HC Deb 08 February 2000 vol 344 cc40-8WH 12.30 pm
Mr. Bill Rammell (Harlow)

I welcome the opportunity to introduce a short debate on councils in negative subsidy and, in particular, the impact that the move to resource accounting for housing revenue accounts will have on those councils. Unless the current proposals are amended, they will have a dramatic and disproportionate effect on several councils whose stability will be threatened, as will their ability to cope with the programme of change and modernisation that the Government and local communities want to take place in local government. I am not having a general whinge that central Government are not doing enough for local government, but as someone who was a local councillor for 12 years until 1 May 1997, I can see the difference in what is happening now.

My local authority in Harlow has, for the first time, a local government settlement that has not led to central Government-directed cuts. It has seen the phased release of capital receipts and the replacement of compulsory competitive tendering by best value. All such measures have been welcomed; all of them were campaigned for by local government for a long time and all of them have been delivered by this Labour Government. Yet now, with the proposed move towards resource accounting, all those changes could be undone. It could, I fear, lead to cuts on a cataclysmic scale, and it is no exaggeration to use such terminology.

I shall describe the impact of the proposals on my local authority. If they were implemented unamended, there would be a cut of £3.1 million from Harlow's annual general fund budget of £12.4 million—a 25 per cent. reduction, leading to a slashing of services or a 55 per cent. increase in the council tax. I could not justify such a reduction or such an increase in the council tax. It is not as though my local authority and others in a similar position have had it easy over the past 10 to 15 years and have much fat and inefficiency to trim from the system.

Before the capping regime was introduced to small district councils when the de minimis provisions were abolished in 1992–93, Harlow had a budget of £24 million. Today, that budget is £12.4 million. I know of no other local authority in the country that has seen such a proportionate reduction in its budget. Having gone through the pain of that experience, difficult decision making, the impact of such action on the community because of the loss of services and the impact on the staff with significant numbers of redundancies and, finally, having felt that with a new Government we are on an even keel and we can go forward, now to be faced with the prospect of a further 25 per cent. cut in council services would be intolerable and unachievable.

I am not making a case for every council in negative subsidy, but I am making a case for Harlow and similar new towns, which, because of the nature of such communities, are in such a position. It is worth examining why such areas will be affected so dramatically by the proposed changes. I understand that the major part of the reason why Harlow is in negative subsidy derives from what the council did with some of its housing capital receipts in the 1980s. Some were used to reinvest in the ageing infrastructure of the new town in non-housing projects.

Why did Harlow and other new town authorities undertake such action? First, they had the money available from the sale of council houses. Secondly, there was no guidance from Ministers or civil servants that there was anything wrong in using the money for that purpose. In fact, the reverse was the case. The use of the money for that purpose was actively encouraged. Thirdly, new towns that have to consider that kind of approach face a particular problem. Unlike other communities, such towns are not masters of their own fate in terms of disposing of land and reinvesting the proceeds in regeneration. Major elements of our local communities are owned not by local councils but by the Commission for the New Towns—now CNT and English Partnerships—which has a specific mandate and direction from the Treasury to maximise the financial return on disposable assets. That generates £150 million for the Treasury per annum, largely without the community gaining. For those three reasons, councils did not have an alternative to what they did in the 1980s. It is therefore hardly surprising that that is how they spent those resources.

The nub of the problem is that that expenditure, and the on-going transfer of the interest from the notional use of capital receipts from the general fund to the housing revenue account, is a major part of Harlow's negative subsidy. That constitutes £1.4 million of the £3.1 million that I mentioned earlier. Without that statutory transfer, the problem would not be of the scale that we face today.

Mr. Philip Hammond (Runnymede and Weybridge)

I assure the hon. Gentleman that that problem does not affect only new towns. I thank him for raising the issue on behalf of many other authorities, including my own in Runnymede, which are affected by the problem.

Mr. Rammell

I am aware that it it not only a problem for new towns. New towns, however, have a special problem.

The problem was also created by the commuting of CNT debt in 1996. My local authority, and others, were not engaged in an activity of which the Government were not aware. The Minister wrote to the chair of Harlow's housing committee as recently as December 1998 on the issue of the transfer of the surplus created through negative subsidy from the housing revenue account to the general fund. He stated: the transfer from the HRA to the General Fund is intended to benefit the authority by recognising that its overall ability to spend in a particular year should increase by the amount of the surplus. It is clear that, as recently as a year ago, Ministers and civil servants were aware of the practice, and, on the basis of that letter, endorsed it. The sudden removal of that ability, under resource accounting, would contradict what Ministers have said and done under this and the previous Government. I acknowledge that the Government understand that there is a problem. They have already talked about transitional protection, which is welcome. Given the scale of the problem that we are facing, however, that does not go far enough.

