Abolish borrowing cap so local authorities can increase housing supply

22 Jan 2018 11:29 AM

The Treasury Committee publishes a unanimously agreed report on the Autumn Budget 2017.

Local Authority Housing Revenue Account borrowing cap should be removed to help meet target of 300,000 new homes per year
Stamp Duty reduction likely to increase prices for first time buyers
OBR should incorporate Brexit in a "special forecast" before Parliament votes on Withdrawal Agreement
Treasury should publish robust equalities impact assessments of future Budgets
Transitional arrangements will provide certainty for businesses, encourage them to invest, and help improve productivity
Use of RPI should be abolished where legally possible

Summary of the report

Local authorities are limited in how much they can build through the cap on borrowing within Local Authority Housing Revenue Accounts. In Autumn Budget 2017, the Government raised the borrowing cap for councils in areas of high affordability by £1 billion to help achieve its target of 300,000 new homes per year. Private housebuilders have consistently provided 150,000 units per year, so the target is unlikely to be met without a significant increase in supply by local authorities. To achieve this, the Housing Revenue Account borrowing cap should be removed. At the very least, the Treasury should define the allocation criteria for the additional £1 billion more clearly.
The Chancellor abolished Stamp Duty for first-time buyers (FTB’s) on the first £300,000 of any property costing up to £500,000. The Office for Budget Responsibility (OBR) forecast that just 3,500 additional first time buyers over the forecast period will become FTB’s as a result of the policy change, at a cost of £3 billion. In isolation, the reduction in Stamp Duty is likely to increase prices for FTB’s by as much, if not more, than the amount they will save as a result of the reduction in Stamp Duty.
Robert Chote, Chairman of the OBR, acknowledged that the consequences of Brexit on economic growth are likely to be so substantial as to dwarf the impact of any one-off ‘divorce bill’. To ensure Parliament is fully informed about these economic and fiscal impacts, the OBR should publish a ‘special forecast’ before the introduction of the Withdrawal Agreement and Implementation Bill.
The Treasury should use ONS and HMRC data to produce and publish robust equalities impact assessment of future Budgets, including the individual tax and welfare measures contained within them.
A rise in public and private investment is likely to improve productivity growth. The Government’s commitment to raise public investment is welcome, but a revival in productivity also requires a response from the private sector. The OBR expects a fall in private sector investment due to Brexit uncertainty. The Government should reach an agreement on transitional arrangements for Brexit that reduces uncertainty for businesses urgently.
The Government has acknowledged that using the statistically-flawed Retail Prices Index (RPI) to uprate the Business Rates multiplier is unfair on businesses. Having acknowledged that RPI is unfair, and removing the link between RPI and the uprating of pensions, benefits, and tax allowances, the Government should stop using RPI for any indexation purpose where legally possible. This would see the use of RPI discontinued as an index, for example, for calculating the interest rate on student loans, the uprating of rail fares, and Air Passenger Duty.

Chair's comments

Commenting on the Report, Rt Hon. Nicky Morgan MP, Chair of the Treasury Committee, said:

"The Chancellor pledged to ‘fix the broken housing market’, but the Government is going to find it very difficult to meet this ambition. The increase in the cap on borrowing for local authorities to build homes is a step in the right direction, but it doesn’t go far enough.

The borrowing cap restricts the number of homes that local authorities could deliver. To achieve the Government target of 300,000 new homes per year, the cap should be abolished. The potential of local authorities to build should be unleashed.

The Government’s commitment to increase public investment is welcome, but a revival in productivity also requires action from the private sector. The OBR expects a fall in private sector investment due to Brexit-related uncertainty. An agreement between the UK and the EU27 on a ‘standstill’ transitional arrangements is therefore urgent."

Further information