The penny drops that homes are worth it

Originally posted on November 11 on my blog for Inside Housing.

Look behind the headlines about going back to the 1970s and the shift in the debate on public investment in the opening week of the election campaign could have a huge impact on housing.

On the surface Thursday’s speeches by chancellor Sajid Javid and shadow chancellor John McDonnell are about who will spend more on public services and who will be more responsible on borrowing.

But they are also about a more fundamental change in the fiscal targets and measures that the government sets itself.

Javid has abandoned the government’s previous fiscal rules and loosened his previous target of reducing net debt in favour of one that it should be flat or falling by the end of the next parliament.

By allowing investment in infrastructure of up to 3% of national output, he would create room for an extra £20 bn a year of investment – although he does not appear to see housing as part of his ‘infrastructure revolution’ and ‘decade of renewal’.

McDonnell would go much further by excluding borrowing for investment from his borrowing targets and looking instead for an improvement in the overall government balance sheet by the end of the next parliament.

He plans an extra £50 bn a year of investment via a National Transformation Fund overseen by the Treasury and based in the north of England.

This revolution involves a Green Transformation Fund and a Social Transformation Fund and it definitely does include housing – retrofitting existing homes and building new ones.

For all the political arguments about reckless borrowing and soaring debt, both plans are essentially about raising borrowing to increase investment.

That is progress in itself although both will have to tackle the same issues of how to find enough projects and capacity within the construction industry to do that (especially if Brexit means fewer building workers from the EU).

But more fundamentally both are also about how the government should adapt to a low-interest rate world that was meant to be temporary but has now existed for more than a decade. If it is not affordable to borrow to invest now, when will it ever be?

The Conservatives have u-turned  on George Osborne’s politically-driven austerity and there seems to be a pattern whereby they adopt Labour targets from the previous election that they condemned as profligate at the time.

Both parties are drawing on a debate among economists that the previous fiscal rules were out of date and ripe for reform. See here for a fuller analysis of both.

Bearing all that in mind, Labour’s 2019 plan is radical not so much because it proposes much more spending but because it involves a completely new measure of how we judge the value of that spending.

McDonnell’s new fiscal rule involves considering the value of assets as well as liabilities on the public sector balance sheet – meaning that new investment counts as a cost as well as a benefit.

And it is based on proposals in two recent reports by the Resolution Foundation think tank led by Richard Hughes, former head of fiscal at the Treasury.

The first sets out three options for changing the current fiscal framework based on Public Sector Net Debt, which only includes borrowing and liquid financial assets:

• Public Sector Net Financial Liabilities would capture all financial assets and liabilities held by the government
• Public Sector Net Worth (the one chosen by Labour) would include all financial and non-financial assets and liabilities and so illustrate the net fiscal benefit of investment.
• The Intergenerational Balance would include not just all assets and liabilities held by the government but also the present value of future taxes and spending to illustrate the long-run sustainability and intergenerational fairness of fiscal policy.

The second report proposes three new fiscal rules including a target to improve Public Sector Net Worth as a share of GDP over the next five years.

The reason why this matters so much to housing is that the fiscal rules drive what is regarded as value for money in the Treasury and beyond – this is a bit like a new version of the old debate about whether housing should count as part of the Public Sector Borrowing Requirement.

As the Resolution Foundation points out, the fiscal frameworks of the 1980s and 1990s ‘encouraged privatisations of state-owned companies and sales of fixed assets such as social housing, even when those assets were sold below their retention value’.

It was a world in which we seemed to know the price of everything and the value of nothing.

So policies like the Right to Buy and sales of public land begin to look very different if you measure the worth of all public assets and liabilities rather than just Public Sector Net Debt.

The old framework also actively encouraged policies like the Private Finance Initiative and Help to Buy whose costs were excluded from Public Sector Net Debt but would be captured by Public Sector Net Worth.

No longer a liability but an asset too, investment in social housing would begin to make as much sense outside the sector as it does inside it.

Indeed it would make sense twice over because by reducing spending on housing benefit it would help the government meet its targets on current spending too.

Whatever the outcome of this election, it’s that shift in underlying ideas about value for money that matters. Because housing’s worth it.