It is also worth while arguing the case in terms of the Government's objectives in moving to resource accounting. Their motives are contradicted by the way in which capital receipts in the 1980s would be treated under the proposed system. As I read the Government's intentions, they want subsidy for local authority housing to be regarded as a national programme. Assumed surpluses in subsidy calculation would be pooled and redistributed to authorities in assumed deficit. That would involve transferring resources from councils with less relative need to those with greater relative need.

The fact that negative subsidy exists is not an accurate indicator of lack of need. It is obscured and masked by the previous use of housing capital receipts for non-housing capital purposes in the 1980s. If Harlow had not used the money for that purpose in the 1980s, its negative subsidy would be reduced by more than £1 million. Under the proposed new system, therefore, the redistribution from Harlow to other local authorities would be reduced by more than £1 million. That distortion means that the system does not accurately reflect housing or other need.

It is easy to criticise a set of proposals. However, I am arguing that there should be more than transitional protection for those local authorities that have been affected substantially. A distinction should be made between local authorities that are affected substantially and those that are not. The Government's consultation paper identified a cumulative total of about £100 million in respect of councils with negative subsidy, but I have analysed the way in which that figure breaks down, and for local authorities that are substantially affected, the amount is much less than £100 million. For example, if the system were so amended that any local authority could not lose more than 10 or 15 per cent. of its general fund standard spending assessment, the cost to the Government would be much less than £100 million.

I would argue for a maximum percentage loss as a percentage of local authority standard spending assessment, and the Government should respond favourably to that. Clearly, it would have to be provided on an on-going basis through a permanent compensatory grant.

On the specific problem of the treatment of capital receipts in the 1980s, I urge the Government not to maintain the current statutory requirement of an item 8 statutory credit transfer for councils with negative subsidy. The Government should allow the notional interest gained from the use of those capital receipts to go to the general fund, rather than the housing revenue account. In my local authority, that measure alone would resolve £1.4 million of £3.1 million, and other new town local authorities would derive a similar benefit.

Substantial transitional protection must be provided for a number of years. The changes, which will occur in just one or two years, will have a huge impact on local councils and cause major problems. This might seem a rather arcane issue, but to judge by the number of hon. Members in attendance it has given rise to considerable concern. I hope that, in the long term, the Government's response will be positive, but I am saying on my constituents' behalf that we need help on this issue. The local authority in Harlow and authorities elsewhere are not to blame. They were simply doing something that the system had enabled them to do for many years. Ministers knew that they were doing it, and they were actively encouraged to do it in the light of circumstances. I see no reason why those local authorities—and, more importantly, their communities—should be penalised in such a dramatic way.

Good government is about pursuing sensible reform, and this Government are demonstrating that in a number of different areas. Sometimes, Mr. Winterton, sensible reform—

Mr. Deputy Speaker (Mr. Nicholas Winterton)

Order. In this Chamber, there are four hon. Members to whom reference should be made not by their names but by the titles, Madam Deputy Speaker or Mr. Deputy Speaker. I have hestitated to draw that to hon. Members' attention but, whether or not we merit those titles, that is the decision of the House.

Mr. Rammell

I ask for forgiveness, Mr. Deputy Speaker. That goes to show that I should not listen to the radio programme "Yesterday in Parliament". According to last week's report on proceedings in Westminster Hall, an acting Deputy Speaker said that Deputy Speakers should be referred to by name. I apologise for my confusion.

Mr. Deputy Speaker

Perhaps I can help hon. Members. On certain occasions, in addition to the four hon. Members who have been appointed as additional Deputy Speakers, senior members of Madam Speaker's Chairmen's Panel may also chair sittings in Westminster Hall. They are addressed as "Chairman" or by their surnames.

Mr. Rammell

I thank you, Mr. Deputy Speaker, for that information. I am duly put in my place.

I was saying that good government is about pursuing sensible reform. Some kinds of sensible reform, which are otherwise perfectly desirable, may have unintended, adverse and dramatic consequences. The move towards resource accounting, and the impact on councils in terms of negative subsidy, is an example of that.

