Localism Bill

Lord McKenzie of Luton Excerpts

Wednesday 7th September 2011 Lords Chamber

Moved by

[Lord McKenzie of Luton]

39: Clause 155, page 149, line 5, leave out “, or is likely to be,”

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[Lord McKenzie of Luton]

My Lords, I shall speak also to Amendments 43 and 45. Clause 155 introduces the concept of settlement payments to facilitate the self-financing system that will replace the housing subsidy system when it is abolished. A devolved system of council housing, whereby councils are able to manage their stock using their own rents, will be achieved by a one-off debt settlement. We discussed this on Monday. The amount of debt allocated to each authority will be calculated on the basis of what its business plan shows it is able to support. The 30-year cash flow of income and expenditure is converted to a capital valuation using standard discounting techniques. If the valuation is below the amount of housing debt for which an authority currently gets support through the subsidy system, the Government will make a settlement payment. If the valuation is higher, the local housing authority will make a settlement payment.

The cash flows for the 30-year business plan will require the forecasting of rental income and of costs for repairing and maintaining stock, as well as debt servicing costs. Clause 155 gives the Secretary of State the authority to make determinations for providing the basis of calculation of the settlement payments. It covers the right to make assumptions about receipts and payments. Any determination can include an assumption even if it is not borne out by events. Further, it can include an assumption whether or not it is likely to be borne out. The amendment seeks clarification of this phrase. Does that mean that at the point when the assumption is made, it does not matter whether it is likely to be borne out? This probe is not just nitpicking; it is important to be clear on the evidence and analysis that will be needed to underpin the assumptions that will be used. These are the sorts of issues on which my noble friend Lord Whitty sought clarification when we last debated this.

I will take one example of an unrealistic assumption. It is understood that the calculation assumes that the initial year’s income is available to offset the cost of the self-financing payment at the start of the year, whereas in practice it will accrue throughout the year. Similarly, the loss of rental income from right-to-buy sales is assumed to operate only from the end of each financial year. This is demonstrably unrealistic and operates against the interests of local housing authorities.

There are also, as I understand it, issues about demolitions. To the extent to which they are recognised, they obviously reduce income in the 30-year plan. However, it is understood that they are recognised only if a degree of actual planning for them has occurred or is under way. Clearly, over a 30-year period, this will not always be the case initially. What is the current position on this? I do not expect an answer to the technical points here and now; but, if correct, they support the proposition that some unrealistic assumptions are built into the calculations operating to the detriment of local housing authorities. What is the process of resolving these?

Amendment 43 focuses on Clause 157 and relates to settlement payments arising from the abolition of the housing revenue account subsidy scheme. Clause 157 covers certain aspects of settlement payments. In particular, it allows the Secretary of State to charge local housing authorities interest, if they pay late, an amount equal to any additional cost that the Government incur. This amendment simply provides for reciprocity should the Secretary of State not pay at the time determined. It may be considered that the Government will never default on a payment or, indeed, on a payment timetable, but we could be dealing with circumstances were there is administrative error or, indeed, an IT problem. As the sums involved could well be significant, it seems entirely reasonable that local housing authorities should be kept whole.

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[Lord Shutt of Greetland]

My Lords, I thank the noble Lord, Lord McKenzie, for speaking to his amendments, the first of which is Amendment 39. Clause 155 provides a power for central government to make determinations providing for the calculation of a settlement payment in relation to every council that retains its own housing stock. This payment is a mechanism for adjusting each council’s housing debt to a level which it can sustain after meeting the costs of managing and maintaining its stock. It will leave every council in a position to finance its own housing stock from its own rental income without need for subsidy. The clause sets out that these determinations may be calculated according to a formula, and that this formula may include variables relating to income, expenditure needs and levels of existing housing debt.

The methodology that we will use to calculate these settlement payments has been extensively tested and refined with local authorities through two public consultations. It has also been the product of joint working with local authorities and others working in the sector. Subsequent to these consultations, we have issued two detailed policy documents this year confirming our intentions to make full reforms based on the key principles set out in these consultations. These policy documents include the models we will use to value the stock and working drafts of the determinations that we will issue. We will publish a further consultation in November on the final proposals, when we have the latest data.

It is therefore fair to say that this policy has been subject to unusually high levels of public scrutiny and debate. In valuing the business, the expenditure needs are rooted in unit costs identified in independent research which was itself published for consultation. The income assumed is that set out in the Government’s national social rent policy. The settlement payments will reflect the difference between the value of each housing business and its existing housing debt. Where the debt is greater than the valuation, the Government will pay the difference to the council. Where the valuation is higher than the debt, the council will pay the difference to the Government.

The amendment which the noble Lord seeks would remove a degree of discretion available to the Secretary of State in setting the assumptions upon which the determinations will be based. This is unnecessary, as the assumptions will be based on the best information available at the time and have been extensively tested and consulted on. In addition, the determination setting out each settlement payment will be subject to a further consultation this autumn, during which councils will be able to correct any errors. Therefore I trust that this amendment will not be pressed.

