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Why won't Osborne let councils borrow to build housing? Even Tories want him to

Conservative councillors and Boris Johnson are among those calling for the Chancellor to lift the "artificial cap" on borrowing but, for entirely ideological reasons, he still won't act.

George Osborne at the Berkeley Homes Royal Arsenal Riverside development in Woolwich. Photograph: Getty Images.

Demand for housing might be surging owing to George Osborne's Help to Buy but supply remains pitifully constrained. The Local Government Association reveals today that 381,390 homes have been given planning permission but have yet to be built. Rather than the planning system (as many on the right claim), it is a lack of finance that is blame. 

Tory councillor Mike Jones, the chairman of the LGA's environment and housing board, has responded by calling for the government to lift the "artificial cap" placed on councils' borrowing and allow them to build more affordable homes. He said:

While there has been progress made, this risks being undermined if we do not find a way to ensure developers keep up with demand. These figures conclusively show that it is not the planning system holding back the building of much-needed new homes.

The challenge now lies in actually getting houses built. Government schemes to help buyers access finance risk creating a bubble if there isn't an increase in house building to match it.

Government has an unrivalled opportunity to create jobs, provide tens of thousands of homes and help the economy without having to find a single extra penny.

New homes are badly needed and councils want to get on with building them. The common sense answer is for the Treasury to remove its house-building block and let us get on with it.

In his recent manifesto for London 2020 Vision, Boris Johnson similarly argued: 

We should allow London’s councils to borrow more for house building - as they do on continental Europe - since the public sector clearly gains a bankable asset and there is no need for this to appear on the books as public borrowing.

In policy terms, it is a no-brainer. The Chartered Institute of Housing estimates that raising the cap by £7bn could enable the construction of 60,000 homes over the next five years, creating 23,500 jobs and adding £5.6bn to the economy.

So what's holding Osborne back? In a word, ideology. Unlike in other European countries, borrowing by councils appears on the national balance sheet making the deficit appear larger than it is. For a Chancellor determined to ensure that borrowing falls every year (to the extent that he delayed payments to institutions such as the World Bank and the UN and forced departments to underspend by £10.9bn), regardless of other policy objectives, lifting the cap is out of the question. 

In an attempt to win Osborne round, Vince Cable proposed allowing councils to pool their borrowing limits so those not using their full entitlement can donate it to authorities with housing waiting lists, but this too was blocked. As Cable recently told the Social Liberal Forum: "What is stopping them? Frankly, Tory dogma. And the Tories are hiding behind Treasury methodology, saying that more borrowing by councils beyond permitted limits will break the fixed rules.

"So even though freeing up this borrowing space would result in tens of thousands more homes being built, and many times more jobs, they would rather start talking about the cuts they want to make, rather than the houses that we should build. That is the difference between Lib Dems and Tories on this matter."

Cable's housing plan will be put forward for endorsement at the Lib Dem conference next month. So long as Osborne continues to resist any reform, he risks being outflanked on an issue of increasing political significance.