Negative Subsidy Authorities (Hansard, 21 November 2000)

§ Mr. Mullin

"Negative subsidy" authorities are those that have been transferring resources from their Housing Revenue Account (HRA) to their general fund under section 80(2) of the Local Government and Housing Act 1989 ("LGHA 1989"). From April 2001, when the Major Repairs Allowance (MRA) is paid for the first time, these authorities will generally make a much smaller transfer, as they will be eligible for more HRA subsidy than without the MRA, and in many cases the transfer will end.

Authorities have a number of options to compensate for the reduction in the transfer from their HRA: in principle they could reduce the cost of services charged to their general fund, or fund them in the short term from reserves, or increase their council tax. It is a matter for the authority concerned as to how it adapts to this change in the income of their general fund. However, as I announced earlier this year, we intended to provide transitional measures for these authorities to allow them time to adjust to their new financial position. We sought views on the form for these transitional measures in a consultation paper "A New Financial Framework for Local Authority Housing: Resource Accounting in the Housing Revenue Account, Transitional Measures for 'Negative Subsidy' Authorities" issued in August 2000. We have given careful consideration to the responses received.

We do not intend that authorities should be forced to make transfers from their HRA to their general fund under the transitional measures. We take the view that it is a matter for local decision as to whether to leave resources in the HRA, where they can be used to support the housing service, or to transfer them under the transitional measures to the general fund to support other services. An 124W authority will be free to adopt a different policy on applying for transitional measures in each year for which measures are available, if it so chooses.

We intend to provide transitional measures that will allow authorities that were in "negative subsidy" in the financial year 1999–2000, for a period of no more than 10 years, to transfer extra resources from their HRA to their general fund in addition to any transfer required by section 80(2). There will be an upper limit as to the amount that can be transferred in each year during that period, in addition to any transfer under section 80(2). Authorities wishing to take advantage of these transitional measures will need to apply each year to the Secretary of State for a special determination to allow a transfer under the terms of the transitional measures.

We would expect to give that approval for transfers, other than any transfers under section 80(2), and make the special determinations at any time after the making of the HRA subsidy determination for the financial year in question but before the final decision under section 80A of the LGHA 1989 as to the amount of HRA subsidy payable for that financial year. We will, of course, consider representations from authorities as to the amount to be transferred in respect of any financial year. But, other than in very exceptional circumstances, we expect to adopt the following approach to calculate the maximum amount an authority may transfer each year.

The maximum period for any authority for which transitional measures will be available will be 10 years. Transitional measures will be available to many authorities only for a shorter period. The first year in which authorities can benefit from these transitional measures will be 2001–02.

The maximum amount that an authority will be allowed to transfer each year under the transitional measures will depend on a 'base amount' for each authority, and will be reduced year by year, by a fixed step reduction, from this `base amount'.

The base amount' for each authority will be equal to the amount of the transfer under section 80(2) from their HRA to their general fund in respect of financial year 1999–2000. The step reduction in the amount of the maximum transfer under transitional measures for each authority will be the larger of: either an amount equal to the additional amount that would be raised from an increase of £10 in Band D council tax (and equivalent increases in the other Bands) based on the authority's council tax base for 1999–2000; or one tenth of the base amount so that after ten years the amount of the transfer under the transitional measures will be nil.

The maximum amount any authority could apply to transfer under the transitional measures in 2001–02 will be the 'base amount' less one step reduction, less any transfer the authority will make under section 80(2). The maximum amount in year two will be the 'base amount' less two step reductions, less any transfer under section 80(2), and so on. In each year an authority must also make any transfer required under section 80(2).

Where an authority which makes a transfer under the transitional measures in year one, makes no such transfer in year two, and in year three applies to make a further transfer, the maximum amount the authority will be 125W allowed to transfer in year three will be the 'base amount', less any transfer under section 80(2), less the three step reductions.

Calculations are based on the position in 1999–2000 as that is the latest year for which audited data will be available in the immediate future.

The amount of the maximum transfer the authority could apply to make under transitional measures, and period of the transitional measures may be reduced if there is a significant improvement in an authority's financial position, in respect of either their HRA or their general fund, as a result of some other factor, or if the size of the authority's stock changes by 10 per cent. or 3,000 properties from their 1999–2000 figure. In any event, we would not expect to agree to transitional measures, in addition to any section 80(2) transfer, if their effect would be to increase the total transfer from the HRA to the general fund above a limit calculated as the amount of the transfer in 1999–2000 less the annual step reductions for that authority.

In due course, and subject to parliamentary approval, we intend to repeal section 80(2) and end the requirement in statute to make such transfers from the HRA to the general fund. Until then section 80(2) will continue to apply and will determine the minimum size of any transfer.

We do not yet have audited accounts for Harlow so there will remain some uncertainty at the margin as to the effect of the transitional measures until the figures are confirmed. However we expect that:

Harlow will be allocated an MRA of £6.6 million in 2001–02 and equivalent amounts will continue to be allocated in subsequent years, subject to retaining stock at the current level.

In 1999–2000 Harlow transferred about £3.5 million from their HRA to their general fund. In the absence of transitional measures that transfer would cease from April 2001 and Harlow would (in the absence of other changes to the subsidy system) also have retained about £2.8 million of new resources in their HRA.

Harlow will benefit from transitional measures for 10 years and so can continue to make a transfer for that period under the measures from their HRA to their general fund.

Their annual step reduction in the transfer would be about £350,000. That is equal to the additional amount that would be raised from an increase of about £12–£14 in Band D council tax based on their council tax base for 1999–2000.