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Loss of control for homes will hurt

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When is a bonus not a bonus? When it’s a New Homes Bonus. This is a cruel joke that rings hollow and belittles the huge damage the initiative will do to core services that many single- and upper-tier authorities provide.

The announcement by ministers at the Department for Communities & Local Government that the bonus will be funded by reducing local government’s control total by £500m next year, £800m in 2014-15 and rising to £2bn in 2018-19 is a disaster for many councils.

It will affect upper-tier council services such as social care and others that support economic development the worst, and spatially will hit those parts of the country suffering most from the effect of the economic downturn on housing demand.

Last month, DCLG officials produced two illustrations showing where the cost of the cuts to fund the New Homes Bonus would fall.

By doing some simple modelling based on the pattern of where the bonus payments have gone so far, it is possible to give an indication of where the net winners and losers might be.

While county and upper-tier councils are likely to bear around 76% of the funding cuts, they’ll only receive 20% or so of the income from the New Homes Bonus. So most counties will be net losers.

The following table summarises the results of my simple modeling, whilst an authority-by-authority breakdown can be accessed by opening the spreadsheet on the right.

 No. of councilsCouncils  with a net lossNet value £m% Net losers
Councils with upper-tier services    
London boroughs3321-1.264%
Metropolitan districts3633-267.192%
Shire counties2727-254.4100%
Unitary authorities5628-1.250%
 152109-523.972%
     
Shire districts2016523.93%

 

There is also a significant spatial effect which can be shown by the three heatmaps below. These maps show a) where the New Homes Bonus is currently received (darker green areas receive the most); b) where the costs of funding the scheme currently fall (darker red areas face the largest cuts); and c) the areas which may potentially gain or lose in net terms (net losers in red, net gainers in green). All figures are given in terms of £ per person.

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It should be noted that in areas that appear green in the final chart, this is at an area level and in shire areas, the county council’s grant could be cut significantly in net terms, with district councils the gainers.

For my own council, we could be losing £10m a year by 2018-19 with the north-east losing £275m by that point with the resulting extra service and job cuts and damage to the region’s economy as a result, see illustration below.

PWoods-Briefing131212-I4

This is just one of the ways that government decisions have a significant redistribution effect, generally taking money away from poorer areas of the country.

Interestingly, while councils get to keep 100% of the extra council tax raised by housing growth over a seven-year period under this scheme, under the business rate retention scheme it is only considered necessary to allow councils to keep 50% of extra revenues to incentivise business growth.

Surely by this logic, the amount of additional New Homes Bonus for future years could be scaled back to 50%? There would still be an incentive to pursue housing growth and the cut to the control total could be softened.

There is another way in which the bonus disadvantages areas of low housing demand. Given that it works by allowing councils to retain extra council tax revenue, councils with more newly built councils in higher council tax bands will benefit more. I believe there should be a flat rate per newly built home such as £500 per house. The premium for newly built affordable housing is paid as a flat rate, so why not the basic bonus?

The Audit Commission’s recently published ‘Tough Times’ report pointed to New Homes Bonus payments as one of the reasons for an increase in reserve levels. So as well as adverse effects on the most fragile of regional economies, the delay in spending some of the bonus payments is likely to lead to an overall negative economic impact in the early years of the scheme.

It is important that this poorly thought out and implemented New Homes Bonus scheme is reviewed (independently if possible) before further damage is done to social service, roads and other core service budgets as well as the damage caused to fragile economies.

Paul Woods, city treasurer, Newcastle City Council

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