The Prime Minister’s aversion to extra borrowing is coming under sustained attack. There is now a strong argument to increase spending in next week’s Budget in order to build more houses and boost the economy.
Those who want to borrow more, for example to build council housing, are said by the Prime Minister to be ‘jeopardising the nation’s finances’. But is he right?
The case for allowing councils to borrow in order to build more homes has received an authoritative airing in several places in the run up to the Budget. First, an impressive range of bodies put it forward in a joint letter to the Financial Times. Second, there was a well-informed debate in the House of Lords on an amendment to the Growth and Infrastructure Bill, which would have relaxed the borrowing caps on council housing. And third, Vince Cable argued for it in a lengthy New Statesman piece on the state of the economy.
Almost inevitably, the government rejected the Lords amendment. Oddly, its main argument against was that to change the borrowing rules would mean the government no longer restraining investment by bodies for which it carries ultimate liability. But this now seems extremely old hat.
Since the 1980s there have been few failures by public sector companies, but plenty in the private sector where the government has had to pick up the tab. Notable among these are of course the banks, but Railtrack and the East Coast Mainline also come readily to mind. None of these liabilities was accounted for as public ones until they actually happened.
There must be a longer list of private companies – such as in the water and gas sectors – that would have to be similarly bailed out if for any reason they collapsed.
Whether or not the rules are changed, there remains a strong case for extra borrowing to build homes, and that doing so boosts the economy too. In response to this, the Prime Minister last Thursday used what has been called the credit card argument, that you can’t get out of debt by borrowing more. While this sounds superficially true, economists are queuing up to point out that, in the context of government borrowing, it is a completely false analogy.
Most notable was the extraordinary rebuttal of the other side of the credit card argument by the Office for Budget Responsibility. Cameron said that reducing the deficit is boosting UK growth. But the OBR said that the opposite is true: on its calculations the austerity measures in 2011/12 actually reduced growth by 1.4%.
The positive arguments for borrowing to provide houses, boost the economy and help to reduce the deficit are also receiving growing support. Jonathan Portes, director of the National Institute of Economic and Social Research, points out that if the Economist and the International Monetary Fund are both calling for extra borrowing to fund public sector investment, the case should be taken seriously.
While Portes may be regarded as one of the ‘usual suspects’ on this issue, this can hardly apply to others who now appear either to support the argument directly or whose analysis, intentionally or not, bolsters the case. Among these, the Institute for Fiscal Studies Green Budget showed how £10bn of debt-financed investment would boost growth, and because of extra tax receipts there would be little adverse impact on the deficit. Yet, extraordinarily, the Prime Minister said it was the IFS that had ‘completely demolished the argument’ for extra borrowing.
Portes goes on to cite a paper from the Treasury itself (admittedly from 2008) that models the effects of extra borrowing for investment and shows that the impact on public finances is actually beneficial. As Portes says of its calculations: ‘borrowing to invest now is indeed essentially free’.
The wider argument for building more homes – that we badly need them and the construction sector urgently needs more work – were put forward in the report from the housing sector, Let’s Get Building. With the economic case now even stronger, and the argument being taken up at last within government, how long will it be before the Chancellor realises that it would indeed be a relatively painless way of tackling the housing crisis and boosting the economy?
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