Mr. Tony McWalter (Hemel Hempstead)

Is my hon. Friend aware that the council that stands to lose most in this respect is Dacorum borough council? Because of its huge overhang of commitments, almost every worthwhile project in my area is on hold, possibly for ever.

Mr. Rammell

I am aware of that, and my hon. Friend makes a telling point. The change is like a sword of Damocles hanging over local authorities that are affected. It puts a stop to the kind of long-term planning and modernisation that I know that the Government want to see in local councils. How can we begin to undertake such modernisation processes if such large cuts, or increases in council tax, are to be borne as a result of the proposals?

I understand much of the rationale behind the Government's move towards resource accounting, but I hope that they recognise the unintended consequences that may result in terms of the scale of cuts that would affect my local authority and many others. I strongly urge the Minister to reconsider the matter and amend the proposals.

12.46 pm
The Parliamentary Under-Secretary of State for the Environment, Transport and the Regions (Ms Beverley Hughes)

I congratulate my hon. Friend the Member for Harlow (Mr. Rammell) on his success in securing the debate, and his courage in raising the subject of housing finance, which is highly complex, as hon. Members who have been involved in it will be aware. He expressed those complex issues well, and it is right and timely that matters of concern to his constituency and elsewhere should be aired.

As my hon. Friend knows, I cannot give a complete or final answer to all his questions today, because we are currently consulting on the proposals, and it would be wrong for us to come to any decision before all those who feel that they will be most affected—such as his constituents—have had an opportunity to comment, and we have been able to consider their responses. However, I hope that I can respond to some of his concerns about the impact of our proposals on Harlow and other authorities in terms of so-called negative subsidy.

One of the problems with the present system of local authority finance is that it no longer meets the demands that are placed on it. We recognise that, and are committed to reforming it. Last year, my right hon. Friend the Minister for Local Government and the Regions announced proposals to improve the system. We propose to introduce resource accounting into the housing revenue account, and to change it to a purely landlord account. As always when such a change is being considered, it is the details, and how the details will affect people, that have to be worked through. We accept that. Concern about the effects of those details has been well expressed by my hon. Friend.

The purpose of the housing element part of the housing revenue account subsidy is to bridge any shortfall between notional income and notional expenditure in each authority. It covers expenditure on maintenance, management and debt charges, and other miscellaneous expenditure. The housing element also takes account of rental income and interest received by an authority on mortgages and investments. When we do the calculation, we find that some authorities have a notional surplus on their housing element, while others have a notional deficit. That means that there are more resources in some parts of the country than would be needed to provide a standard level of service, and too few resources in other parts of the country. In other words, there is an inequity in the distribution of resources.

We need a mechanism to allow us to transfer those resources to where the housing need is greatest. The mechanism that we currently use reduces another subsidy stream—the rent rebate subsidy—by the amount of any surplus, so there is an offset. That does not entirely work in the case of Harlow and about 60 other local authorities, because their notional surpluses are so large that they still have a surplus even when the whole of their rent rebate subsidy has been taken into account.

Authorities go into negative subsidy when they have very low debt or significant assumed investment income. Some authorities, for example, have a small number of properties in their HRA and there is perhaps significant income, often from the assumed investment of the set-aside resources generated by the transfer. Other authorities have a large and active HRA, but very little debt, and a below-average proportion of tenants available for rent rebate subsidy. As my hon. Friend said, authorities such as Harlow took responsibility for property from the Commission for the New Towns when it was wound up, but the debt that was transferred was commuted in 1996, so such authorities have relatively little debt. That is what creates the equation for them.

There is a legislative requirement for authorities in negative subsidy to transfer the amount of their remaining actual surplus into the general fund. The sums involved, as we have heard today, can be quite substantial for some of the 60 authorities. Nationally, we expect that about £100 million will be transferred from housing revenue accounts into authorities' general funds.

Those transfers can make a major contribution in individual cases to the amount of money that is available in an authority's general fund, which will either allow the authority to spend more than it could otherwise afford or allow the level of council tax to be held down. We expect some £3.3 million to be transferred in the case of Harlow in 1999–2000.

Our proposals for the changes to the housing finance system will also do away with that system. We believe that it is wrong that local authority tenants, who are for the most part among the poorest in the community, should subsidise the generality of council taxpayers in an authority. Such a cross-subsidy cannot in principle be right. I take my hon. Friend's point about the way in which that situation has developed over many years in constituencies such as Harlow, but that is not a justification for not doing anything about a cross subsidy.

