New Homes Bonus Redistribution Research / Model
Paul Woods, Director of Finance and Resources Newcastle
1 / Summary1.1 / The Growing New Homes Bonus and the increasing topslicing of grant funding to pay for the Bonus is having a significant redistributional impact for councils around the country.
1.2 / This paper seeks to highlight the scale of the redistribution - even if all councils are equally successful in building the same proportion of new houses in their areas.
1.3 / The paper summarises the issues and makes recommendations for change that could reduce the scale of impact of the scheme and eliminated much of its unfairness.
2 / 2014/15 Grant Projections - New Homes Bonus and Topslice
2.1 / The 2014/15 Grant projections published by DCLG include a comparison of spending power for 2013/14 and an estimate for 2014/15. The projection for 2014/15 assumes the same level of New Homes Bonus is paid out as in 2013/14 - £236.449m, which is added to the Bonus paid out in 2013/14 of £668.339m to give total NHB payment in 2014/15 of £904.788m.
2.2 / This is funded by a Government grant of £250m plus an RSG topslice of £654.788m. With £800m already having been deducted from the RSG control total, a New Homes Bonus credit adjustment is assumed for 2014/15 of £145.212m. An extract from the DCLG spreadsheet including these figures for each council and the net loss gain in 2014/15 is given at Appendix A.
2.3 / The distribution of the New Homes Bonus adjustment is used as a basis for arriving at the estimate of the grant topslice for each council by scaling the £145.212m up to £654.788m to represent the total topslice in 2014/15. This figure is also used to provide an estimate of the £2.0billion topslice in 2018/19 again by scaling the distribution of the £145.212 up to £2.0billion.
2.4 / Comparing the New Homes Bonus estimate for 2014/15 – scaled to the topsliced total of £654.788m – with the distribution of the grant tospslice, provides an estimate of the redistribution in 2014/15. This highlights the scale of the overall redistribution from New Home Bonus including all of the causes of the redistribution.
2.5 / The ten biggest losers and gainers in cash terms are shown below. The biggest loser in cash terms is Birmingham, losing a net -£11.8m in 2014/15, rising to -£35.9m if the national topslice increased to £2.0bn, as envisaged by DCLG by 2018/19. The scale of this loss is due in part to its size, but also because the number of new homes was below average and the bonus per house of £1,264 was less that the £1,474 national average. County Councils are also large net losers as they only get a 20% share of the New Homes Bonus in their area. The figures for Newcastle are shown in cash terms. Councils with big losses among London, Metropolitan and Unitary councils have grant cuts that are more than twice the amount of their New Homes Bonus. For County Councils the cash gap is even larger. This puts extra pressure on councils providing upper tier services including social care.
NEW HOMES BONUS REDISTRIBUTION IN 2014/15 – BIGGEST GAINERS / LOSERS
2.6 / The biggest gainers include London Boroughs in the vicinity of the Olympic site, councils that have increased their new homes but have relatively low levels of general grant and shire districts that get an 80% share of the New Homes Bonus but with a much smaller topslice of grant funding – e.g. Aylesbury Vale and Basingstoke and Dean.2.7 / Part of the distributional impact is due to the fact that in wealthier areas the new houses have a higher council tax band and attract a bigger New Homes Bonus, whereas in areas with property values there are more new houses in the lower council tax bands. For example, in 2013/14 the average New Homes Bonus payment including the affordable Housing contribution per new dwelling was £1,269. This compares with a national average of £1,474 and an average for Westminster of £2,307. In Newcastle the average was £1,392 (including more affordable homes), whereas in Wokingham the average was £1,738.
3 / New Homes Bonus with Average Number of New Houses and Bonus Payments
3.1 / The distribution in the previous section reflect the level of New Houses to date as well as the difference in the level of Bonus paid per House, which is being reflected in the Distributional impact.
3.2 / To isolate the distributional impact a simple model has been created that assumes a standard average % increase in Dwellings in an area and that each dwelling attracts a standard amount of New Homes Bonus of £1,474 per dwelling. The results of this model are shown in Appendix A. This shows the distributional impact from the way that the grant cut is made as a % of total funding and the 80/20 split in shire areas between districts and counties.
3.3 / An example of the ten biggest cash gainers and losers and Newcastle are shown in the table below. Again Birmingham is the largest cash loser and the analysis shows the huge scale of the grant distribution even when each council is equally successful in building the same proportion of new homes. Comparing this result with the result in the previous table shows that for Birmingham the majority (-£9.195m) of their -£11 .771 net loss in 2014/15 is due to the way the funding for New Homes Bonus is topsliced as a percentage from total grant. The net loss/gain is also shown in relative terms in £ per the current number of dwellings in each council. The net loss/gain is also scaled up to the position if the New Homes Bonus reached £2.0bn by say 2018/19.
LARGEST GAINERS AND LOSERS FROM NEW HOMES BONUS REDISTRIBUTION – WHEN ALL COUNCILS BUILD THE SAME % OF NEW HOUSES
3.4 / The biggest gainers are generally Shire Districts and the least deprived areas in the country, particularly those with the largest gain per dwelling.
3.5 / The following table shows the twelve biggest net losers and gainers in terms of £ per dwelling.
3.6 / When it comes to biggest net losers in £/dwelling from the systemic distributional impact the losers are some of the most deprived councils in England.
3.7 / The main cause of the redistribution is the lack of thought about the way in which the funding should be taken to fund the New Homes Bonus, which means that it is simple taken as a % from the total funding available.
3.8 / Much of the redistribution could be avoided if the funding for the scheme was found on a more even and equitable way across the country e.g. by a grant cut per person a grant cut per dwelling.
4 / Heat Map Showing Net Loss
4.1 / In February we produced further heatmaps showing the impact of the geographic redistribution of New Homes Bonus. This was based on a projection of the net impact of New Homes Bonus grant and topslice around the country at an area basis, which does not shows the large net losses for most county councils. This heatmap is replicated below for information.
5 / RECOMMENDATIONS FOR CHANGE
5.1 / The following recommendations for changes have been made to DCLG over the last year, with no acknowledgement that there is a problem and no action being taken to address the inherent unfairness in the New Homes Bonus system arrangements.
5.2 / A review of the scheme should consider –
a) consider limiting the scale of the New Homes Bonus to the £1billion considered in the original consultation paper. If Treasury were providing the funding for a policy initiative they would provide a cash limit rather than allow an open ended commitment. Given the impact on social care and other key services its impact needs to be scaled back
b) reducing the level paid for 2014/15 Bonuses onwards either to a cash sum per new house or by way of a % of a national budget allocation and cap the allocation - e.g. to an extra £150m in 2014/15 as opposed to an extra £300m as currently envisaged.
c) the funding should be provided by way of a reduction either in the central share of formula grant in the 2013/14 grant settlement, or by a similar reduction per dwelling so the cost is evenly distributed on a fair basis around the country to avoid the significant redistributional effects it currently has; and
d) a fairer split between county and district level funding needs to be introduced to minimise the adverse impact on social care budgets.