Border tensions: devolution, rents and housing benefit

Steve Wilcox

The eleventh edition of this report, bringing together the most up-to-date housing statistics for the UK.

The UK Housing Review provides key information for managers and policy-makers. Now in its eleventh edition, it brings together the most up-to-date housing statistics for England (and its regions), Wales, Scotland and Northern Ireland.

Its 200 charts and tables include data on:

  • UK and international economic trends;
  • Public expenditure plans;
  • Housing stock and conditions;
  • Household characteristics and incomes;
  • House prices and market trends;
  • Housing investment by councils and housing associations;
  • Rents and revenue spending;
  • Homelessness and lettings;
  • Subsidies, tax relief and benefits.

In addition to commentary on current trends, this edition features essays by leading analysts on issues relating to devolution and its impact on housing policy.

Summary

Summary

While responsibility for housing policy has been devolved to England, Wales, Scotland and Northern Ireland, responsibility for housing benefit and wider social security policy has been retained as a 'UK function'. Yet housing benefit is the primary form of government expenditure in support of housing policies. This analysis by Steve Wilcox, from the UK Housing Review 2002/03, explores the tensions arising from this division of responsibilities, as well as the ramifications of rolling out the Treasury 'resource accounting' conventions for local government in all parts of the UK.

  • Housing benefit policy for Scotland and Wales is wholly in the gift of the UK government. In contrast, housing benefit policy is formally devolved to the Northern Ireland Assembly, with the financial responsibility for any divergence falling to the Assembly.
  • Under the terms of the devolution settlement, if council rent increases in Scotland and Wales are higher than those in England, they would impose housing benefit costs onto the devolved budgets. However, the Scottish Parliament has no powers to influence or control autonomous council decisions on rents, and is thus financially at risk.
  • Radical housing benefit reform has been deferred by the UK government pending rent restructuring in the social rented sector. There are, however, no current plans to restructure social sector rents in Scotland or Wales.
  • Housing benefit rent limits for council tenants in England are to be linked to new 'target' rents. There is no equivalent policy in Scotland and Wales. UK housing benefit policy is thus being tailored to English rent policy, and will operate differently in Scotland and Wales.
  • The capital control system for English councils is to be reformed under resource accounting conventions. Direct capital controls will be replaced by 'prudential' borrowing rules linked to subsidy provisions and a tightly controlled revenue regime. However, housing legislation in Scotland is different, and a prudential borrowing regime could permit Scottish councils to raise some £1 billion to supplement their housing capital investment programmes.
  • The Treasury has agreed to cover any net council debts in Scotland and Wales following stock transfers, as an addition to the devolved budgets for the Scottish Parliament and the Welsh Assembly. This commitment goes further than in England; it could be viewed as an intervention into the devolved housing policy.

The devolution settlements

While housing benefit is quite firmly a retained UK function as far as Scotland and Wales are concerned, the position in respect of Northern Ireland is more complex. In principle, the NI Assembly has autonomy over the policy and administration of housing benefit. However, it is not unfettered, and there is a duty on the UK and NI ministers to consult one another 'with a view to securing, to the extent agreed between them, single systems of social security, child support and pensions'.

In practice there is no seeming desire in Northern Ireland to move away from the 'aspiration for parity' between the GB and NI systems. Moreover, the Concordat between the UK and NI governments makes it clear that, if the NI Assembly did wish to pursue alternative policies, this would require a financial settlement - whereby the costs (or savings) of any NI policy innovations would have to be met from the budget of the Assembly and would be neutral for the UK government.

The financial settlements for devolution also contain riders in respect of the relative movements of council rents. If council rents in Scotland or Wales rise more rapidly than in England, then this would result in a charge against the budget for the Scottish Parliament or Welsh Assembly. Conversely, if they rise more slowly, this will result in an increase in the budgets for the devolved administrations.

In England and Wales, local authorities' freedom to set rent levels is constrained by subsidy rules. If authorities increase rents by more than the level of guideline increases, then any 'surplus' increases that result in housing benefit payments to tenants are not supported by central government subsidy. Those restrictions are now in the process of being further tightened in England under the new 'rent restructuring' regime.

Different Scottish rent regime

The financial regime for council housing in Scotland is radically different. The 1989 Act that is the legal basis for the English and Welsh regime does not apply in Scotland; in part, this reflects the traditional separate legal system for Scotland and the opportunities that this provided for a degree of Scottish autonomy in the years before formal devolution.

So there is no link between the housing and housing benefit subsidy systems for council housing in Scotland, and only two councils receive housing subsidy. In contrast, low debt authorities in England and Wales are currently required to contribute towards the costs of housing benefit payments, and remain within the grip of the rent guidelines built into the subsidy system.

There are no subsidy or other central controls on decisions on rent levels by the great majority of Scottish councils. Only the two councils remaining in subsidy are influenced by the rent levels assumed in the Scottish subsidy formula. Currently, Scottish councils raise over £100 million per annum from rental incomes to supplement the limited resources otherwise available for their investment programmes; this accounts for about a third of the total level of investment in council housing in Scotland.

Without any central powers, the Scottish Parliament is at risk of facing an imposition on its budget as a result of the autonomous decisions of local councils on rent levels. So far this has not happened. The first adjustments to the Scottish Parliament Budget in respect of rent increases will be applied next year, in respect of relative rent movements in 2000/1 and 2001/2. The adjustments will increase the budget for the Scottish Parliament, as council rents in Scotland in those years rose by less than those in England.

Housing benefit policy developments

The English Green Paper on housing policy also contained a discussion of UK-wide options for housing benefit reform. Relatively minor reforms followed on from the Green Paper; a key decision was that radical reforms would need to await rent restructuring in the social rented sector.

