The construction of more council houses could help provide homes to rent while boosting job creation and the wider economy. George Osborne should lift the borrowing caps on local authorities to make this happen.

Only a few weeks ago Prime Minister David Cameron said again that ‘you can’t borrow your way out of a debt crisis’.  But borrowing to build houses makes perfect economic sense.  Here’s why.

Chancellor George Osborne plans eight years of spending cuts to drive down Britain’s sovereign debt, and when his austerity plans don’t work he says that it’s because they didn’t go far enough.  Osborne and Cameron now make frequent references to the global race, but at least in Europe the race seems to be about who can cut their debt fastest.  As the National Institute for Economic and Social Research has pointed out, if interlinked economies like those of the EU all cut at once, the austerity is self-defeating and debt overhang gets worse, not better.

So some judicious extra spending therefore makes sense, as Colin Talbot has just argued on the PF Blog. While Osborne recognised this in finding £5bn to spend on schools and roads, his move is going to have limited impact for three reasons: it’s too small, he’s found the money by making cuts elsewhere and new schools and (especially) roads take years to get started.

What he should have done is invest in housing. There was little to lift housing in the Autumn Statement, in part because the government had already announced £10bn of guarantees for housing associations and other measures to stimulate house building.  But housing associations are still waiting to find out how the guarantees will operate, and stimulating the building of houses for sale will only work if buyers can get mortgages.

What is needed is direct investment in building new homes for rent.  Commentators like Tim Morgan, otherwise somewhat hawkish on economic policy, have advocated just that.  As I pointed out here last month, it so happens that local authorities have the capacity both to borrow and to build.  Neither supply nor demand is a problem.  Furthermore – and here is why it should work for the Chancellor – it so happens that building council houses provides an almost perfect combination of economic benefits that could easily outweigh the costs.

First, it would use spare capacity in the construction industry and create jobs at a time when many point out that it is the decline in construction that is dragging down the economy.  Many councils would link building contracts to training and apprenticeships, not only taking people off the dole but equipping them for future work.  Gloucester City Homes calculates that apprenticeships are almost cost-neutral given the benefit savings if the apprentice was previously unemployed.

Second, every pound spent becomes £2.84 in the wider economy – just the sort of high-leverage impact required.  In part this is because when spending money on building houses 92p of every pound stays in the UK.

Third, houses when built and let generate rents and save benefit expenditure, because half of new social lettings go to people who were paying expensive private rents.  If some of the remaining lettings rehouse people from costly temporary accommodation, there are further savings.

Fourth, since they started building again two years ago, councils have shown they can do so at lower costs, with less grant and charging lower rents – they have a powerful value-for-money argument and they now have experience in delivery.

Finally, if you are sitting on valuable assets that carry low debts, as councils do, borrowing to build more of those assets makes good sense, especially when there is unprecedented demand.

Talbot argues that by borrowing say £30bn at historically low interest rates, and investing it in projects with high impact, the government would more than recoup the money. Councils now have the capacity to invest about a quarter of this amount in house building, and the impact would be much quicker and wider than in building schools or roads.

Not only does such investment make economic sense, it would be a political response to the crisis in the housing market that would be both immensely popular and help the lower-income groups that the Chancellor is accused of neglecting.  He simply needs to lift the borrowing caps to allow this to happen. Can anyone think of a good argument against doing it?

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