There is potential to build an extra 60,000 homes over five years if borrowing restrictions are lifted. So why is the government still applying double standards?
In an era of privatisation, it’s been good to see some promises about public sector infrastructure investment in the last few weeks. But why should they have to count towards government debt?
After HS2 wobbled on its tracks recently its prospects suddenly seemed to improve with a semblance of cross-party support for the investment required. Then Ed Balls reiterated Labour’s commitment to a target of completing 200,000 homes per year, which will surely require a significant input from local councils. But as things stand both of these substantial investments will depend on extra government borrowing, even though in any other European country they wouldn’t do so.
This irony is compounded when we look at other news items over the last few weeks. One was the sale of Royal Mail, only possible because its pension fund liabilities were taken on by the public sector, costing the Exchequer £1.2bn last year and likely to increase year on year. Then came the announcement of a new nuclear power station at Hinckley Point, to be built partly by the French government-owned firm EDF with massive UK government subsidy. And following that was the news that the budget for further and higher education is in danger of being breached because colleges are admitting too many students: all FE colleges were reclassified as ‘private sector’ in May last year.
The irony is that if investment is made by the public sector it has to be shackled by the rules about government debt, while privatised services seem to have an open-ended call on government subsidy. This happens even when they are run by government-owned firms, as long of course as the government isn’t British. As John Harris of The Guardian asked recently, is nationalisation ok as long as someone else is doing it?
When attempts were made to convince the incoming Labour government in 1997 that they should change the borrowing rules to fit in with our European neighbours, the reply was that this would lead to unfair competition, given that government-backed bodies can borrow more cheaply. Our neighbours are not so scrupulous: firms like EDF and Arriva (owned by the German government) dominate their respective sectors. If Britain’s stake in Eurostar is sold, ownership might well pass to SNCF, owned by the French government. As more and more British infrastructure is run by foreign governments it makes Britain’s unique borrowing rules look even more absurd.
Of course, since the coalition was hell-bent on privatising the Royal Mail they were hardly likely to look at ways of protecting public sector investment. But HS2 is different: it’s a massive project that requires public subsidy, but could surely raise a substantial part of its investment on the private market. If HS2 were established as a public corporation, under EU rules it would be allowed to borrow without that counting towards government debt. The alternative, as with HS1, is to make the investment then privatise it, recouping some of the costs but giving the private sector the eventual profits.
However, it’s council housing that has a particularly strong case, made again in a new paper from the National Federation of ALMOs. In part this is because self-financing has established the council housing service as an autonomous business, a process that will be completed as councils separate out their housing-related debt. In part it is because of growing housing need, as it is obvious that council borrowing and land resources will be needed alongside those of housing associations, if housing output is to be increased as (for example) Ed Balls promises.
NFA research confirms the potential to build an extra 60,000 homes over five years if borrowing restrictions are lifted. And also this month the Smith Institute reported overwhelming support from councillors for easing borrowing limits, with 80 per cent prepared to use extra borrowing to build more new homes.
In the run up to the next election parties will be trying to square the circle of tackling the deficit while still making promises about extra investment, especially in housing and transport. Why don’t they simply announce that they plan to follow the same rules about the UK’s borrowing as are applied by the EU, IMF and OECD, and at least give themselves some room for manoeuvre?
John Perry is author of the paper Treating council housing fairly, published today by the National Federation of Almos
Original post and comments: Public Finance