John Healey: local government can prove borrowing to invest and build can be a good thing

Just off junction 33 of the M1 at the edge of the town centre is the New York Stadium, Rotherham United Football Club’s newly-built home ground. It has helped double the home game gates, boosted the team and given the town an iconic gateway.

It would not have been built without Rotherham MBC, which used its borrowing capacity to make the cost affordable for the up-and-coming second division club. The council has helped the local further education college in a similar way.

Not all borrowing is bad. And local government generally borrows well. We have a long British tradition of municipal fiscal caution, codified in 2004 by the Treasury in the current prudential borrowing regime. Local government’s net debt is less than 5%; central government’s is 86%.

The chancellor could use local government to do much more to lift their areas, and boost jobs and growth. The LGA, CLG select committee, Chartered Institute of Housing (CIH), Association of Retained Council Housing and others have all urged him to lift the tight borrowing cap on the recently-reformed Housing Revenue Account (HRA) so that councils can build thousands of new homes.

The CIH’s new UK Housing Review confirms the HRA changes contain the capacity for councils to borrow an additional £20bn in total over the next five years – in a prudent and sustainable way, serviced by their income from planned rents.

Even if Mr Osborne used next week’s Budget to raise rather than remove the HRA borrowing cap by £7bn, the CIH say this would allow an extra 15,000 council homes a year to be built over the next five years.

Councils have proved they can do it. In 2009, when I introduced the Local Authority New Build programme as part of the housing fiscal stimulus, 51 councils of all tiers, from all regions and led by all parties together built over 5,000 new council homes in less than two years – more than double the total during the whole of the previous decade.

There’s a wide consensus to will ‘the ends’ but few prepared publicly to will ‘the means’, in our current strangled political and economic policy debates.

So let me do so.

Investment in more homes or infrastructure requires more capital spending and – yes – more borrowing, including by government.

Borrowing is bad when repayments aren’t affordable and if it’s done to cover revenue costs or a shortfall between income and spending.

Borrowing is good, if it’s for investment to improve longer-term productive capacity as well as create jobs, generate tax revenue and revive growth in the short term. Interest rates on public debt are historically low, so now is just the right time for government – national and local – to borrow to invest.

Companies would borrow to take advantage of good investment opportunities to increase earnings or profitability. Households would do the same, if borrowing to buy a car means better-paying work becomes possible or taking out a mortgage is cheaper than the monthly rent, then they’d be daft not to.

More borrowing by government is now the right thing to do, not the wrong thing; part of the solution not the problem. But too often this question is ducked, and the public know when politicians avoid answering a question.

The result suggests to people that a policy will indeed need more borrowing, and that more borrowing is a problem, which is why politicians won’t talk about it.

Yet even the chancellor has spoken before about keeping up capital spending. In his first Budget directly after the 2010 election, he told the House of Commons that ‘Well judged capital spending by government can help provide the new infrastructure our economy needs to compete in the modern world… I think an error was made in the early 1990s when the then Government cut capital spending too much’.

However, figures from the Office for Budgetary Responsibility (OBR) show that in the first three years of this Parliament, capital spending has fallen year on year, and is now £12.8bn lower than Labour planned.

Since that first coalition Budget, the OBR’s forecast for the country’s GDP in the coming fiscal year is 6.3% lower than it expected. The UK economy is still 3% smaller than it was before the global financial crisis and recession, while all other major countries have recovered lost capacity and grown.

If we want to move the dial on GDP growth when the economy is weak, then it is government investment, not simply the private sector, that’s needed. When the economy is weak, more public investment does increase debt but it also increases output.

After nearly three years of economic policy failure, the balance of economic advantage now lies decisively in government borrowing to invest and build. And open advocacy of the means as well as the ends is overdue.

Nye Bevan once warned of the dangers of government simply stepping back in times of economic distress. It risks becoming, he said, a mere ‘public mourner for private economic crimes’, lamenting the problems people face but unwilling to act.

Local government is willing and also trying to act despite deep budget cuts and unreasonable constraints. But Britain can no longer afford a chancellor who simply remains a bystander.

John Healey is a former Treasury minister.

This article was published in the Municipal Journal.