Reclassification of housing associations was an accident waiting to happen,  but it’s wrong to let it determine what kind of regulation should apply to the sector.

It’s ten years since Steve Wilcox in the UK Housing Review first warned of the possibility that housing associations could be reclassified as public bodies. At that time the decision that raised question marks was the ruling that they were caught by EU procurement rules, but in reality the degree to which they are overseen and financed by government had put their accounting status in doubt for at least a decade.

So while the government’s response to the decision to reclassify them is understandable – that it should lead to regulatory changes – it’s also right that all concerned demand a period of reflection. Otherwise, the risk is that hurried changes might be dictated solely by the need to shift associations back into the ‘private sector’ as soon as possible, with little regard to what sort of regulation is now required to protect the interests of tenants, lenders, the government and the public’s investment in the stock – and of course of the associations themselves.

It’s worth emphasising that the dilemmas resulting from the ONS reclassification and the urgency about resolving them are entirely of the government’s making (and not just this government, but its predecessors). Britain’s use of classification in setting its ‘fiscal rules’ is unique (see below). Anywhere else in Europe, such a change in the accounting status of housing associations – from private sector non-financial corporations to public ones – would be largely bureaucratic. After all, some of France’s HLMs (their equivalent of associations) are private and some are public, depending on their relationship to the local authority. Something similar applies in Sweden, where what were once the municipal housing companies delivering council housing are now in some cases part-owned by the private sector. In neither case are any differences in regulation due to their ‘public’ or ‘private’ status, they are determined by what regulation the bodies are judged to need.

Reclassification is a decision by the statistics body, the ONS, to put an organisation or firm into a different accounting category. In the case of HAs the move was from a ‘private’ non-financial corporation to a ‘public’ one. Reclassification in itself only affects where the income, expenditure and debt of associations fits into the national accounts.

Fiscal rules are set by the Treasury and determine which bodies count towards public expenditure and the government’s debt. The Treasury uses a wider rule than is used internationally, counting public non-financial corporations in its measure, but not private ones. Internationally, and especially in the EU generally, all non-financial corporations are counted outside government debt. This means that reclassification of associations is very significant in the UK but would be of minor importance in most other countries. It also doesn’t affect how our debt is judged internationally, as bodies like the IMF ignore the UK rules and follow the international rules.

In fact although the label ‘public non-financial corporation’ is a mouthful, it recognises that bodies which are largely self-financing and whose main income is from their customers (like, say, the Post Office) are different from (say) the Housing and Communities Agency whose finances and policies are determined entirely by government. That is why council housing and ALMOs have been treated as public non-financial corporations for several years, even before April 2012 when they became properly self-financing. Private non-financial corporations – the category into which housing associations fell until the recent decision – may still carry out public functions (like providing affordable housing). If they get too close to government they may be reclassified as ‘public’, but only in Britain does this have broader consequences for the public finances.

The danger now is that the cart will try to pull the horse – government will deregulate hurriedly, anxious to ensure that the sector loses its ‘public’ label, while legitimate interests reflected in the regulatory system are brushed aside. Long-lasting changes might be made, backed by the argument that unless they are adhered to the sector’s status could again by threatened by a future ONS review (and given they have looked at the sector once, they are clearly likely to revisit it later). But surely the interests of tenants, lenders, local authorities and indeed government (with its grant commitment to associations) and associations themselves are as – if not more – important than the sector’s accounting status, especially when this only matters because the Treasury sticks to obsolete rules about the definition of government borrowing? It’s particularly ironic that regulatory decisions might be driven by one set of EU rules (set by Eurostat, the EU statistics monitor) when logic suggests they should be driven too by the EU’s rules on how government debt is measured. The absurdity is deepened by the fact that the Treasury does indeed have to follow EU borrowing rules when reporting its debt to international bodies like the IMF and OECD: its UK rules are only for domestic consumption.

At the moment there is a danger we get the worst possible outcome for the social housing sector as a whole: housing associations are hurriedly deregulated while council housing’s position (now in the same accounting category as associations) is resolved by pulling it further into the public sector, and undermining if not destroying the self-financing status that took years to argue for and create. It so happens that as a consequence of the ONS decision a large proportion of the bodies that make up public non-financial corporations are – for the moment – social landlords. Wouldn’t it be a good idea for the sector as a whole to demand that the government change its borrowing rules, to allow a sensible debate about the sector’s purpose and status rather than have a set of rushed decisions which have little to do with protecting public investment, the interests of tenants or the long-term interests of landlords themselves?

If this seems pie in the sky given the government’s reluctance to address the real cause of the problem – our idiosyncratic fiscal rules – we should point to the inconsistency of believing that public corporations (such as council housing) can’t be trusted with more independence, when we seem happy to put crucial areas of the economy into the hands of public corporations which are state-owned or have large state shareholdings, as long as the control is exercised by foreign governments.  After all, significant parts of our transport and energy services are provided by firms like Abellio, Arriva and EDF, owned or controlled respectively by the Dutch, German and French governments. They enjoy the same commercial freedoms which English housing associations want to preserve and local authority housing would like to gain. Yet this seems to cause no problems for the Treasury, even as it refuses to extend the same freedoms to bodies with very similar status if they happen to be British.

Original post: Chartered Institute of Housing