This report does not constitute a rating action.
Key Takeaways
- The U.K. government's Autumn Budget 2024 outlines steps to address deficiencies in the funding framework for public finance entities, but near-term underfunding persists. We expect more measures to be announced over the next few months.
- We understand that social housing providers' current rent regime will stay in place for at least five years.
- The government will top up funding for local authorities, as well as increase capital funding for Transport for London (TfL). It has also committed to increase funding to the devolved regions.
- Following the autumn budget, the government announced the first increase in undergraduate tuition fees in eight years.
For social housing, we view the government's commitment to medium-term certainty on the rent settlement and additional grants as positive. The proposed five-year indexation of social and affordable rents to the consumer price index plus 1% is consistent with our base-case assumptions. The details of the rent settlement are still under consultation, but we do not think social housing providers will receive compensation for deviations from the settlement in previous years. Additional grants for investments in existing homes should be positive for the sector, but details about scope, availability, and disbursement are currently lacking. The budget also announced a £500 million top up to the existing £11.5 billion Affordable Homes Programme (AHP) 2021-2026. Representing a less than 5% increase, funding for new homes continues to lag rapidly rising construction costs.
Local authorities will see a small increase in grants as an interim solution to underfunding, while the government outlines its broader aspirations for the sector. The budget statement acknowledged the financial stress local authorities have been experiencing and announced additional grants accounting for about 2% of the sector's total annual revenue. These are being directed to areas with immediate funding pressures, such as schools, special educational needs and disabilities (SEND), homelessness, and adult and social care. The substantial additional funding to the NHS could also help alleviate care costs for local councils.
The statement also alluded to a comprehensive review of local authorities' revenue sources and spending responsibilities, as well as a further devolution of public services during this parliamentary period. We anticipate reforms will focus on grants allocation arrangements, the business rates system, adult and children's social care, and councils' own revenue flexibility. The latter has some precedent; previously local authorities received ad hoc approval to raise council tax significantly to help bridge fiscal gaps. We also expect that multiyear budgeting will resume in the next one-to-two years. We believe this will provide long-term certainty and increase predictability for the sector.
Outside the autumn budget, on Nov. 4 the government announced the first increase to domestic undergraduate tuition fees for English universities in eight years. Many institutions have experienced financial pressure in recent years. This is the result of tuition fees having been frozen since 2017, high cost inflation over the past two years, and the prospect of reduced international student numbers. The 3.1% increase in tuition fees should help universities balance their finances, although this will depend on international student numbers. A positive announcement in the autumn budget is the government's commitment to a research and development budget. This includes funding the U.K.'s association with Horizon Europe, the EU's key funding program for research and innovation. We think this will help protect the quality of U.K. higher education research-focused institutions and will reap benefits from closer cooperation with the EU.
The budget set slightly-more-than-expected capital funding for Transport for London (TfL). The government committed close to £500 million of capital funding in the next fiscal year, which equates to about 25% of TfL's annual capital expenditure plan. We think this provides TfL some leeway to allocate resources to improving the quality of services and rolling stock, after significantly reducing such investments during the pandemic. It further supports our view of the government's sound support of TfL despite uncertainty regarding future long-term capital funding. While we understand this doesn't apply to TfL, other transport companies in England will benefit from an increase in the bus fare cap to £3 from £2. We anticipate the government will also be allocating more resources to transport-related projects across the country.
Funding arrangements for the devolved regions show continued commitment from the U.K. government, with real-term growth in transfers to Scotland, Northern Ireland, and Wales. We believe rated local authorities and social housing providers operating in the devolved regions will continue to receive adequate funding, in line with our base-case assumptions.
Related Research
- U.K. Social Housing Providers' Financial Capacity Shrinks On Investment Needs, Nov. 4, 2024
- Autumn Budget 2024: Looser Policy Will Keep Pressure On The U.K.'s Constrained Public Finances, Oct. 31, 2024
- Non-U.S. Social Housing Providers Ratings Risk Indicators: Ratings Pressure Has Eased, Oct. 31, 2024
- Non-U.S. Social Housing Providers Ratings History: October 2024, Oct. 31, 2024
- U.K. Local Authorities Are Bending, But Adapting, June 6, 2024.
- Your Three Minutes In The U.K. University Sector: Immigration Restrictions Dent Universities' Finances, May 21, 2024
- Transport for London Upgraded To 'AA-/A-1+' On Post-Pandemic Recovery; Outlook Stable, May 20, 2024
- U.K. Social Housing Borrowing 2024: Borrowing capacity remains constrained, March 6, 2024
| Primary Credit Analysts: | Noa Fux, London + 44 20 7176 0730; noa.fux@spglobal.com |
| Felix Ejgel, London + 44 20 7176 6780; felix.ejgel@spglobal.com | |
| Secondary Contacts: | Beatrice de Taisne, CFA, London + 44 20 7176 3938; beatrice.de.taisne@spglobal.com |
| Karin Erlander, London + 44 20 7176 3584; karin.erlander@spglobal.com | |
| Abril A Canizares, London + 44 20 7176 0161; abril.canizares@spglobal.com |
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