Not just for geeks – why ‘the borrowing rules’ matter

What’s this about and what’s the point of all these initials?

The main measure of Government debt used in the UK is the PSND (Public Sector Net Debt) which is similar to the more well known PSBR (Public Sector Borrowing Requirement) used in the past. Other countries use GGGD (General Government Gross Debt) and all international comparisons are done on this basis.

The main difference between the two measures is that GGGD excludes the public corporate sector, whereas the PSND includes it. So in the UK public corporations (which include council housing) are controlled together with the rest of general government debt, whereas in other countries they are controlled separately and their borrowing is regulated by their own business plans and their own prudential borrowing rules.

More information can be found in the recently-published UK Housing Review  and in a report by a number of housing organisations called Let’s Get Building published late last year.

There was a period in the 1990s when no tenant conference would be complete without demands for a change in the ‘PSBR rules’ that made it hard for councils to borrow to invest in council housing.

Before the 1997 Election there was a head of steam behind making changes to the definition, changes that many people believed could lead to a major increase in housing investment and a renaissance in council house building, with particularly influential reports from the Chartered Institute of Housing gaining widespread support.

The fact that, in the event, the rules didn’t change tells us something about the Labour Government (council housing wasn’t very New Labour) but also about the power of Treasury Conventions. The PSBR had been invented as a measure of public indebtedness during the 1976 IMF crisis when the scale of the public corporate sector was huge (due to the size of the nationalised industry sector) compared to 1997 and now. But it had become a firm part of the Treasury mindset.

This little foray into history is of relevance because ‘the rules’ are again becoming a major topic of conversation, especially in housing but also in other affected sectors like transport.

There are two parallel arguments running. First, that an increase in borrowing for housing investment is justified even under the current rules because the economy needs a boost and because it would virtually pay for itself as the effects multiply through the economy. And secondly that a permanent switch in the debt measure would enable the council housing sector to borrow to build and use the freedoms of the new self-financing housing revenue account regime to the full.

Changing the rules has a measure of support across the political spectrum. Broad support amongst Lib Dems and Labour is well known, but there have also been Conservative voices, especially in local government, calling for the greater freedoms that the change would bring – which also chimes with the localist philosophy.

The Lib Dems have recently picked up the argument, presumably encouraged by Vince Cable. In a debate in the House of Lords last week (Column 158) Lib Dem Peer Lord Shipley (former leader of Newcastle) set out the case:

Councils have the capacity to build more homes, given that council housing is now self-financing. They could raise £7 billion. This could be done if the Government removed the borrowing cap on housing revenue accounts, relying instead on a prudential borrowing code to guarantee that only sustainable investment gets the go ahead. Many councils have successfully used prudential borrowing and have shown that they can manage such borrowing without risk. The Local Government Act 2003 already empowers the Secretary of State to cap any local authority which undertakes risky borrowing.

I understand the need for the Government to be careful about public borrowing levels. However, relaxing the housing borrowing cap need not be counted as public sector borrowing any longer. The UK uses a much wider measure of public debt than other countries. Council housing is a trading activity and international regulations already permit this to be discounted from government borrowing levels, although unfortunately the UK does not currently adopt such an approach and I remain puzzled as to why it does not.

The arguments against the change look increasingly weak. The Treasury maintains the line that PSND is the right measure because it enables the government to be aware of all its contingent liabilities. But, as John Perry has pointed out on his Two Worlds blog, in the last 2 decades there have been few failures by public corporations and many by private corporations where the government has had to step in (notably the Banks) and pick up the liabilities. In practice, the government’s contingent liabilities are not restricted to the public sector.

The debate has been joined again within the Labour Party, with the Labour Housing Group taking a lead role in promoting the need for rule changes to enable a new generation of council houses to be built, adding to the success of the self-financing HRA regime.

It’s an argument that won’t go away.

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10 Responses to Not just for geeks – why ‘the borrowing rules’ matter

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  3. Is local government borrowing rolled up with central government borrowing to produce annual Government borrowing figures? And whatever the answer for the UK, is it the same for Scotland?

