Councils need to ‘keep calm and carry on’ despite the chancellor’s threat yesterday to re-examine how much local government is allowed to borrow for housing
Tucked away in the Budget red book published yesterday was a worrying mention of the effects on public borrowing of council housing finance reform.
The Office for Budget Responsibility has forecast that the resultant debt will be half a billion pounds higher than expected in the coming financial year, and this may grow to be £0.9bn higher by 2016-17. The estimates are said to be ‘highly uncertain’, but are enough to make the Chancellor warn that he will ‘take action to address the increase in public debt’ if the forecasts don’t change.
What does this mean? First, someone has made a mistake, since if the OBR forecast is out of line with those by the Department for Communities and Local Government or the Treasury they have either spotted something that officials didn’t or officials have changed their forecasts since they finalised the borrowing caps that apply to council housing authorities only a short time ago.
Or perhaps the OBR themselves have assumed that the full borrowing cap limits will be used by councils, whereas DCLG and Treasury think many councils will borrow less than the permitted maximum.
Second, this new uncertainty is something for which councils bear no responsibility, since naturally they have assumed they can borrow up to the levels set by the borrowing caps that each has been given, without any repercussions. Indeed, that was one purpose of having the caps.
If some problem has arisen, councils might well feel they have made legitimate business planning decisions and they shouldn’t be given the responsibility of correcting errors that they didn’t make. They will remind government that the decisions made are not just about figures, but about spending in the building industry on planned maintenance to council housing and of course on new house building, which should not be disrupted.
Third, the government clearly promised, in their November 2011 paper on the transition to self-financing, that they wouldn’t go back on these limits. It’s worth quoting what they said as it’s unusually specific:
‘Ministers have stated during the passage of the Localism Bill that we will not subsequently reduce the aggregate borrowing cap, or the borrowing caps for individual councils, which are set out in the original self-financing determinations. Councils will therefore be able to plan ahead on the basis of those caps.’
To state the obvious, councils have indeed planned ahead and to even hint at any change now is bound to shake their confidence.
Even more annoying is the fact that all this angst is unnecessary. The Chartered Institute of Housing and others have repeatedly advised governments to make changes to the borrowing rules affecting council housing that would bring them into line with international conventions.
If government were to do this, borrowing for self-financed council housing would no longer count towards the main measure of government debt. This means there would be no need for the current artificial caps on borrowing, although of course borrowing would still have to follow prudential rules. And there would be no need for government to intervene to reopen the settlement because of possible breaches to its targets for public borrowing.
A further irony is the confirmation that the Treasury will get a net receipt of £8.1bn from councils when the debt settlement takes place on 1 April. This reflects the expected profit the Treasury would have made from council housing over coming years. The irony lies in the fact that – although under government rules the transaction is neutral – under the international accounting rules on which the government’s reputation is judged, councils will be giving a very useful boost to the government’s efforts to reduce its debt levels.
Faced with this new uncertainty, what should councils do? The answer is probably ‘keep calm and carry on’. They have the legal power to borrow up to caps they have been given, and the Treasury can only change this by issuing a revised determination on debt limits which – given the government’s previous assurances – would certainly be closely questioned. The message is: if the Treasury has created a mess, let the Treasury sort it out.