Budget 2018 – a stepping stone to a truly 21st century Spending Review?
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The lifting of the housing revenue account cap in next week’s budget should be the first step towards a wider reform of public finances to encourage growth, says Tom Lawrence
It’s difficult to believe it’s only a year since my last blog for Room 151 on this subject. So much has happened in that time.
On a personal note, I’ve been kept busy creating tools for the LGA for their Fair Funding Review work and writing a report for EPI on school funding. I’ve also moved house twice.
Things have also moved on in local government finance.
In my last blog, I called for reforms to the public finance accounting regime to reflect the growing financial autonomy of local government.
I argued that these would make it easier to extend borrowing for investment in both council housing and in local infrastructure and growth.
As it happened, in the Budget two days later, the chancellor announced that the housing revenue account (HRA) cap would be lifted for areas of high affordability pressure, up to a total of £1bn by 2021-22.
Then, earlier this month, the prime minister announced that it would be ended completely – we are told that details will be provided in next week’s Budget.
This is very welcome news. Sixty local authorities have stated in an open letter that they will borrow more for building homes as a result. Cheltenham BC has written about its plans here on Room151.
A sense of what could be achieved can be seen from the flexibilities in the headroom granted in previous years.
In both 2015/16 and 2016/17, HRA borrowing limits were raised by just £150m.
This extra headroom was allocated by competition, with 74 awards in 2015/16 made to 21 authorities.
West Lancashire Borough Council, for example, was allowed to borrow an extra £2.5m for the Firbeck Revival Scheme (part of a wider regeneration of Skelmersdale town centre).
The extra borrowing unlocked further funding, allowing a total investment of £8m on the scheme, with £5.5m provided from the council’s HRA and general fund budgets.
Three years on, there are 42 new dwellings at the site, all equipped with smart meters and a “home office area”.
The builders successfully ensured that construction waste was kept to a minimum, and ecology surrounding the dwellings was left undisturbed. The development has used energy efficient fabrics, provides plenty of daylight for residents and has included street scene improvements.
Headache
If this is possible with just £2.5m in a few years, the development resulting from removing the cap entirely could be truly impressive.
However, it could leave the chancellor with a bit of a headache.
The Budget will be looking towards next year’s Spending Review.
In the Spending Review, he will want to pull out all the stops to boost growth across the whole country, in case of short-term (or even long-term) economic shocks caused by Brexit.
He will also want to demonstrate that the UK is emerging from a decade of austerity. He will want to show that the government is serious about tackling the housing crisis by making the lifting of the HRA cap permanent. And he will want to achieve all this without letting the deficit grow again.
Furthermore, creating sustainable communities is about more than just providing housing, as welcome as that is.
Residents need jobs too, but they also need the amenities that local businesses provide in a successful town or city centre.
And they need the infrastructure to support their housing (as recognised in the open letter mentioned above).
For the chancellor to square the budgetary circle and allow councils to invest in housing, infrastructure and local economies long term, he will need to implement the kind of reform of the public finances mentioned in my post last year.
Next year’s Spending Review should reflect and mould the devolved reality of the public sector in the 21st century, not the centralist tendencies of the late 20th century.
Good practice
I am about to publish an extensive report on this on my website, looking in depth at the way the government treats local authority financing as its own in Budgets and Spending Reviews.
It shows the problems this has caused for councils across the country wishing to invest in housing and infrastructure and grow local economies.
It looks at other countries’ measures of deficit and debt, such as Denmark, Sweden and Canada, but also the wider context for these, such as the presentation of fiscal documents and the country’s local government finance system.
It finds that all of these vary very widely, with economic history, political culture and technocratic choices all having an effect.
None of these would be ideal as a wholesale replacement for the way we currently do things.
But it’s clear that we can learn from good practice to improve public financing in the UK.
For example, in Canada, the federal government focuses mainly on federal deficit and debt in its budgets, but also presents some charts showing general government debt for international comparison purposes.
(The latter is something we already do in the UK, as required by Eurostat. It has been suggested in the past that adopting Eurostat’s measure of general government debt, sometimes known as Maastricht Debt, would allow greater investment in social housing. However, it would not promote investment in the supporting infrastructure and in local economies. With Brexit meaning that we are no longer required to collect this data and the HRA cap being removed, the arguments for this no longer stack up.)
Drawing on these examples to improve the UK’s fiscal documents would allow the Treasury to present the situation more honestly: some councils will doubtless invest to boost their local economies, while central government continues to practice borrowing restraint.
Tax increment financing
This would, for example, free councils to borrow on the basis of future business rates growth, as has happened in the Stephenson Quarter of Newcastle. This is part of one of England’s three Tax Increment Financing (TIF) schemes.
Under this scheme, the two local authorities agreed with the Government in 2012 that all business rates would be ring fenced and retained for 25 years.
On this basis, they were able to invest £92m across four sites in an Accelerated Development Zone (ADZ), including the Stephenson Quarter.
On this site, the following have been completed: a Crowne Plaza hotel, a 35,000 sq ft Grade A office building (fully occupied since 2016), a multi-storey car park, a University Technical College (UTC) and a 1,000 capacity, Grade II* listed cultural venue.
Further new builds, conversions and redevelopments are planned.
The chancellor could announce in Monday’s Budget the start of a process of reform leading up to next year’s Spending Review – please take this opportunity, Mr Hammond.
Tom Lawrence is public policy consultant at TRL Insight
