Ed Balls’ speech – the wrong balance between austerity and investment?

The abject failure of the Tories to build enough new homes, and especially enough new genuinely affordable homes, should present Labour with a golden opportunity. The housing statistics are stark and concern about where a growing population will live has been rising. It is now not only the number of homeless, overcrowded and sharing households, it is the number of 30 year olds living back with parents, the ‘generation rent’ forced to shell out on exploitative rents instead of saving for a deposit. There is growing concern that in the high pressure areas of the country, housing shortage and very high housing costs are a major brake on the economy.

Labour’s policy appeared to be moving in the right direction. By adopting the target of building 200,000 homes a year by the end of the next parliament – not enough to do the job, but a start – Labour demonstrated some commitment. By establishing the Lyons Commission – expected to report this week but now supposedly a few weeks away (a worrying development) – Labour showed it was willing to get into real detail about making the land and development markets work better. And there was a huge head of steam behind calls to end the artificial ‘cap’ on councils borrowing to build new council houses.

Ed Balls is a very clever man, the architect of the stunning announcement on Bank of England independence to set interest rates after the 1997 Election. So I’m hoping that yesterday’s speech only told half of the story and Ed Miliband has grabbed all the good stuff for his speech today.

Everyone in the Party will have views on austerity and the fact that it makes ordinary people and the poor pay for the Bankers’ crisis. But the point that concerns us on a housing blog is Balls’ strong statement that there will be no new policies that increase public borrowing in the next Parliament. Searching for a silver lining, he did say that housing would get increased priority within the existing capital expenditure limits, and that line was also being spun by housing spokesperson Emma Reynolds during the day. That could well mean that the ‘cap’ will be loosened or even lifted and that councils will be able to expand their building programmes – something that is absolutely essential if the 200,000 target is to be met. But the question is begged – giving housing greater priority at the expense of what other capital programmes? I can’t imagine HS2 being reversed to make room for the housing programme and other capital programmes have their own strong justifications.

There is a general belief that the private sector can build a bit more and housing associations can build a bit more, but that the 200,000 target will not be met unless councils are unleashed – see for example the evidence from SHOUT to the Lyons Commission for the full argument (and summary below). I can see nothing but economic benefit from extra council borrowing. It is good borrowing: it creates a capital asset that will bring in income for decades to come; it creates jobs that are still much needed; and it has a long supply chain generating far more economic activity than the original investment. And borrowing is and will remain cheap. Yet Balls’ whole speech was couched as if capital spending was a bad thing because it adds to total government borrowing and therefore the ‘deficit’. (See an interesting article in the FT (paywall) on what the various borrowing figures mean).

There is a further challenge. More borrowing to build does not necessarily produce homes that are genuinely affordable, even if they are built by councils. To get down to traditional social rent levels, subsidy is needed. Good councils, like Islington, are finding new ways of cross-subsiding new council homes to keep rents down. But the national programme would need significantly more grant to enable rents to be kept to sensible levels. The grant programme has been cut by more than 60% since the Coalition came in, which is why rents for new social homes are so ridiculously high.

For many of us, determining how much grant is available is the key decision that Labour has to make in the housing field. Building more homes at genuinely affordable rents is the essential first step towards removing the growing dependence in the housing system on housing benefit. Every home built with grant for social rent saves money forever in the benefits system.

Two previous promises have been made about increasing grant but these appear to have disappeared from current consideration. First, an increase in grant to grow the housing programme was promised out of the proposed Bankers’ Bonus Tax. And secondly, an increase was promised out of the proceeds of the sale of 4G bandwidth. If these are now consigned to history, there are currently no promises about grant levels.

There was also no sign in Balls’ speech that labour will take more radical steps like taking council borrowing for housing out of the prime measure of public borrowing, bringing the UK into line with standard international debt measures and treating councils as ‘public corporate bodies’ who should determine their borrowing on prudential grounds within their own business plans rather than as a conglomeration with central Government. Maybe that will be Balls’ next ‘Bank of England’ moment in May next year.

Imposing a borrowing straightjacket on housing will be a disaster for Labour’s housing ambitions. If housing is to have higher priority within existing spending plans we need to know how much priority and the cost in terms of other programmes. And to give confidence to the people who will actually deliver the 200,000 promise, something signidficant must be said about grant.

Ever the optimist that one day the housing penny will drop, attention turns to Ed Miliband today. There is some speculation that housing will feature big in his speech. Personally, I think it must.

 

SHOUT submission to Lyons Commission

Key Messages

A very significant increase in house building, of all tenures, is required. The Review’s starting point of 200,000 a year by 2020 may well be too low.

The total 200,000 new homes a year (or more) must include at least 100,000 new social homes:

  • an increase in the social housing stock on this scale is needed to provide good quality housing for hard-working people on low to middle incomes at a cost which enables them to have a good quality of life
  • welfare reform will not succeed without it. It would significantly increase the extent to which work pays, remove the need for many households to claim welfare benefit, and reduce the costs of welfare for others
  • Developing new housing on this scale will create a hugely valuable national asset, which will generate economic and social returns indefinitely
  • We won’t get 200,000 homes a year without building 100,000 social properties a year. Garden Cities, and other big new settlements or urban extensions will only be deliverable and socio-economically sustainable with proportionate levels of social housing development

“Social housing” must mean housing at rents comparable to traditional social housing rents. The ‘affordable rent’ tenure introduced under the current government is not in fact affordable for hard-working families, it cannot be financed sustainably by social landlords, and it is poor value for money for the taxpayer.

We can afford 100,000 new social units a year. Its cost is equivalent to just a few days of welfare spending. Even if the entire £4.5bn a year cost beyond current housing capital had to be found within spending totals, it could be accommodated. In fact, the net impact on public spending totals would be significantly reduced by savings on welfare, health and other programmes, and the provision of units by private developers through s106. It would be an investment which would carry on producing benefits to the taxpayer and society indefinitely.

There is a strong case for reclassifying the housing borrowing and spending of local authorities outside the core public sector definitions, in line with international practice and the self-financing business model of social housing.

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4 Responses to Ed Balls’ speech – the wrong balance between austerity and investment?

  1. Pingback: The dog that never barks – will housing feature in the General Election campaign? | Red Brick

  2. runner500 says:

    The silence on grant levels has been deafening, which is extremely worrying because if there isn’t more grant funding under Labour, while there might be a few more homes built it will just be more of the same (un)affordable rents with more people trapped in poverty.

  3. Pingback: The housing baton passes to Sir Michael Lyons | Red Brick

  4. danfilson says:

    I am delighted you make the point that building housing creates an asset which represents the debt incurred in the process. I get fed up with people only referring to the debt side of the balance sheet and disregarding the asset side. Sure local authorities have debts running into hundreds of millions of pounds, but most have assets of value exceeding those debts several fold. The local authority that rubs revenue deficits will burn through its reserves but the one that builds for the future is indeed incurring “good debt”. Time was when government gave a subsidy on the interest charges on housing construction. So it’s not just permitting the borrowing that we need but support for the borrowing for the right purposes. The reduction in direct and indirect costs of supporting homelessness could be substantial, to say nothing of the social cohesion benefits of closing the shortage of housing and the unemployment reduction.

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