Council debt caps – questions and answers
The Autumn Budget has once again brought councils' housing debt caps into focus. The Government announced it will lift borrowing limits for councils in areas of 'high affordability pressure,' inviting bids for increases from 2019-20.
£1 billion of additional borrowing is 'on offer' for the three years to 2021-22. The Government has said it will monitor how councils respond and then consider what further action may be required.
Readers will have read much about these debt caps, but usually without any explanation, i.e. what the debt caps are, how they might be relaxed and what the effect will be. We hope these questions and answers will be useful.
What is the HRA debt cap?
It derives from the self-financing settlement in 2012, when the Housing Revenue Account (HRA) subsidy system was dismantled and, in effect, the national HRA debt was re- distributed among stock-owning councils in England. 'Redistributed' is not quite right because more debt was distributed than was then in the system. The intention was that each council would be able to afford, from rents, the debt it was either left with or acquired; but for various reasons debt 'headroom' varied from council to council.
Why is the housing debt cap important?
For councils, it limits its capacity to borrow. The formula rehearsed above makes clear that capital expenditure financed by borrowing 'counts' against the debt cap and reduces any headroom which the council either had at the point of self-financing in 2012 or which it still has now. The HRA debt cap enables the Government to control the amount of debt within councils' HRAs, which as public sector debt 'scores' against the country's overall indebtedness.
From a councils' perspective the HRA debt cap is critical in its ability to deliver new HRA housing and its ability to spend retained Right to Buy monies (not least because under the terms of a council's retention agreement, the retained monies can only be spent on 30% of development costs- the remainder having to come from other resources, so in effect via borrowing). Scott Dorling and Rachel Collins' article on page 10 and 11 in this edition explains more. The HRA debt cap is also critical for some councils in terms of their ability to fund fire safety and other improvement works.
Where are the debt figures to be found?
Annex B to the Limits on Indebtedness Determination 2012 sets out the maximum amount of housing debt that can be held by each council. In technical language, a council will breach its HRA debt cap if its HRA Capital Financing Requirement (CFR) on 31 March in any year exceeds the amount held on 1 April 2012.
What is the Capital Financing Requirement?
The calculation of the HRA CFR is set out in Annex A to the 2012 Determination. It is a complex calculation, but as implied it is essentially capital expenditure financed by borrowing plus the value of additional dwellings (but not acquisitions) less capital receipts used to repay the principal of any borrowings, similar payments by the Secretary of State to the Public Works Loan Board, the value of 'lost' dwellings/land (but not disposals) and provision for the repayment of borrowings.
Are there other debt restrictions?
Yes. The Local Government Act 2003 (the 2003 Act) imposes limitations on a council's statutory power to borrow. Section 3 of the 2003 Act requires it to determine and keep under review how much money it may borrow. Councils are required to have regard to the Prudential Code for Finance in local authorities but this is less prescriptive than the housing debt cap, requiring the council's finance officer 'sign off' that any borrowing is indeed 'prudent'.
How can debt caps be relaxed?
New determinations could relax or (theoretically) remove those limits. Any relaxations are likely to be specific. An example is the amending Determination in 2013 which allowed councils to deduct from their HRA CFR receipts used to meet capital expenditure on General Fund assets except for expenditure on affordable housing or regeneration projects.
The effect was to control such housing or regeneration expenditure within the HRA debt cap regime. Councils in 'high affordability pressure' areas bidding for the new borrowing power may well benefit from a similar determination. Or there may (also) be an agreement akin to the Right to Buy receipts 'retention agreement'. Understanding what is on offer will be as important as the bidding criteria and process.
Is relaxation of the debt cap the answer?
Not for every council. Having debt capacity and the revenue to use it are very different things. Councils have been criticised for not using their debt cap limits to the full extent possible and in some cases this will be because those councils simply cannot find the surplus rental income to service that additional debt.
What about "joining up" councils with debt capacity and those without?
This has been often considered and would not increase overall public sector debt, thus allaying Treasury fears. On the other hand there are statutory difficulties. The Localism Act regime permits only individual debt caps and not joint ones. Statutory provisions apply to each council, so as well as the political difficulties with joint decision-making the legal barriers are significant.
We recommend "Raising the Roof", a report just prepared by the Association of Retained Council Housing and the National Federation of ALMOs. Please also contact us if you would like to see what we are calling the Unofficial HRA Manual. It is still in draft and we welcome input. The last official Manual was issued in 2006/7. The debt cap is one of the items in it. Meantime we will monitor Government plans in order to be ready to help councils make use of their head-room and in due course make bids for the £1 billion announced in the Budget.