UK

Austerity by another name: “Exceptional Financial Support”

 

There can be no resolution of the housing crisis without a break from austerity, argues Martin Wicks.

The financial crisis of local government is spiralling out of control. 30 councils have been granted “Exceptional Financial Support” which offers no support but only more debt. Does this impact on Housing Revenue Accounts, which are ‘ring-fenced’? How does the crisis of Council General Funds relate to and impact on the financial crisis of Housing Revenue Accounts?

“Councils desperately need a significant and sustained increase in overall funding in the Spending Review to meet the requirements being placed on them,” was the Local Government Association response to National Audit Office report on Local Government financial sustainability.

Council housing finance operates within a Housing Revenue Account (HRA). It sits within a council’s General Fund (GF) but is ‘ring-fenced’. Council rents can’t finance other services and council tax cannot fund council housing. Hence HRAs are not directly impacted by the crisis of council GFs. However, the financial crisis of the GF has impacted on the HRA because staff who do work related to council housing, but work under the GF, have been subject to massive cuts.

The National Audit Office reported in 2018 that spending on Planning and Development had been cut by 52% and Housing Services (GF only) by 45.6%. It’s not uncommon that when a council has a recruitment freeze it is applied to the HRA despite the fact that it is ring-fenced.

Housing functions, separate from the HRA, funded from council tax, deal with homelessness,  providing temporary accommodation and regulation of private sector housing. Austerity continues to impact on these. The freeze of Local Housing Allowance (LHA) at 90% of the 2011 LHA rate, maintained by Rachel Reeves, means that there is a growing gap between the cost of placing increasing numbers of people in temporary accommodation, and the funding the government gives councils. This gap has to be covered by the GF. It is driving some councils to the financial edge.

Some of them, especially those without council housing, are having to spend up to 50% of their income on temporary accommodation. The bigger metropolitan areas face placing thousands of people in temporary accommodation. We have highlighted the case of Newham which has more than 6,000 households in temporary accommodation. The National Audit office has just reported that the cost of temporary accommodation in 2023/24 was £2.13 billion, nearly double what was spent in 2015/16.  The number of households in temporary accommodation is still rising. There were more than 126,000 in September 2024 and 164,000 children.

Some councils are using part of their own stock as temporary accommodation, since it is much cheaper than the private sector. The more it does this then the longer people on the waiting list will wait for a tenancy.

Meanwhile the crisis of council GFs is spiralling out of control. We have just heard that 30 local authorities have been granted “Exceptional Financial Support” (EFS, see table below). Birmingham MP Preet Kaur Gill described this as “additional financial support”. It’s nothing of the sort. In the case of Birmingham Council they have been granted “capitalisation” of £490 million for 2024/25 and £180 million for 2025/26. She says this will “help the council recover from the financial challenges it faces”.

How taking on more debt because they haven’t got sufficient revenue to cover the cost of their services will help them recover, is a mystery. As the Guardian explains: “The exceptional financial support packages enable councils to take out capital loans to fund revenue spending, on the basis they will pay down the debt in future by disposing of assets and cutting back on frontline services.”

Claire Holland, the chair of London Councils umbrella group, said: “These figures show almost a quarter of town halls in London would face financial collapse without emergency borrowing.” The National Audit Office says, of ESF: “It creates longer term risks for local authorities.”

In order to balance their budgets, councils are asking for permission (some have been granted it) to raise their council tax above the limit of 4.99%. The government has allowed them to, without having to hold a referendum.

The LGA has warned of an overall funding gap by 2028/9 of £8.4 billion. In relation to children with Special Educational Needs, they say there is “a mismatch between demand and funding”. A substantial  proportion of councils now run a ‘deficit’ on these services; a situation only made possible by government permission. This override of the usual rules is due to end at the close of the financial year 2025/26. A survey by the LGA in January 2025 indicates that 53% of these councils will not be able to set a balanced budget for 2026/27 if the override is not extended or another method to address the deficit is not introduced.

While the LGA has welcomed some additional funding settlements, “they do not address the fact that the sector is increasingly reliant on ESF and temporary adjustments to accounting rules to remain solvent.” EFS is just austerity by another name.

“The government must urgently rethink its position”

CIPFA (the Chartered Institute of Public Finance and Accountancy) has said it is “deeply concerned” by the number of local authorities forced to seek EFS. Given the number involved, it could no longer be deemed “Exceptional”.

“Covering recurring day-to-day revenue expenditure through capitalisation directions is unsustainable and represents poor financial management and most significantly poor value for money to the taxpayer,” it said in its response to the government’s consultation on local authority funding reform.

“Our experience with the sector shows that this is leading to increased borrowing and consequently greater instability within the sector, and the government must urgently rethink its current position.” (our emphasis)

In a separate submission to Parliament’s Housing, Communities and Local Government Select Committee’s inquiry on council finances in England, CIPFA said that a fifth of local authorities now receive additional support. It identified a total of 108 current interventions across local government, with 55 councils in Delivering Better Value in special educational needs and disability programmes and 34 in Safety Valve measures because of their high-need dedicated schools grant deficits.

That figure potentially understated the scale of the problem, CIPFA said, because authorities not yet in receipt of additional support were nevertheless “severely impacted” by the current funding system.

“All local authorities are experiencing the consequences of the funding shortfall and this will continue to get worse until reforms are actioned… Being unable to pay for services and unable to produce a balanced budget is now a constant reality for many CIPFA members who are chief finance officers in local authorities, and this impacts the communities that they serve.”

