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Labour says no to raising debt caps Matthew Warburton - 26/09/2014

austerity_300Sir Michael Lyons is yet to report on how Labour can meet its target of 200,000 new homes a year, but it already seems clear that any recommendation to lift council debt caps will be resisted by the Labour leadership.


Ed Balls' attempt on Monday to convince doubters that Labour can be trusted with the public finances painted a picture of little more than austerity with a human face, and its fiscal conservatism clearly extended to a ban on additional borrowing, even that which would not be repaid from taxation.


Both Chris Leslie, shadow Chief Secretary to the Treasury and housing spokesperson Emma Reynolds made it clear that Labour continues to see housing borrowing as remaining on the government's balance sheet, despite the cogent case for following European practice and counting it separately.


In an interview, Reynolds seemed to argue that there is no strong case for lifting the cap because most councils are operating well within it. Some councils have no headroom but in aggregate borrowing is well within the cap. " Lifting the cap in its entirety would be difficult …", she said, "Michael is considering what to do within the cap in terms of sharing the headroom".


Let us hope that he is able to come up with a better proposal than the unworkable proposal trailed by the Liberal Democrats that councils should be enabled to exchange headroom. Without an incentive to give up their headroom - and none currently exists - such a proposal is doomed to fail. What might work better is simply allowing councils more freedom to borrow within the aggregate debt cap.


However, what councils are borrowing now is, arguably, a poor guide to how much they might be wanting to borrow in a few years time to play their part in meeting Labour's 200,000 homes target. And in any case it is wrong to imagine that any prudent council would commit to borrow to the limit of its debt cap, leaving no room for overruns or contingencies. Wherever the cap were set, actual borrowing would be likely to fall short by a sensible margin.


So long as Labour accepts that councils' housing borrowing counts the same as other government borrowing, there remains a major risk that it will prevent councils from making as big a contribution to the supply of new homes as they could.


The temptation remains to fund housing associations to build in preference to councils for the spurious reason that their borrowing is private not public. One can understand why the Labour leadership might be unwilling to risk the step of a change in accounting rules at a time when they are desperate to prove that their approach to the public finances is proof against any challenge of irresponsibility.


However, it is not just the future of housing policy that may hinge on this issue. Any suggestion of a bigger role for public ownership in rail transport raises the identical issue - Richard Branson has seen his investment in new trains handsomely repaid from passengers' fares, yet any publicly owned rail operator would find similar investment as scored and constrained as government borrowing, unless the accounting rules are changed. Labour needs to look again at the argument for change, and be just a little braver..

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