Council borrowing: the cap doesn't fit

22 Nov 12
John Perry

The case for councils being allowed to borrow up to affordable limits to build more homes has been made before, but there was never a better time for the government to listen

Until 2009, council house building had been in the doldrums since the late 1990s, with usually no more than a couple of hundred homes built each year.  When the last government belatedly woke up to the need for more affordable housing, it began to pump money in – mainly to housing associations but also to local authorities.  Over 2010 and 2011 councils geared up to build over 3,000 new houses.

The first argument in favour of continuing to build council houses now is therefore that their new productivity shouldn’t go to waste, particularly as they can build with lower levels of grant.  Further, it links to a second argument, which is that they often have access to land – old garage sites, garden land behind estates – that only local authorities can easily develop, and many recent schemes demonstrate this point.  They also usually have good relations with local communities that enable them to produce new homes that meet local needs.

From April, the government has put councils in a better position than ever before to invest in new homes, because they are now self-financing.  Even though they have been forced to take on extra debt, at £17,000 per unit it is still low.  On the basis of their projected income, they could borrow as much as £20 billion and stay within prudential rules, which would allow them to build as many as 170,000 houses.  However, the government has put caps on their borrowing, which mean their headroom is only £2.8 billions and under current plans they will build just 3,000 houses per year.

Let’s Get Building, a new report from five national bodies led by the National Federation of ALMOs, argues that the government should drop these borrowing caps.  It recognises that councils’ borrowing counts as part of government debt, but says that the urgent needs both to stimulate the economy and provide more affordable rented homes mean that extra borrowing is now justified.  It shows too that house building is such an effective economic stimulus that much of the expenditure comes back to government in taxes or benefit savings.  Furthermore, councils can save by providing lower-cost homes to tenants paying high private sector rents or living in expensive temporary accommodation.

The main objections to extra borrowing are that it would breach fiscal rules and provoke an adverse reaction from the markets.  As part of the study, Capital Economics were asked to test the market response to councils borrowing an extra £7 billions over five years – about one third of their full borrowing capacity.  The responses suggest that this sum would be too small to worry the markets – but it would allow 60,000 extra homes to be built.

Capital Economics also tested reaction to the case for bringing fiscal rules into line with those used elsewhere in Europe, an argument familiar to readers of the PF Blog.  Markets were cautious on rule changes, but accepted they could be made over time provided it was done transparently and weren’t a cover for extra borrowing.

Let’s Get Building therefore argues that, if the government meant what it said when it cut council housing free of subsidy and made it self-financing, the logical next step is for councils to manage their own borrowing on market terms, just as housing associations do.  They could then continue to build new homes year-on-year, financed from rents.

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