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31 January 2014

Labour has got to bite the bullet on borrowing for investment

The great council housing boom of the post-war years was only achieved by public investment. The same action is needed now.

By John Healey

Ed Balls made an important speech at the weekend, not only setting out Labour’s promise of fairer taxes but also our commitment to turn the current account deficit into a surplus and to get national debt falling. Hand in hand with this fiscal discipline is Labour’s plan for investment-led growth, with housing at its heart.  

Public housing investment was central to the action we took in the last year of the Labour government when I was housing minister. Alongside measures to help home owners and private house builders, this included the first local authority new build programme for two decades, and reform of council housing finance to create the capacity for councils to build over 50, 000 new homes for social rent.

Despite the fact that councils in all parts of the country and led by all parties started to build again, this was one of the first targets for the coalition. On taking office, Tory ministers cut the capacity of this new settlement for councils in half and slashed direct capital investment in social homes. The hard truth for Labour is that while there’s a growing public sense of crisis in housing, and a belief that the housing market is failing, there’s currently no swell of public or political support for investment in social housing. Above all, there is a pessimistic fatalism that much can be done about failings in the housing market, or that public housing can play anything but a peripheral part in building the homes our country needs.

In 1945, when Aneurin Bevan assumed responsibility for housing alongside health, he put local authorities in charge of a huge homes programme because the nation could rely on them rather than the private housebuilders to get building. Councils repaid his faith – from a standing start, they were completing almost 150,000 new homes a year by the end of the decade.

Now as then, the only way to show investment works is to allow councils to get on and do it. One difference with Bevan’s time is that our public housing stock, though depleted in recent decades, is an asset base against which councils can borrow. And local government generally borrows well. We have a long British tradition of municipal fiscal caution, codified since 2004 in the current prudential borrowing regime. Local government’s net debt is 5 per cent. Central government’s is close to 80 per cent of national income.

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We have got to bite the bullet on borrowing for investment. We’ve got to recognise that affordable homes require subsidy to build, but that because housing is such a low risk and reliable source of revenue, rents pay back the capital cost in full and continue to provide a return beyond that. Entirely the opposite of the relentlessly rising housing subsidy paid from the public purse via housing benefit.

An excellent report by the National Federation of ALMOs at the end of 2012 set out one of the first steps. It estimates that by lifting the borrowing caps that this government has set, we could free up an extra £7bn of investment to build 15,000 new council homes a year. The benefits would be felt well beyond those tenants on housing waiting lists, or trapped in the private rented sector, it could also add £20bn to the UK economy and generate over 100,000 jobs across the country.

There is an understandable concern about the impact that councils’ borrowing could have on the public finances. Our idiosyncratic fiscal classification rules set us apart from much of Europe in classing such local council borrowing as adding to national government debt, even though any costs are more than met by rents. The borrowing by Bevan and Macmillan was repaid long ago, so these council homes are now subsidy-free, still bringing in revenue and a great asset for current and coming generations. 

It may well make sense to change accounting methods so that this debt is not counted in the same way as central government borrowing, a way of organising the public accounts which international organisations such as the OECD already use. This kind of change could be made by a sympathetic Treasury and has the great advantage of not requiring a fundamental change in status of council and ALMO housing.

However, setting councils free from current borrowing constraints is necessary but not sufficient. The bigger challenge lies in making the case for smart state action. The great council housing boom of the post-war years was only achieved by public investment but it drew its widespread support from the popular conviction that government action was an essential answer to a housing market that was failing so many people.