On Amendment 43, Clause 157 sets out the practical provisions under which settlement payments should be made. It gives a reserve power to the Secretary of State to charge interest or recoup costs incurred if councils make their settlement payments after the time specified in the determination. I have described these as reserve powers as we do not expect to use them due to the excellent track records councils have in meeting their financial obligations. The noble Lord’s amendment would establish reciprocal arrangements whereby the Secretary of State would make additional payments where any sum payable by the Secretary of State to particular local authorities was not paid on time. I can assure you that the Government will make its payments to local authorities on time.

That sounds grand, so I thought I would check it out a bit further. Presently housing revenue account subsidy is paid in 10 instalments in the year, and is paid on time. When councils receive regular revenue support grant, it is paid and it is paid on time. On the rare occasions, for some technical reason, it has not happened on time, the Government have voluntarily paid compensation. The determination setting out the payment date will be issued by the Government and detailed arrangements for the day have already been set out by the Department for Communities and Local Government in the policy document Self-financing: Planning the Transition, which was issued this July. Therefore, I do not believe that this amendment is necessary, and I trust it will not be pressed.

On Amendment 45, we had some discussion on these areas on Monday and we already debated the power we are taking to set a cap on housing debt as part of our reforms. As I noted previously, Clause 158 is not a minor or technical part of these reforms, it is integral to protecting the Government’s central fiscal priority—to bring public borrowing under control. I understand that many councils do not want a centrally imposed limit on their ability to borrow for housing, but our reforms must not risk undermining national fiscal policy on public debt. Self-financing will give local authorities direct control over a rent income stream of around £6 billion a year. This could potentially be used to finance a large increase in public sector debt. It is not possible to say confidently how many councils might choose to borrow more but we know that councils will start out under self-financing with much less debt per dwelling than housing associations with similar costs and incomes. It is just not possible to take the risk that this deal might drive a big increase in public sector debt.

Noble Lords have asked why the prudential borrowing rules are not sufficient to protect against this. The prudential borrowing rules have worked very well but, as I said previously, our concern is not that local authorities will act in ways that are imprudent locally, it is that in aggregate these borrowing decisions may be unaffordable nationally. The amendment tabled by the noble Lord would remove this specific cap on housing borrowing and replace it with a power for the Secretary of State to issue guidance or regulations under the Local Government Act 2003. The Act does include powers to cap the debt of individual local authorities, but these are,

“for the purpose of ensuring that the authority does not borrow more than it can afford”.

As I have said, our concern is not that a council would borrow more than it can afford, it is that in aggregate councils may borrow more than the country can afford. The bespoke powers we are taking ensure that this cap will apply only to housing debt and not to any other borrowing by local authorities. Indeed, I have some sympathy with the intentions but I have to resist the amendment and I trust that it will not be pressed.

[Lord McKenzie of Luton]

My Lords, I thank the Minister for his very detailed, if predictable, reply. In relation to Amendment 45, I honestly do not think that he has reasonably addressed that point about the power that already exists with the Secretary of State being able, for national economic reasons—which is why he wants it in this clause—to set limits in relation to the borrowing of money by local authorities. That power is there. Why is an additional power needed? I do not think that the noble Lord has dealt sufficiently with that point.

As regards Amendment 43, as I understand it the proposition is that should the Government be late with their payments for technical or any other reasons, as has happened albeit infrequently in the past, they will make a voluntary payment. Is that on the record and what we are dealing with here? The amendment simply seeks to enshrine that formally in legislation. But, as I have said, I will not push that point if the noble Lord is putting on the record that in those circumstances the Government anticipate keeping local authorities whole.

[Lord Shutt of Greetland]

That would be the anticipation but the idea is that the Government pay on the dot at the appropriate time.

[Lord McKenzie of Luton]

Of course it is. One would hope that they do and I accept that overwhelmingly they have, under the current subsidy system. But it is good to have that clearly on the record.

As to Amendment 39, I recognise and understand that there has been extensive consultation around these important provisions and that there is more to come. I was seeking to get a better view on the extent to which there may still be disagreement challenges over the technical aspects of how the settlements are proposed. What is the process for settling that? Consultation is all very well but it is a question of how the Government respond to that if there are at least residual challenges about those calculations. As I have said, I do not propose to press Amendment 39. We will see where those future consultations and discussions lead us. I made my point in relation to Amendment 43 and we have something on the record.

I am inclined not to push Amendment 45 today, although I urge the Minister to give us a better explanation of why proposed new subsection (4) is not sufficient to cover what the Government seek to achieve. Without that, I give no guarantee that I will not seek to bring that point back at Third Reading.

Amendment 39 withdrawn.

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[Lord McKenzie of Luton]

My Lords, we have put our name to this amendment and support it thoroughly for the reasons that have been advanced by all noble Lords who have spoken in favour of it. I want to pick up the point my noble friend Lord Whitty made about how it all pans out in the Government’s accounts. It seems to me that the Government’s arguments on deficit reduction have not been entirely logical. They recognise the loss of rental income that arises with local authorities because the proceeds are snaffled by Government to the extent of 75 per cent. Therefore, debt that is imposed on local authorities is reduced by £862 million.

