UK: A Bleak Outlook For Social Landlords

Last Updated: 31 March 2010
Article by Adrian Wild

We look at what the future holds for RPs now that we are (for the moment at least) out of recession.

Technically, the recent increase in GDP of 0.3% means that the economy is now out of recession. But as we look to the future – and putting aside fears of a double dip recession – what can social landlords expect from the economy and the Government?

Unemployment

The worst aspect of any recession is the human cost of unemployment: lives put on hold, childhoods blighted and for some youth unemployment moves seamlessly into long-term unemployment.

There is also the financial cost to consider: not just unemployment benefits and housing benefits, but also the wider support which higher levels of unemployment requires to mitigate its effect. And while people are unemployed they are not creating wealth.

So, what now? Regrettably, the story is a rather pessimistic one. In the last two recessions, unemployment lagged GDP and continued to increase even as the economy started to grow (shown in figure 1). If unemployment follows the same trend this time around, the headline rate could easily increase by a further 2% of the work force. That would imply a further 400,000 people becoming unemployed over the next six months and potentially remaining unemployed for at least two years.

Unemployment always seems to bear down hardest on those who are in lower-paid work and so social landlords need to be braced for more tenants falling out of work. Housing benefits should protect the rental income in the longer term, but inevitably the transition from paid employment to benefit claiming is not easy. Social landlords will need to offer more support and assistance, and may also face an increase in rental debtors while housing benefit claims are resolved.

Government Spending And Public Debt

The treasury estimated that the recession will reduce the national income by 5.2%, which will increase the public sector deficit by some £73bn. In the short term, this hole is being filled by increased Government borrowing, which will push up the overall forecast debt requirement for 2009/10 to an incredible £177.6bn.

The current Government expects to reduce the deficit and the borrowing requirement in the following ways.

  • Through the effects of economic growth, which is assumed to resume at an annual rate of 2.75%. Such growth will increase the tax take and should, in time, reduce the cost of social benefits.
  • By implementing a fiscal tightening regime which will reduce the gap between Government income and expenditure by £77bn over the next eight years. This will be implanted by tax rises and by freezing outgoings at current levels, i.e. a reduction in total spending in real terms.

The Impact Of Fiscal Tightening

Fiscal tightening will be felt throughout the economy. Currently, there is a lack of clarity as to exactly how and where reductions in spending will arise. This is partly because some of the tightening is expected to be achieved so far in advance. However, the Government has limited scope to reduce expenditure and certain spending is deemed to be outside of the normal budgetary control scope, for example:

  • unemployment benefits are dependent on the numbers eligible to claim that benefit (which could rise significantly)
  • interest payments will inevitably rise due to the massive increases in borrowing, and potentially, increases in interest rates
  • other social costs will increase due to demographic changes in society – for example, old age pensions will increase due to the changing age profile of society.

The Government has also committed to 'protect' certain expenditure – namely, expenditure on health, schools and overseas aid.

The net result is that some expenditure will continue to increase, so that there is proportionately less money for other areas. Freezing the health service budget in real terms can only be achieved by concentrating reductions in other budget areas.

It is estimated that these other areas will face a 12.9% cut on average by 2012/13.

However, the cuts are planned to be incremental over eight years. Should the Government choose to keep protecting the expenditure on health, schools and overseas aid, these reductions will deepen to a cumulative 23.8% by 2014/15 (with more to come by 2018).

Capital vs Revenue

As with most organisations, the Government now splits its spending between investment (i.e. capital outlay) and current outlay (i.e. operating costs). Over the last ten years there has been a significant increase in investment spending, which has risen from less than 1% of national income to over 3.5%. Included within this expenditure has been the considerable recent spending on housing.

However, this situation will change over the next four years; while spending overall is forecast to be frozen, current expenditure is forecast to increase by 0.7%, which requires large reductions in investment spending.

Investment expenditure, which increased by 12.5% from 1997/98 to 2010/11, is forecast to reduce by 14.4% by 2014/15.

Impact On Social Housing

The outlook for social housing providers is particularly dire.

Capital Grants

The forecast reduction in Government capital spending of 14.4% over the next four years will impact most on those departments which have high levels of investment expenditure. The department of Communities and Local Government is one such department, which currently spends over 50% of its budget on investment.

It is therefore highly likely that the significant increase in investment in housing over the last ten years will be reversed in the next four, with further reductions thereafter. New building programmes will be severely affected.

Revenue Grants

Even the modest 0.7% increase in current expenditure represents a reduction in real terms and the reductions will not be spread evenly.

We can expect the Government to cut expenditure whenever and wherever it can. Supporting People funding rates are already under pressure; this will only continue as the Government's fiscal tightening gradually takes hold over the next eight years.

Other revenue grants will also be squeezed and social programmes reduced or eliminated.

Housing Benefit

Currently, housing benefits payable to social landlords are some £10bn per annum. Although the current rent regime does not appear generous at the moment, a change to the Retail Price Index (RPI) + 1 formulae would provide a quick and easy way to reduce expenditure. Might we then see RPI + ½%, or even just RPI in the future?

What Should You Do Next?

The last two years have been difficult for social landlords, but the reality is that the future is probably going to be even worse.

Development programmes will need to be significantly curtailed as investment drops back to 1999 levels. Major developing social landlords may need to significantly reduce their development staff and may need to rethink their entire business models.

Revenues will come under intense pressure and social landlords will also need to deliver more for less as tenants become more needy, through increased unemployment and reduced net incomes.

Although it is possible that the Government's projections for the economy are pessimistic, many economists think the exact opposite. They worry that the recession is not over and that the assumed future growth rates are overly optimistic. Should this be the case, we can expect higher reductions in Government spending much sooner.

As Government spending is frozen for the next eight years, the coming decade will be one of stagnation for social landlords at best (January 2010's shock borrowing requirement does not bode well).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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