Green light for affordable homes

Originally posted on February 8 on Inside Edge 2, my blog for Inside Housing

If you feel like you’ve been banging your head against a brick wall making the case for greater investment in rented homes, take heart. Someone is listening.

The Green Budget from the Institute for Fiscal Studies appears every year a month before the real thing and gives an impeccably independent and influential assessment of the chancellor’s options.

The 2016 version was published on Monday and it includes two chapters written for the IFS by the Institute for Chartered Accountants in England and Wales (ICAEW). Yes, I know the mention of chartered accountants may have you asking yourself why you started reading this blog, but please try to contain your excitement – because there is an important point to this.

The first chapter is a scary assessment of the true scale of government liabilities when you take account of factors such as pensions, private finance and nuclear decommissioning in the Whole of Government Accounts (WGA). On this basis net government liabilities more than doubled in the five years to 2014 to a cool £1.85trn.

The second on infrastructure spending is the really interesting bit for housing.  As things stand, George Osborne is committed to increasing investment in infrastructure. But by ruling out any increase in borrowing to pay for it he’s tied his hands. Infrastructure spending has to be paid for out of current income and is therefore subject to the same austerity as everything else.

One way round that is to use the Private Finance Initiative (PFI) to move the debt off-balance sheet and hide it from the government’s National Accounts. Governments have been doing this for years but the PFI is an expensive way of funding projects: in 2012 the Treasury concluded that it had become ‘tarnished by its waste, inflexibility and lack of transparency’; and guidelines for the new generation of PFI contracts (PF2) are in inherent conflict with the need to keep them off balance sheet.

Meanwhile other forms of private finance have become harder to raise since the global financial crisis. For example, only £1.7bn in guarantees were issued in the first two years of what was meant to be a £40bn UK guarantees scheme to support private sector infrastructure investment.

The ICAEW says it’s time to bring PFI contacts back on the public balance sheet and adopt what it calls a ‘sustainable commercial rationale’ for public investment:

‘The government’s approach permits (de facto) borrowing through off-balance-sheet PFI contracts, but does not permit borrowing to fund investments that would generate a positive financial return and hence pay for themselves, either directly through income from user charges or indirectly through higher tax receipts.

‘This creates a systemic preference for higher-cost off-balance-sheet projects over financially beneficial investments that might improve economic growth by much more in comparison. Requiring such investments to be paid for out of current income means that they need to compete for funds against other priorities, even though the public sector as a whole would be better off if borrowing were to be permitted to fund them.’

And that’s where housing comes in:

‘Examples of projects that are disadvantaged by this approach include direct public sector investment in housing and transport developments that are not suitable to be built through PFI contracts, but which would potentially generate sufficient additional direct revenues and higher tax revenues to pay back the cost of the public borrowing needed to finance them.’

Even better, that specifically means social and affordable housing:

‘Given the lower cost of borrowing available to government, care would also need to be taken to ensure that public sector investments do not inappropriately substitute for private sector investment by ensuring that there is an appropriate public policy objective being met. For example, increased investment in social and affordable housing is likely not to be an issue given the failure of private sector house builders to compete in this area, whereas investment in luxury housing might be inappropriate for government investment even if it did provide a positive financial return.’

Projects would have to demonstrate that they can increase economic growth by enough to pay back their costs and the interest on public borrowing used to finance them. But housing does exactly that:

‘One benefit of this approach might be in areas of historical underinvestment such as housing and railway networks, where direct income such as rents or contributions from train operators would contribute to a positive financial return when combined with incremental tax revenues stemming from increased economic growth.’

Here in a nutshell is the case for housing we’ve all been banging our heads against a brick wall about for years: investment in genuinely affordable homes more than pays for itself in the long-term.

Will Osborne listen? Sadly he seems more intent on pouring billions into Starter Homes and Help to Buy, including off-balance sheet equity loans and guarantees. This for homes that stretch the definition of affordable to breaking point and, as Savills argues today, schemes that could fail to deliver extra homes and may distort the market. Worse still, he is cannibalising the existing social housing stock to pay for it.

But this is important independent backing for the case for investment in homes. And who would ever have believed that Osborne would learn to love the minimum wage?

The cap doesn’t fit

The rest of the Green Budget is worth a read both for its warning that there may be more spending cuts or tax rises to come and for the discussion of housing benefit and universal credit – plus a reminder of the farce that Osborne’s welfare cap has become. In the wake of his u-turn on cuts in tax credits, he will breach his own cap in each of the next three years. The only reason that he won’t bust the cap in 2019-20 and 2020-21 as well is that he shifted housing benefit for temporary accommodation from central to local governments. As the IFS comments dryly:

‘It is highly doubtful that this stream of spending will be reduced to zero as a result of the policy change, so at the very least the government’s performance relative to the cap is flattered by the reclassification of this spending item. This somewhat opaque method of meeting the cap does little to enhance what was left of its credibility.’