Correspondingly, the government debt is higher. If local authorities retained the proceeds, the government debt would be lower, presumably by £862 million, and local authority debt correspondingly higher. That seems to be a net nil. Local authorities would then have the proceeds either to pay down their debt or, as we would all urge and my noble friend Lord Beecham in particular urged, to reinvest in new stock. So I think the Government are entirely in the wrong place on this.

[Lord Shutt of Greetland]

My Lords, I thank the five noble Lords who have spoken and I pay tribute to the noble Lord, Lord Best, and his work in housing over many years. The business of the amount gained when houses are sold and how the money is used is a subject that many of us have been debating for most of our years in public life.

What we have here is a total, and there are trade-offs in this element of the Bill. Although I understand the intention behind proposed new Clause 51, which is to end the surrender to central government of 75 per cent of receipts from the sale of right-to-buy and similar houses, and although I appreciate councils’ disappointment that we have not been able to end the policy, its continuation is necessary to help with the country’s huge fiscal deficit. The Government have ensured that the viability of the self-financing settlement is not affected by the decision. We are compensating local authorities for loss of rental income from future right-to-buy sales. To do this, we have included a forecast of right-to-buy sales in our valuation. The level of debt that authorities will take on has consequently been reduced in our latest estimate, as the noble Lord, Lord McKenzie, indicated, by £862 million. In addition, all councils will still retain 25 per cent of receipts. They will also be able to retain 100 per cent of receipts from other sales to spend locally on affordable housing or regeneration. It is worth noting that receipts generated from right-to-buy sales have rapidly declined, sales being now about 5 per cent of what they were at their peak.

I hope the noble Lord will draw some comfort from the fact that we issued a consultation on 25 August, which set out proposed amendments to the regulations governing the use of receipts arising from the disposal of council housing assets. We have proposed to amend the regulations to make it clear that the requirement to surrender 75 per cent of receipts to central government shall apply only to receipts arising from right-to-buy sales or sales that are right-to-buy in all but name: that is, sales to existing council tenants. Sales at market value to other purchasers could then be retained, provided they were spent on affordable housing, regeneration projects or paying off housing debt. I trust that that is helpful and, bearing it in mind, that the amendment will not be pressed.

[Lord McKenzie of Luton]

The Minister said that the Government were reducing the level of debt that local authorities would otherwise take on because of this policy by some £860 million. Does it follow that central government debt is correspondingly £860 million higher than it would otherwise have been, and how does that help deficit reduction?

[Lord Shutt of Greetland]

I might have to think that one through, because I see the contra. On the other hand, there is only one central Government. The problem that we have all along is that some 170 local government entities are involved in housing. At least you know where you are with central government and that £862 million. The position can be entirely different in local government.

I would like to think that there will be a time when this policy is not in place. However, as I indicated, it is no longer the big deal that it was, given that so many former council houses have been sold and the amounts coming in are nothing like they were at their peak, when this Government were not in business.

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[Lord Best]

I am very grateful to the Minister for what he has just said. There has been a problem here, but it sounds as though it is well on the way to resolution. I am very happy not to move Amendment 64.

[Lord McKenzie of Luton]

We are grateful to the Government for responding to the earlier amendment. I acknowledge that the noble Lord, Lord Best, will not move his amendment, but are classes 4 and 5 specified in that amendment classes that the Government would support and take forward under the process that they have set down?

Amendment 63 refers to,

“modifying or removing a permitted class added by order under this subsection”.

Do the Government have anything in mind concerning modifying or removing a particular class?

[Earl Attlee]

My Lords, those are exceptionally good questions, but unfortunately I will have to write to the noble Lord.

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[Lord Greaves]

I think that that was an acceptable answer. I understand that we cannot bring back the amendment that was defeated in the vote, but there are plenty of things in these amendments that we can talk about in relation to what the Bill states. That gives us sufficient leeway to talk about what we want to talk about. Whether the Government will extend their offer of discussions to the Opposition, who rudely threw it back in their face on the previous group of amendments, I do not know. I would welcome their participation, but that is up to the Government.

[Lord McKenzie of Luton]

Perhaps I may make it clear that we voted on the original proposition because we believed that it would secure the best outcome. As that did not succeed, it is not inconsistent to want to see a lesser position that nevertheless improves on what is in the Bill. That is entirely sensible and reasonable. Whether we will be involved in those discussions is up to the Government. If they are going to bring something back—and I believe that that is the wish of the noble Lord, Lord Greaves—we will have an opportunity in this Chamber to join in the debate.

[Lord Newton of Braintree]

Before the noble Lord withdraws the amendment, as I presume he will, I will express the hope that the House will go along with this. We got into a mess earlier over the vote because of the separation of these issues, which could have been linked. We now have an opportunity to take up the Minister's offer of discussion. I think that we should, and I hope that neither she nor we will dig in out of purism, and that the Clerks will have their ears open.