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20 October 2014

The Lyons report reveals our politicians’ fear to discuss borrowing for investment

In its major housing review, Labour seems to be ruling out borrowing more to pay for increased investment. This could be a mistake.

By Emran Mian

Labour last week has published its major housing review, the Lyons report. It has been well-reviewed for the policy measures it proposes that may lead to more home building. Though housing experts like Toby Lloyd of Shelter have pointed out that the report doesn’t say whether a future Labour government will put more public money into development.

Speaking at a Progress event last Tuesday, Ed Balls, the shadow chancellor, suggested an answer: “Within the overall capital allocation, we will increase the priority compared to George Osborne’s plans for housing.” Decoded, that means cutting other items of capital spending – rail, roads, schools, take your pick – in order to put a bit more money towards home building. What Labour seems to be ruling out is borrowing more to pay for increased investment.

This is, to use a technical expression, odd. Government can borrow cheaply right now. And that isn’t only a short-term phenomenon, in the sense that government is already locking in low interest rates on its bonds for up to 50 years. Cost aside, it makes economic sense to borrow for investment. After all by investment in fixed assets such as transport infrastructure or buildings government creates an asset on the other side of the balance sheet to the debt. Borrowing for these items may even be fairer than funding them through taxes, ie. it is future tax payers who will accrue the benefits and so they ought to pay most of the costs as well.

Now we might surmise that Labour doesn’t dare to borrow for investment because voters don’t rate it highly for economic competence. They do rate the Conservatives though, and they too are ruling out borrowing for investment. The chancellor’s ambition is to run an overall budget surplus by 2018-19, not merely a surplus on the current account with investment counted out.

So what’s going on? Some tend to the conclusion that, if they’re not borrowing for investment, then it must be that our politicians are economically illiterate. I doubt that’s true, but there may be another explanation.

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One possibility is that rather than borrowing money from rich people and corporations by selling them bonds on which government has to pay interest, politicians want to take their money by taxes instead. My guess though is that there are no secret plans for tax rises in order to pay for more housing.

A second explanation may be that our politicians are Ulyssean, their fiscal rules are self-denying ordinances that they consider necessary or else they can’t resist the sirens’ calls for irresponsible spending. By binding themselves to the mast there are some responsible spending decisions they can’t make either but on the whole it’s better to have lost the freedom to borrow than to have kept it.

If our politicians are behaving like this, then this must be at least in some large part because they believe that we – as voters – want them to. They might be right – for example, the idea that soon the government will be spending as much on debt interest as it does on education certainly touches a nerve. That said, most home owners probably spend more on mortgage payments than they do on education. If only politicians talked about borrowing for investment differently then they might win the argument with voters.

Another possibility is for politicians to put the money for investment at arm’s length. Sticking with housing, a future government could create an agency or company to build housing and give them the money raised by borrowing. This would still count as government debt but Ministers wouldn’t be able to divert the money to other uses. The self-discipline could be strengthened. A future government could make the commitment that by the end of its term the money will have been paid back. What I mean is that, once ready, the houses could be sold and the proceeds used to pay back the debt that was taken on to build them. Alternatively, if the houses were for rent, government could sell shares in the holding company, with shareholders to be paid dividends from the rental income and the proceeds of the flotation used to pay down government borrowing.

All of this is novel and it may be that private home builders, local authorities and housing associations can bring forward all the investment that is needed on their own. Crucially though, that isn’t what the Lyons report concludes. Instead it reckons that private home builders can only achieve an incremental increase in volumes and goes on to say, “it is clear that without further capital support there will be a limit to the amount councils and housing associations are able to do.” That limit is unnecessary and can be lifted.

Emran Mian is the director of Social Market Foundation

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