Blind spot

Fiscal myopia: that’s the telling phrase in a report out this week on the long-term value of social housing.

In a way the verdict of Capital Economics merely confirms what we know intuitively: building social housing at low rents costs much less in the long run than not building it and instead subsidising high rents through housing benefit.

But the report for SHOUT and the National Federation of ALMOs demonstrates just how good long-term deal social housing represents. Capital Economics compared a programme building up to 100,000 social rented homes a year from 2020/21 with existing policies. Among the conclusions:

• Looking over 25 years, lower housing benefit costs alone justify government investment in social housing in most parts of the country.
• However, that takes no account of the value of the asset created that remains after 25 years. Once this is done, investment stacks up in most of the rest
• In a handful of cases where the sums do not add up (mostly larger homes in areas where private rents are the same or lower than social rents) there are still good arguments for investment (urban regeneration, positive impacts on health and education etc).
• Tenants will also be better off: the report estimates that families would see their net incomes after housing costs rise by £942 a year.

If that’s not convincing enough, the report also has some projections for the public finances in 50 years’ time: 2065/66 is the furthest time horizon used by the Office for Budget Responsibility for its fiscal projections. On current trends in tenure, the cost of housing benefit will increase from £24 billion to, wait for it, £197 billion.

Little wonder then that a social housing investment programme could have a massive impact on the national finances. Capital Economics estimates that the net impact on public sector net debt would peak at £2.9 billion in 2019/20 but tail off sharply after that as savings in housing benefit are made. By 2034/35, the policy would be delivering an in-year surplus and by 2065/66 public sector net debt would be 5.2 percentage points lower than on current policies, saving £0.9 trillion in nominal terms. Meanwhile the structural deficit would be 1.2 per cent of national output rather than 1.7 per cent, saving £91 billion a year.

Any report like this is obviously highly dependent on the assumptions made. While some of them (such as that housing benefit bill) may seem on the high side, others look Conservative. For example, the gap between social and private rents and the gains from investment in housebuilding (which is labour-intensive relative to other forms of construction) could well be higher than the figures used.

Overall though there seems little reason to doubt the report’s conclusions that:

‘The current allocation of public expenditure to housing does not take into account the future costs to the welfare system of meeting higher rents in the private rented sector and ‘affordable rent’ social housing. It is therefore a form of fiscal myopia: saving pennies in the short term only to waste pounds in the future.

‘From our analysis, we have a stark and clear finding: the government would achieve better value for taxpayers’ money, as well as improve the living standards of many low- income households, if it were to part fund the delivery of 100,000 new social rent homes each year rather than continue with its existing policy.’

Of those 100,000 homes, 24,500 would come from local authorities or ALMOs and 85,000 would be supported by government grant of £59,000 per unit. I make that  £5 billion of extra borrowing a year but the report argues that the bond markets are relaxed about borrowing to invest and save.

Meanwhile investment channelled via a new funding platform of not-for-dividend institutions (including perhaps a housing investment bank with money coming from ISAs) could be outside of public borrowing constraints and still obtain cheap rates through partial Treasury guarantees. Overall, it argues:

‘At first glance, one might think this increased borrowing flies in the face of any policy of “austerity” – or whatever the Conservative government will call its cuts. But this fails to recognise the underlying rationale for the current fiscal restraint: namely, to improve the fundamental sustainability of public sector finances. Not all borrowing is the same.’

Given all that the big question is why, far from recognising the logic of the argument above, George Osborne seems to be moving as rapidly as he can in the opposite direction.

As Monimbo99 blogged this week at Red Brick, the chancellor’s plan to legislate for budget surpluses in ‘normal’ times appears to rule out any form of borrowing for capital investment, in housing or anything else. New homes would instead have to be financed entirely from current taxes – plus more asset sales under the Right to Buy and conversions to affordable rent.

I’m not sure whether Osborne does not care very much what happens in 25 or 50 years’ time because all that matters is the election in 2020 or whether he’s doing this out of ideological conviction about the role of the state and public investment. Perhaps the answer is a combination of the two, since failing to invest in housing now will make the public finances look better by 2020 but effectively transfer higher costs to future generations (and electorates). I am sure though that current housing policies will result in a ballooning housing benefit bill for years to come, plus pressure for even more cuts.

When it comes to fiscal myopia, George Osborne is Mr Magoo.

First posted on June 17 on Inside Edge 2, my blog for Inside Housing