capital receipts which could give councils the ability to develop a comprehensive strategy to maintain, improve and develop their housing. The consultation document will therefore set out proposals to end the pooling of all housing capital receipts.

I want to see councils building and commissioning more of the new homes that people need in their area. We are therefore taking immediate steps to support this role for local authorities, based on the same principles I am setting out for our long term reforms.

For the first time, councils can now access the same capital subsidy through the Social Housing Grant that is provided to housing associations for new affordable homes. Decisions on the first Council schemes to be funded in this way will be confirmed in September.

At the Budget, we announced £100m to fund some 900 new council homes. Yesterday, in his Housing Pledge, y the Prime Minister announced a further £1.5bn to build an extra 20,000 affordable and energy efficient homes, increasing the scale of the programme for the next two years to a £2.1bn investment for 110,000 new affordable homes. This includes a fourfold increase in our plans for new council homes. Together, these changes will enable councils to become once again significant providers of new housing, with further flexibility to do more, where councils can act rapidly and offer good value for money.

We want to maximise our efforts behind building of new affordable homes. So I can also confirm that we are closing the open market HomeBuy scheme to new applicants and in future our low cost home ownership programme will be directed to schemes which support new build homes.

Tenants and council tax payers expect to see their services delivered with the very best value for money. I want to ensure that our reforms to the council housing finance system have strong incentives for improving efficiency, which will benefit councils and their tenants.

We remain committed to completing our comprehensive decent homes programme and to maintaining this standard.  The reforms I propose will safeguard this commitment. Capital funding will be provided to support this.  We also intend to complete improvements required to common areas of estates and will ensure that there is sufficient funding in the system to maintain them in the future.

Our aim in setting up the self financing system is to ensure that it delivers the investment needed to sustain and maintain the existing stock of council homes.

In the future within this self-financing system, local authorities may also wish to borrow to fund investment. Government is currently considering whether and how any local flexibilities for new investment could be reconciled with the need to ensure the overall fiscal position for Government is not undermined.

The benefits delivered by Arms Length Management Organisations that manage council housing services should not be affected by a change in the system for financing council housing. We see a strong future role for ALMOs which are valued by their tenants. We would expect ALMOs to continue to develop their housing management capacity and to look for opportunities to extend the range of services they offer, including to other landlords, where this would improve efficiency and effectiveness.

Transferring to a housing association should also remain an option that council tenants can choose. There are potential benefits from bringing in a not-for-profit body with access to private finance to own and manage the homes. However, there should be equity in the terms of public funding whether they are transferred or retained in the future under self financing. The value placed on the stock in a self-financing agreement and a transfer deal will be based on delivering the same standards of service at a comparable cost.

We will continue to work with councils whose tenants have voted for transfer and councils who are currently developing transfer proposals to bring these to completion. Future transfer proposals will not gain any financial support beyond what would be provided under self-financing.

A number of councils have been developing proposals to establish Local Housing Companies (LHCs) that combine public land and private finance to deliver new mixed tenure housing. Current market conditions create difficulties in taking the next steps, and the consultation document will confirm how we will assist the establishment of viable LHCs as quickly as possible.  In future, self-financing will provide another option for councils who want to put their land and income into schemes to deliver new housing.

Responses to the review showed strong support for a more devolved approach to financing council housing.

A fully self financing locally devolved system cannot be implemented in a single step but I want to move as rapidly as possible to put these reforms in place and the consultation document will set out my proposed timetable.

However, there are steps we can take without delay. So I am announcing that from today we will exclude all new build council housing from the HRA subsidy system which means that councils will retain in full the rent and capital receipts from these homes.

I will work with all those with an interest in improving the system to make sure that these plans for reform are robust and deliverable.