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This note explains the implications of local housing authorities (with retained stock) moving to a self-financing regime from April 2012. It considers what use authorities are making of their new financial freedoms and the case for some continuing restrictions (borrowing caps) to be lifted.

Background on the move to self-financing can be found in The reform of Housing Revenue Account Subsidy (Library note SN/SP/4341).

Local authorities have welcomed the new financial framework and evidence to date suggests that they are responding well to it. The key priority for most authorities is continued investment in their existing housing stock to ensure it meets and maintains the decent home standard; some have adopted a higher, locally determined standard.

The Coalition Government took powers under the Localism Act 2011 to impose a cap on the level of borrowing that local housing authorities can undertake under the self-financing regime. The decision to cap debt at its opening level of £29.8bn was, and is, controversial. Local authorities argue that they are already subject to the Prudential Code for Capital Finance and can demonstrate a good track record which should be viewed as a sufficient safeguard against imprudent borrowing. Housing commentators calling for the cap to be lifted have estimated potential for additional investment of £7bn over five years which could produce 60,000 homes (12,000 extra per year).

As part of the 2013 Autumn Statement the Chancellor announced a limited increase in local authorities’ borrowing caps resulting in authorities gaining additional borrowing capacity of £300m over 2015-17. It also commissioned the Elphicke-House report into the role local authorities can play in supporting overall housing supply, published in January 2015.

The final section of the note considers the case for bringing UK borrowing rules in line with international practice. This would have the effect of putting council housing on the same financial basis as housing associations and could boost councils’ capacity to invest in the development of new housing.

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