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John Perry is a policy advisor at the Chartered Institute of Housing
Why councils don’t use all their existing borrowing capacity
The borrowing cap is an unnecessary piece of red tape and needs to be dropped, argues John Perry
Before parliament went off for its summer holidays, housing minister Kit Malthouse said he was “at a loss” to understand why councils don’t use their full borrowing capacity to build new homes.
Always willing to help out a new minister, I’ll offer a quick guide as to why this situation has come about.
First, there’s a conceptual issue with putting limits on things. If you paint a stop line on a road, some cars will halt before the line and some on it. Inevitably, fewer than 100% will touch the line itself.
The way to get the most out of a system is only to impose limits when they are strictly needed. In the case of council borrowing, the caps don’t apply to any other area of spending, nor do they apply in Scotland.
So why have them in England if you really want to “push, prod or harass in order to build more”, as the minister says?
“If you paint a stop line on a road, some cars will halt before the line and some on it. Inevitably, fewer than 100% will touch the line itself.”
Second, the caps were imposed when council housing became self-financing in April 2012. Although the caps were set by a formula, it bore no relation to individual councils’ need to build more homes: some were given more capacity (‘headroom’) than needed, others were given none at all. In practical terms, the caps were arbitrary.
After six years, why not – at the very least – review the basis of the caps and lift them where possible?
Third, councils that were previously making annual payments to the Treasury were obliged to take on £13bn of extra debt in 2012.
Many were smaller authorities that had been running surpluses on their housing accounts. Not surprisingly, councillors often wanted to repay this debt rather than keep it on the books. Those that did this saw their headroom increase further.
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Fourth, councils can only borrow if they can pay for the debt from rental income. The self-financing settlement was “intended to endure for the long term”. In practice, the initial promises were broken very quickly.
The worst blow was the imposition of four years of rent cuts, which will continue until 2020/21. Given such drastic cuts in their income, plus the threats to their asset base from the ‘reinvigorated’ Right to Buy and the planned sales of high-value homes, it is hardly surprising that councils trimmed their investment plans.
The Chartered Institute of Housing and the Chartered Institute of Public Finance and Accountancy calculated two years ago that councils’ investment capacity was only 28% of what it was originally in April 2012.
“Councils will sensibly stay within a margin of their borrowing caps both to mitigate risks and to allow for long-term planning of investment.”
Fifth, while most councils want to build homes to let at social rents, many have turned to local housing companies, which suffer none of the constraints just outlined, as a better proposition for housebuilding. If their energies – and their land – are being used for these new ventures, the headroom in their housing accounts could go unused.
That’s a reason why it would have made sense to allow all those who want and need to build, not just councils in areas with higher than average rents, to bid under the department’s scheme to raise the caps selectively in 2019/20.
However, even with all the constraints mentioned above, a survey for the Association of Retained Council Housing and the National Federation of ALMOs last year found that 80% of councils were borrowing at or near the borrowing caps.
As the report said, councils will sensibly stay within a margin of their borrowing caps both to mitigate risks and to allow for long-term planning of investment. In practice, out of a total borrowing potential of £30bn, around 10% is unused. This is hardly a surprising outcome.
If Mr Malthouse really wants to “prod and push”, he should ask his officials why, when councils set out programmes to build 20,000 new homes in 2012, they now only manage to build around 2,500 annually.
An honest reply will point to the debilitating effects of the rent cuts, Right to Buy and the higher rent arrears resulting from welfare changes.
But it will also suggest that the borrowing caps, even if they were an understandable result of the Treasury’s caution when it gave councils more financial freedom, are now an unnecessary piece of red tape. They should be quietly dropped.
John Perry, policy advisor, Chartered Institute of Housing
UPDATE at 12.51pm on 30.07.18
This article was expanded from an earlier version following a request from the Chartered Institute of Housing. A line setting out the case for allowing all councils to bid for raised caps did not appear in the earlier version.