This decision about the future for UK housing benefit was based on a detailed evaluation of rents and policy in the social housing sector in England, with little reference to rents and policy issues in Scotland and Wales.

Rent restructuring in England for the local authority and housing association sectors is now underway. The process is problematic, will be subject to a three-year review and will be far from complete in ten years' time. The current profiles of local authority and housing association rents in Scotland (especially) and Wales are also problematic, but there are no current plans to restructure rents in either country; however, research on the current rent structures and policies of local authorities and housing associations has recently commenced.

A measure of divergence?

One particular feature of the English rent restructuring policy is that in two years' time the housing benefit rent limit for each individual council dwelling will be based on the target rent for the dwelling derived from the new rent policy (70 per cent based on earnings and 30 per cent on capital values).

These rent limit rules will only apply in England, and there will be no equivalent target rents for Scottish and Welsh authorities. Nor can the UK government require such target rents to be determined, as rent policy is a devolved function. This English development in housing benefit policy sets a clear precedent for housing benefit rules on rent limits being set on a different basis in England, Scotland and Wales. It also demonstrates the inherent difficulty in the devolution divide on the responsibilities for housing and housing benefit policy.

More radical reforms for housing benefit are under active consideration for the private rented sector, with consideration being given to introducing some flat rate element into the calculation of benefit entitlement, in conjunction with entitlement then being restricted to a maximum proportion of the total rent. Whatever the merits of such reforms, the question arises as to whether, if introduced, they should apply uniformly across England, Scotland, Wales and Northern Ireland.

The different approach being taken in respect of the housing benefit rules on council rent limits in England provides the precedent for negotiating a different approach in each territory, albeit that the ultimate decisions in respect of Scotland and Wales would rest with the UK government. Only the Northern Ireland Assembly would currently have the option of taking a different approach to the rest of the UK.

Local authority capital controls

As part of the move to resource accounting conventions across all UK government departments, direct controls over local government capital spending in England are to be abolished. Instead, levels of borrowing will be subject to 'prudential rules' on the levels of borrowing an authority can make, based on its capacity to service loan payments.

Wales will inevitably be bound into this approach by its continued tie to a common legal framework with England. However, in England and Wales the implications for levels of borrowing under this new regime are effectively constrained by a tight subsidy system and by the clear indication that borrowing will not be permitted against the new major repairs allowances.

The new system will, effectively, regulate investment levels through subsidy controls, whereas the current system uses direct capital controls to determine levels of subsidy provision. The new system may be less burdensome for authorities, but it is essentially a reform of government controls over council borrowing rather than their abolition. Council borrowing will still count against the government's key public spending measures.

In Wales, the failure to increase levels of council housing investment in the post-devolution years means that there will be severe revenue constraints on potential borrowing levels. Increased borrowing by Welsh councils under the new regime would only be possible if the Welsh Assembly was prepared to increase its budgeted provision for housing subsidy payments. The low priority given to housing investment by the Assembly in the post-devolution years suggests that this is unlikely, especially when the Treasury has agreed to meet the costs of any residual council housing debts in the event of stock transfers by high debt authorities. The choice for the Assembly is between housing policies that have costs that fall onto its own budget and policies where the costs are met by the UK Treasury.

It has also been proposed that prudential rules should be applied to local authorities in Scotland. However, at this stage it is proposed that council housing in Scotland should be excluded from this system; it should continue to be subject to direct capital controls. While, on the face of it, this represents an odd anomaly, the reason is quite clear. If Scottish councils were permitted to operate under the 'prudential rules' regime, the substantial revenue sums they currently apply to supplement their capital programmes could, instead, be applied to support a massive increase in short-term investment. Even without any further rent increases, councils could raise close to £1 billion for investment in the first few years under such a regime, instead of the £100 million a year they are currently investing direct from rents.

Such a regime would also increase the incentives for Scottish councils to consider further rent rises to support increased levels of investment. If Scottish councils did choose to increase rents in this way,

the consequential housing benefit costs would have to be met from the budget of the Scottish Parliament. Such a regime would provide some councils with a viable policy alternative to stock transfer. This, too, would be problematic for the Scottish Parliament; not just because it has put so much store in the stock transfer option, but also because (just as in Wales) the Treasury has agreed to meet the costs of dealing with any residual council housing debts that follow from stock transfers by high debt authorities (such as Glasgow).

The Scottish Parliament is, consequently, unlikely to agree a prudential borrowing regime for council housing in Scotland unless it is insulated, at least to some degree, against costs falling on its budget as a result of council decisions on rent levels. However, in this context, Scottish councils may in turn be prepared to accept some fettering of their discretion on rent setting policy if that is linked to opening the door to a prudential borrowing regime for council housing.

Conclusions: border tensions

The housing policy strategies of the Scottish Parliament and the Welsh Assembly are thus heavily constrained by the UK-wide accounting conventions and by the Treasury agreement to meet the costs of residual council housing debts following stock transfers in Scotland and Wales. Both the devolved administrations are thus presented with a central choice between housing policy options that either have to be met from their devolved budgets, or are covered by the UK Treasury. There are many sound arguments in favour of stock transfers, but it is difficult to argue that housing policy in these areas has been fully devolved when the Treasury has intervened to support one policy option for Scotland and Wales far more firmly than has been the case in England.

About the project

This analysis by Professor Steve Wilcox is contained in one of the articles in the 2002/03 edition of the UK Housing Review (formerly known as the Housing Finance Review). Other articles examine developments in devolved housing policy in Scotland and Wales, and steps towards the integration of economic, planning and housing policies in the English regions. The Review also contains over 120 tables of key housing statistics for the whole of the UK.

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