It would appear that councils are now applying for EFS as a means of avoiding issuing section 114 notices, which lead to the government sending in commissioners and councillors losing control.Worcester County Council said exactly that. If they had not  been granted EFS they would have had to have issued a section 114 notice.

Housing Revenue Accounts have insufficient resources

HRAs also face an acute crisis. As we have explained before, in The case for cancelling council housing ‘debt’, the new financial system introduced in 2012, underfunded HRAs from the start. Austerity measures then made matters worse. A four year rent cut was applied to save the government money on housing benefit. Councils weren’t compensated for the loss of rental income. An increase in the discount for Right to Buy produced a fourfold increase in sales which lost HRAs a huge amount of rental income. That’s why 109 councils came together to support “Securing the Future of Council Housing”. The document warned that: “Unless something is done soon, most council landlords will struggle to maintain their existing homes adequately or meet huge new demands to improve them, let alone build new homes for social rent.”

Subsequently, a survey of those councils showed a deteriorating situation where a quarter of those who responded said they will be forced to sell some of their council homes “to get by”. The survey found that “two thirds of council housing budgets are on the brink of collapse”, at risk of being unable to set a balanced budget by the next general election. A sign of the deteriorating financial position of HRAs is Lambeth Council being granted an EFS of £40 million for its HRA rather than GF.

“Years of financial strain have forced councils across the country to reduce their maintenance of council homes, cancel new build projects and even sell off existing housing stock.” 28% of councils that answered the survey expected to have to sell off some council homes “to get by”. What sense does it make to sell off council homes when there is an acute shortage?

“Securing the Future of Council Housing” called for £12 billion over five years to bring homes up to the Decent Homes Standard and £23 billion for decarbonising existing homes. While we must obviously continue to press the government for a significant increase in funding for new build/acquisitions, we cannot accept the deterioration of existing homes. The new regime of inspections by the Regulator of Social Housing has exposed the scale of the problems. Of 35 authorities inspected and graded so far, 19 were graded C3, deemed to have “serious failings”, and two were graded C4, “very serious failings”.  We say that “there can be no renaissance of council housing if existing homes are allowed to deteriorate”.

Fiscal strait-jacket

The main obstacle to securing sufficient funding for existing council housing and the building/acquisition of additional stock is the Chancellor’s ‘fiscal rules’ and the refusal to tax wealth. To call the fiscal rules “non-negotiable” reduces them to immutable rules which should be adhered to regardless of real life experience. They are rooted in an economic approach which maintains a regressive tax system which enables the big corporations and capital gains to be under-taxed.

So long as the government carries on with austerity, councils are not going to be funded sufficiently to maintain and renew existing council housing, never mind build/acquire on the scale that is needed to begin to resolve the housing crisis. It has been reported that government departments have been told to factor in the possibility of 11% cuts. If that is applied to the Ministry of Housing, Communities and Local Government, it suggests that the freeze of LHA will continue. As a consequence, the gap between the cost of temporary accommodation and funding will continue to grow.

In her resignation letter, Annaliese Dodds said that she was expecting collective discussion on the ‘fiscal rules’ and approach to taxation. These rules, and the refusal to move back to a progressive taxation system, leave the poor and the homeless to pay the price for economic orthodoxy. Ironically, while the fiscal rules mean that the national government cannot borrow for everyday spending it is allowing councils to do precisely that. Indeed they are giving them no other option save for issuing a section 114 notice (a declaration that they cannot set a balanced budget).

Spring Spending Review

The delayed Spring Spending Review has been the focus of demands for ‘social housing’. Shelter and others have been calling for funding for 90,000 social rent homes a year. However, the die may be cast before then. It looks like Rachel Reeves is going to set in stone the contours of the Review when she gives her speech on March 26th reporting on the OBR’s assessment of economic prospects.

The government is already defending cuts to benefits heavier than the £3 billion programmed in by the Tories. If they go ahead they will impact heavily on council and other tenants, many of whom are on benefits because of poverty, illness or disability. Austerity always hits the poorest people hardest. Those who need statutory services don’t get them because of insufficient funding as councils focus on “those most in need” in language borrowed from the coalition government. That means others with genuine needs, go without. Their lives are restricted, their last years made more miserable. For many people, temporary accommodation is anything but temporary. You are not even guaranteed that it will be in your locality. The Guardian has reported that London councils have spent £140 million to move homeless people out of London.

Social rent council housing

The housing crisis cannot be resolved without making social rent council housing the focus of government housing policy. It will provide security and will ease “the cost of living crisis” for tenants. It will create “growth” which is socially useful rather than merely lining the coffers of the corporations at our expense. It will help to liberate a new generation from the private sector.

Retro-fitting existing council housing will cut carbon emissions, make the cost of heating cheaper for tenants, and create socially useful jobs. If these are political priorities, then the funding can be found. There are many ways to find that funding; making pension tax relief the same for everybody at 20% (as opposed to being higher for those on a 40% tax rate) and equalising capital gains tax with income tax are just a couple of examples.

Continued austerity for local government means deepening cuts, a downward debt spiral, the continuation of the homelessness crisis and the deterioration of existing council housing. That’s why a break from it is necessary.

Martin Wicks is Secretary of the Labour Campaign for Council Housing.