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  7. Dan Filson says:

    However debt is defined – and I give my view below – one thing is often, if not invariably, overlooked when considering how much debt a nation is carrying: that is what assets were acquired with that debt or are now representing it. “Good debt” has been in vogue as a phrase recently, denoting debt incurred on infrastructure projects. I would extend that phrase to encompass assets which are not generally seen as infrastructure in the way we view roads, railways, airports, R&D etc.

    Take this example. In the latter years of the Labour administration in power 1971-1978 at the London Borough of Hammersmith & Fulham (as it has since been renamed), the council acquired about 4,000 residences, mostly in terraced streets and in need of repair and modernisation, both by purchase on the open market and by compulsory purchase order to force the issue. I believe the average acquisition cost was about £8,000, but possibly it was less than that. Even allowing for the modernisation costs which added perhaps 25% to the bill, these properties rose in value between 1978 and 1982 almost immediately to about £20,000 to £25,000 per dwelling and continued to rise in value throughout the the 1980s and 1990s and then rose very substantially during the present century, dipping relatively little in the property slump from 2007 on. Sadly the housing stock fell from a peak of say 22,000 units owing to the Right to Buy legislation (which, amazingly, Labour did not repeal when restored to power nationally in 1997), with vigorous promotion of RTB by the local Tory-Liberal coalition in power 1978-1986 and with no enthusiasm of RTB by the successor Labour council in power until 2006.

    The point I am making is that the debs incurred in that period 1974-1978 were massively counterbalanced by the value of the assets representing that debt even allowing for those properties sold off under right to buy with discounts of up to 60%. Now, amazingly, the government wants to allow discounts in London of up to £100,000 (the current discount list is £75,000), which will still limit RTB purchases to the surprisingly wealthy (no surprise that recent RTB sales have been very low).

    On the general issue of how debt should be defined, perhaps I am a ‘small “c” conservative’ when it comes to debt accounting, but I would prefer a wide definition ( ie not just the debt of central government) because I think there are potentially great dangers in overlooking debts that in reality are national debts even though held by supposedly independent bodies, whether the Housing Corporation or local authorities or other quangos or the local equivalent of quangos. The national debt of the USA is not just the Federal debt but should include the debts of the fifty several states, most of them “too big to fail” to use another popular phrase. In short, PSBR v PSND v GGGD is not the key issue – it’s what you did and do with the money that counts.

  8. Why does it have to be so fucking complicated? We know,Because the scum have told us, that
    there are 2 million applicants on housing waiting lists,we know that there are greedy bastards out
    there that are making a fortune out of people who cannot afford to buy because of the same greedy speculators,so a simple answer is to build enough social housing to house those waiting
    and get people back to work.They are not working and paying taxes because Gidiot has taken
    their jobs.They are getting benefits for the same reason.The simple answer is make work pay and
    house people. It doesn’t matter if it’s PSBR or GFYM,people only need a reason to get up in the

  9. grahamangus says:

    You are quite right, those of us who have been calling for a change for 20 years or so ( which includes people who are not Socialists ) through good times and bad wonder why a change has not been made or had stronger poolitical support. Probably a dislike of giving Local Government more freedom and/or just a dislike 0f Local Government.

  10. martinwicks says:

    Not sure about this. The ‘self-financing’, of course, is underpinned by the ‘debt settlement’ by which mythical debt was handed over to Councils. The assumption in terms of the 30 year business plans was that rent would rise by RPI plus 0.5% plus £2 a week, punishing tenants with above inflation increases, at least until 2016. The finances will vary from Council to Council, but if more borrowing was taken on (who from, the PWLB?) the debt interest and debt payments resulting from the ‘debt settlement’ would have to be taken into account. As far as I can see the scope for building would be very limited in the absence of a national subsidy. Council rents are already high enough as a result of the ‘rent equalisation’ rules. Existing tenants cannot afford to subsidise new build by paying ever higher rents.

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