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Why are the Tories so sanguine about adding £60 billion to public debt?

Once upon a time, the reclassification of housing associations as ‘public non-financial corporations’ by the Office for National Statistics (ONS), which happened last Friday after years of speculation, would have been seen as a catastrophe. We therefore have to look behind the immediate issue to try to understand why the Government is so sanguine about the apparent disaster of having to add £60 billion of debt to the public balance sheet and why some housing association bosses see it as a great opportunity.

The long-term role of housing associations has been as the ‘third arm’ in housing, sitting between public and private sectors. This made them politically acceptable across the spectrum, sufficiently non-public to keep Tories happy and sufficiently non-private for Labour. Since 1988 they have been in the highly advantageous position of being able to borrow money as ‘private’ organisations, pay tax based on their charitable status, and receive grant from the public sector towards the building of low rent and low cost homes. In return for grant they accepted a regulatory regime governing their management, finances and performance, and were required to co-operate with housing authorities over issues like housing allocations and housing development. In many ways the model has been a great success, although in my view many associations have fallen well below what was possible.

Like flat caps and manual trades unions, Council housing never really fitted with New Labour. After 1997, housing associations – already the Tories’ favoured option – were confirmed as the primary bodies to deliver housing objectives under New Labour – not only building new homes but also accepting the transfer of hundreds of thousands of homes from councils. One reason was the Treasury’s obsession with a particular definition of public borrowing, different from any other European country, which meant that housing association borrowing did not appear on the public sector balance sheet whereas borrowing by councils for the same purpose did.

Extending a policy started by the Tories, the Labour Government saw an opportunity to reduce the level of grant needed to produce social housing, encouraging associations to ‘stretch their assets’ to get more homes for a set amount of public spending through housing association grant. The quid pro quo was that rents would be allowed to rise faster than inflation – in effect housing benefit took the strain. Labour tightened regulation, with associations for example becoming subject to inspection by the Audit Commission, raising the first queries about the ‘private’ classification that housing associations enjoyed within the public borrowing definitions.

Since 2010 the Tory Government has gone to new extremes, reducing grant hugely and forcing rents up towards market levels, thereby requiring housing benefit to take much more strain. Their approach to regulation has been entirely contradictory: they have deregulated in some areas with a fanfare, for example virtually ending oversight of service standards and ending the highly effective inspection regime, but have imposed their ideological priorities such as moving towards market rents (followed bizarrely by a recent rent cut), reducing security of tenure, virtually ending the provision of social rented homes, ‘pay to stay’ and the ‘right to buy’ with its associated forced sale of high value council houses.

It is therefore no surprise that ONS would fulfil their duty to review the classification within the public accounts of housing associations, determining on the basis of the evidence whether their borrowing should be regarded as ‘public’ or ‘private’.

Their review, however, appears to have had nothing at all to do with the recent fuss about right to buy for housing association tenants. One of the key arguments used to get associations to vote for the voluntary ‘deal’ on right to buy was the impending threat of an adverse ONS decision. It is clear from their published decision that their review was based on the legislation passed by Labour in 2008 and the Coalition’s 2011 Localism Act.

The ONS decision has been ‘on the cards’ for some time and it would astonish me if Government was not aware of the likelihood of this change. It is totally disingenuous of the Government to feign surprise. They have had time to think it through. I suspect that their initial public response – that they will bring forward deregulatory measures to return the sector to a private sector classification as quickly as possible – covers a more carefully worked out plan, or at least an ambition. They will not want to simply tip HAs over the line back into a private sector classification, they will want to shove them firmly into the real private sector. If they want to maintain their interfering policies on right to buy, pay to stay, and the rest, they may have to push the boat out a long way on other forms of regulation to change ONS’s balance of opinion.

What might this mean? HAs have already virtually ended the provision of genuinely affordable homes for social rent. They have been selling social housing assets on the market and ‘converting’ empty homes from social rent to much higher ‘affordable rents’ (at up to 80% of market levels). Some have argued consistently for ‘freedom’ to set their own rents and to break away from having to house local authority nominees. Now they are saying that even the ‘affordable rent’ model is unviable, and their other big product, shared ownership, is unviable in high value areas.

Big associations increasingly look like and sound like housing developers who are focused on their total output and the bottom line and much less on what they are building and for whom. They are potentially very useful to a Government which talks big on housing production but has delivered very little in practice. It would be very helpful for them to have a not-for-profit, tax-advantaged, sector providing mainly market homes and delivering one or two top priority programmes like ‘starter’ homes.

The whole movement is being de-linked from concepts of housing need and from the very notion of a housing strategy, because there isn’t one. A few housing association bosses have in the past expressed a desire to become PLC companies and there may be more than a thought or two in Government as to whether the possibility of real privatisation should be opened up.

It is the political and not the technical aspects of the ONS decision that will decide the future.