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Control over the financing of council housing is to be devolved from central government to local authorities, under plans being developed by the government.

Housing minister John Healey has announced in a written statement to Parliament that his intention is to scrap the existing housing revenue account subsidy system, and give local authorities control over their own finances.

Under the current system money generated by local authorities by renting and selling council-owned homes is pooled by central government and then redistributed. The new system being proposed by Mr Healey would radically change this.

The government has not published its proposals in full. It intends to issue a full consultation document before Parliament begins its summer break on 21 July, but the statement given by Mr Healey sets out the principles that will guide reform.

In it he says the government will propose ‘a devolved self financing alternative to the current system’.

‘With these reforms, councils would finance their own businesses from their own rents, in exchange for a one-off redistribution of housing debt,’ he says.

Mr Healey goes on to say that there is also a ‘strong case’ for allowing councils to keep the money they get through selling homes. ‘The consultation document will therefore set out proposals to end the pooling of capital receipts,’ he states.

He says change is needed because although there is a ‘clear rationale’ to the current system it also has ‘significant drawbacks’. The new system will be designed to ‘increase local responsibility and accountability’.

A complete overhaul of the system is likely to take time, however. ‘Change on this scale is complex and will require primary legislation,’ Mr Healey says. ‘A fully self financing locally devolved system cannot be implemented in a single step.’

One of the major hurdles will be adjusting housing debt. At present around £17 billion of housing debt, which costs around £1.1 billion a year to service, is split across 202 councils. The new system would require local authorities to manage and fund this debt.

The government is, however, introducing some immediate changes. All new homes built by local authorities will be exempt from the current subsidy system, meaning councils will be able to keep all the rents and any revenue from sales of these properties.

Although councils build relatively few homes, the government is encouraging them to get back into house building. Earlier this week the prime minister Gordon Brown announced a £1.5 billion house building fund, which includes £250 million to get local authorities to build 3,000 homes over two years. This is on top of £100m for the same purpose, which was announced in the Budget in April.

The Chartered Institute of Housing welcomed the proposal to scrap the HRA subsidy system. Chief executive Sarah Webb said: ‘We are delighted that the government has responded so positively to our calls to abandon this archaic and unfair system which has done nothing to help councils deliver quality services or plan their budgets over several years.’

She added that self financing would allow councils to ‘make better and more locally-based decisions about the upkeep of existing homes and the building of new homes in their area’, but warned ‘if councils are to manage their own housing stock to the best advantage of local people, they will need new skills in long-term business planning’.