Liberal confusion over borrowing caps

Not only have the Lib Dems rejected their own housing policies, they seem confused about what they mean. That’s the conclusion we are bound to draw from the past week’s debates in Glasgow.

It so happens that the Lib Dems had an excellent policy about investment in council housing which they adopted last year.  It’s set out in Decent Homes for All: ‘Liberal Democrats will abolish the “cap” on local authority borrowing for housing investment’. They had a similar unequivocal policy in the run-up to the last election.  The problem seems to be that they are scared to death of the consequences if these policies are actually implemented.

Nick Clegg successfully pulled the wool over delegates’ eyes at the Lib Dem conference, both by misrepresenting the policy and by claiming more for the watered-down version than it can possibly achieve.  Let’s looks at the watered-down one first.  It amounts simply to keeping the current borrowing caps on local authorities but allowing two or more councils to pool their borrowing potential.  The argument is that, given the rather arbitrary nature of the caps and the headroom they give councils, some who have more headroom than they need might be willing to give some of it up to help those who have far less. London Councils called for this last year in their report Meeting Londoners’ Housing Needs. Indeed in London it may help, especially if a borough giving up part of its headroom can get something in return, such as nominations on a proportion of the houses built.

However, to claim as the Lib Dems did in the summer that this could produce an extra 15-25,000 new homes seems highly unlikely for several reasons.  First, councils who are not yet fully using their headroom may simply be waiting to see how strong their finances look next year or the year after. Second, if any do decide to share their headroom, will they be able to reach agreement with adjoining councils on what they get in exchange? And third, since self-financing began in April last year, councils have made a total of just over 2,000 housing starts: would a reform as modest as shared borrowing caps really produce such a dramatic boost in their output?

Even wilder claims were being made about complete removal of the borrowing caps: that it might produce an extra 300,000 homes per year.  The amendment to the conference economy motion, which came from the Social Liberal Forum, was actually more sensible, calling for the ending of the caps and changes in the borrowing rules to facilitate ‘at least 50,000 homes per year for social rent’. This was rejected by Clegg and ultimately defeated, partly because delegates fell for his weaker alternative but also because Clegg said that it wouldn’t have much immediate impact anyway (yet strangely, the approved motion would!).

Roll forward a few days, and the otherwise conformist Communities minister Don Foster was suddenly saying that it is absolutely essential that the borrowing caps are scrapped. Shared borrowing limits should merely be the ‘first step’.  Did Don miss Monday’s economy debate, as Vince Cable was supposed to do? And will he pursue this ‘absolutely essential’ policy when he’s back in his department?

The other part of the Social Liberal Forum motion was about changing borrowing rules to conform with international norms, and this got a half-hearted approval on Monday as ‘party’ policy which evidently commits the coalition to nothing.  Even here, Clegg was confused and confusing.  According to the Guardian, he warned that ‘…if Britain “on a whim” followed EU definitions of public debt, so freeing councils to borrow, debt would then have to include taxpayer-funded liabilities such as in the banking system, meaning “debt would go through the roof”.’

This may have done enough to see off the dangerous lefties in the Social Liberal Forum but it was also nonsense.  For a start, the Treasury already treats its various financial interventions as a separate item in the accounts, not as part of its main measure of public debt.  Similar practices have been followed by other countries that have intervened in the banking crisis.

Banks like RBS and Lloyds are classed as public corporations anyway, so their debt isn’t included in international debt measures. But the truly frightening scale of these liabilities (originally £1.3 trillion) is regularly reported as a separate item in the UK accounts.

The point that Clegg may have been making is that UK debt on the main international debt measure, General Government Gross Debt, is higher at the moment than the Treasury’s figure which is based on Public Sector Net Debt. However, the Treasury is obliged to publish the general government figures and has done so for many years (the latest ones are here). These measures are the ones used in international comparisons by the IMF and other bodies.

Nevertheless, these issues are complex. If a proper study of the implications of moving towards international measures were to take place, it would be very important in clearing the way for a potential change that could benefit council housing (as well as other public corporations, such as those in the transport sector).  What is far from clear is whether this will actually happen as a result of the Lib Dem conference resolution. Will Clegg go back and insist that the coalition actually does such a study?

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6 Responses to Liberal confusion over borrowing caps

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  4. Prateek Buch says:

    Thanks for paying such close attention to the amendments and the debate, some of us in the room ended up confused by what Nick’s contortions actually mean going forward – not helped by Mr Foster’s claims to support abolishing the cap after all…!!

    There is an additional point if I may. Yes, greater borrowing may add to Govt Gross debt – but it might also add to productivity, growth and (crucially) productive capacity by alleviating housing shortage and creating jobs – a multiplier that is pretty undeniable (if unknown in its exact magnitude). I could even see public house-building, if targeted to areas and demographics where shortage is most acute and the biggest barrier to living standards rising, as a key driver of growth and hence LOWER public debt through the usual mechanisms.

    I declare an interest of course – my rant in the form of a speech followed my role in drafting the amendments as part of the Social Liberal Forum…

    thanks, excellent blog

    • monimbo99 says:

      I do of course agree with your additional comment, and there is an attempt to calculate the economic effects (which as far as I am aware hasn’t yet been challenged) in the report Let’s Get Building by the NFA and others, published last November.

  5. Ken Lee says:

    Spot on – CIPFA have always said that the borrowing cap was not needed – the rest of local government capital expenditure has been successfully controlled by the Prudential Code – effectively do not borrow more than you have the revenue to fund. Self-financing Housing Revenue Accounts (classed as a quasi corporation account and so should be outside general government debt) clearly acts a natural barrier on how much can be borrowed.

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