Abolish borrowing cap to solve housing crisis, say MPs

A group of MPs has called on the government to abolish the borrowing cap for councils and let them build more homes.

A report published today by the treasury select committee has recommended the local authority housing revenue account (HRA) borrowing cap be scrapped to help councils solve the housing crisis.

The report describes the move by chancellor Philip Hammond to raise the HRA borrowing cap by £1bn in his last autumn budget as a ‘positive step’, but warns the treasury’s own allocation criteria for local authority borrowing is ‘unclear’.

It calls on government to remove the cap altogether, which could ‘result in a substantial increase in the supply of housing’, and allow local authorities to determine the level of additional housing needed in their areas.

The report adds the government’s target of building 300,000 new homes a year will not be achieved under its current set of policies.

‘The government will need to show greater commitment to housing supply to achieve its aspiration and will need to bring forward additional policy measures,’ the report states.

In particular, it calls for a ‘step change’ to help first-time buyers, and quotes figures from the Office for Budget Responsibility that show the chancellor’s decision last year to abolish stamp duty for first-time buyers on the first £300,000 will only help 3,500 first-time buyers and cost £3bn.

The report warns the cut in stamp duty could increase house prices for first-time buyers by ‘as much, if not more’ than the amount they might save as a result of it being cut.

‘The chancellor pledged to “fix the broken housing market”, but the government is going to find it very difficult to meet this ambition,’ said committee chair, Nicky Morgan.

‘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,’ added Ms Morgan.

‘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 select committee report also recommends the government ‘ease the cashflow challenges’ around universal credit by giving recipients the option of fortnightly payments.

It also warns the social care precept on council tax is not ‘a sustainable or equitable way of financing social care’.

‘The drawdown of reserves among local authorities where social care demand is high, compared to the increase in reserves among local authorities where social care demand is lower, is evidence of this,’ the report states.

‘The government should consider, in the context of reforms to local government finance – including business rates retention – how social care funding can be allocated in a way that more closely reflects underlying demand and need in different parts of the country.’

The committee’s call to abolish the borrowing cap for councils was welcomed by the Local Government Association, which has long campaigned for authorities to be given additional powers to solve the housing crisis.

‘It is great that the influential Treasury Select Committee has backed our call for councils to be given the freedom to borrow to build more of the new homes our communities desperately need,’ said LGA chair, Lord Porter.

‘This is significant recognition of our central argument about the vital role councils must play in solving our housing shortage.

‘When giving evidence to the committee last year, we were clear that if we are to truly get back to building 300,000 homes a year, then all areas of the country need to be able borrow to invest so that they can resume their role as major builders of affordable homes,’ added Lord Porter.

• Read the full report here.