Scrapping HRA cap risks ‘turf war’ at Westminster

Measures expected to add around £1bn to the public balance sheet every year sets up a behind-the-scenes stand-off.

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Scrapping the borrowing cap could spark a Westminster ‘turf war’ with Treasury unhappy about a policy pitch with the potential to put around £1bn to the public balance sheet every year.

Government is playing down expectations of the measure being detailed as soon as the Autumn budget – looking instead to the Spending Review as a more likely date.

Treasury’s reported “unhappiness” at the scrapping of the cap sets up a behind-the-scenes stand off as to jurisdiction over policy detail.

Which means it may be months before such detail is spelt out.

Soon after the PM’s conference announcement scraping the cap, it emerged the measure is expected to add around £1bn to the public balance sheet every year – a significant hit to the Treasury’s deficit targets.

Ministers are widely expected to seek to pass legislation to lift the cap, meaning HRA borrowing will come under the prudential code – the rules determining other types of council borrowing.

The LGA suggests the borrowing powers could be focused on “additional units” only with an emphasis on mixed-tenure development including homes for social rent, affordable rent and shared equity products.

But this could potentially rule out using additional borrowing for refurbishment or repairs.

Nor is it clear how related restrictions would be enforced – with the obvious concern at heavily indebted councils having to bid to take out new loans within their HRAs.

Against this background is the PM’s corresponding conference pledge to bring a decade of austerity to an end – of which expects are sceptical given the government’s continuing commitment to deficit reduction until the second half of the 2020s – with significant cuts to many departments’ budgets pencilled in.

The conference announcement moves housebuilding on from the warning government had from the Treasury Committee in January that targets would not be met unless the borrowing cap was scrapped.

To the committee, such a measure was essential to get anywhere near the target of 300,000 new homes a year.

Only 217,000 new homes had been built the previous year, and private housebuilders were said to have consistently provided 150,000 units per year – meaning the target was, at best, unlikely to be met without a significant increase in supply by councils.

At the time, the Treasury expected “too few” applications from councils to raise the borrowing caps on their housing revenue accounts – despite the committee saying raising the cap would have “no material impact” on the national debt.

Chancellor Philip Hammond expressed his support for “lifting” housing revenue account caps for councils in “high demand areas to get them building again” the previous year’s budget.

But councils had to bid for increases to their HRA caps with the additional borrowing being be spread over three years between 2019-20 and 2021-22.

Although “up to” £1bn was pitched as available until the end of 2021-22, at the time only £880m had been set aside.

Treasury documents told of a £120m shortfall based on the assumption that only “80% of the borrowing headroom will be taken up by local authorities with the main uncertainties outlined as relating to the “behavioural response” of councils to the measure.

The sector saw historical precedent in the 2013 plan to let councils borrow an extra £300m over two years for housing – councils only took £160m with “strings attached” cited as the reason why.

Treasury maintains a stance of monitoring how councils respond to additional borrowing.

Initial indications suggest the lifting of the borrowing cap could allow councils to build up to 100,000 more homes – a provisional figure based on building rates as they were pre-cap and the current logistical capacity of the construction sector.

Overall, councils could take on between £10bn and £15bn in extra debt for housebuilding without the HRA limit – building around 15,000 homes a year.

By comparison, councils in England alone built just 3,500 homes over 2016/17.

But any initial figures are at the whim of due detail.

Councils also have that offer of 1bn extra HRA borrowing capacity made at last year’s Autumn Budget.

Bidding for this closed last Sunday (Sept 30) with the programme understood to be oversubscribed.

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