Mr. Rammell

In principle I accept my hon. Friend's argument, but will she bear in mind the fact that the 50-plus legislative change introduced during the last Conservative Government created a stack of cards? The problem that the Government face is that councils responded by pulling out one card. That has many dramatic knock-on consequences.

Ms Hughes

I accept that the situation of some authorities, such as Harlow, has arisen because of the actions of the previous Government, and that the authorities acted in good faith. Nevertheless, it is not right that a cross-subsidy should effectively be paid for by some of the poorest members of the community. My hon. Friend's arguments cannot be used as a reason for doing nothing. That is our starting point.

We intend to make two changes to the housing finance system that will first reduce and later end this cross-subsidy. The first step will be introduced in April 2001. From that date we intend to pay authorities an additional subsidy as part of their housing element, which will be called the major repairs allowance, the MRA. It will help to focus scarce resources on local authority housing repairs to maintain the value of those assets, and we hope that it will provide a more stable framework for housing authorities. We do not yet know how much money will be available for MRA—that depends on the outcome of the spending review—but it will substantially reduce the assumed surpluses on authorities' housing element. In particular, it will reduce, and possibly in some cases extinguish completely, the transfers that authorities in negative subsidy would otherwise continue to make to their general funds. We are consulting separately on the MRA.

Even when the MRA is paid, some authorities will continue to cross-subsidise council tax payers. That problem will be solved by the more effective mechanism that we plan to introduce to capture and recycle all housing element surpluses. We are consulting on that mechanism now. To introduce it would require primary legislation. Our objective is to pool the assumed surpluses on the housing element across all authorities, so that they can be distributed according to need. The change will mean that authorities in negative subsidy will no longer be able to transfer resources to their general fund; instead, they will transfer the resources to the pool for redistribution to other housing authorities.

Criticism may be made that those pooling mechanisms are not in principle correct and that surpluses are local resources that should remain with the authority. That may be at the root of some of my hon. Friend's points. We take the broader view that local authority housing is not a purely local service, although it is managed locally. It is a national resource and needs to be considered as such, not least because it is funded extensively by the taxpayer centrally. The financial structures must reflect that.

Mr. Hammond

Does the Minister envisage that councils that are forced to transfer to the pool will keep their rents static and gradually allow the surplus to be eroded over time?

Ms Hughes

No. The equation that will produce the notional surplus or deficit for any authority will take into account not only rents, as it does now, but the proposed changes, including the major repairs allowance. It will be a different way of calculating whether an authority is in surplus or deficit. We need a system that can ensure that the best use is made of national resources that can be devoted to the housing sector. That means finding a way of allocating those resources to take account of relative need.

We realise that the introduction of the major repairs allowance and, in the longer term, the pooling mechanism, will have a significant effect on the finances of some authorities, such as Harlow and Dacorum, which will remain in negative subsidy even after the introduction of MRA. My hon. Friend the Member for Hemel Hempstead (Mr. McWalter) has explained some of the difficulties. To end the cross-subsidy from housing to council tax as soon as we introduced the new measures would cause difficulties for the authorities concerned. We want to address those difficulties.

As I have said, we are consulting on our detailed proposals for the changes to the housing finance system. As part of that consultation, we asked whether transitional arrangements should be introduced for negative subsidy authorities. I cannot pre-empt the results of the consultation, but my hon. Friend the Member for Harlow has made some important points and suggestions for that process. I know that a number of authorities have expressed concern that transitional measures would not be available from April 2001, but only at the second stage when pooling is introduced. I assure my hon. Friend that we have not ruled out the introduction of transitional measures from April 2001, when the MRA is paid for the first time. We need to consider both the form that such measures might take and the authorities to which they might apply, a point that my hon. Friend made clearly. We would consult on our detailed proposals for the transitional measures in due course.

I assure my hon. Friends that the Government are aware of the difficulties that they have raised. We have not ruled out transitional measures in the first phase of the introduction of MRA, but want the transitional arrangements to soften the impact as far as possible. Because of our longer-term objectives to produce a fairer housing finance system that relates national support to the areas of greatest need, this is a process on which we must embark. However, I am grateful to my hon. Friend the Member for Harlow for providing me with the opportunity to make the position as clear as I can. I assure him that we shall listen to the points that he and others have made and shall consult on them particularly on the arrangements for transition.

Question put and agreed to.

Adjourned accordingly at one minute to One o'clock.