Not just for geeks – why ‘the borrowing rules’ matter

What’s this about and what’s the point of all these initials?

The main measure of Government debt used in the UK is the PSND (Public Sector Net Debt) which is similar to the more well known PSBR (Public Sector Borrowing Requirement) used in the past. Other countries use GGGD (General Government Gross Debt) and all international comparisons are done on this basis.

The main difference between the two measures is that GGGD excludes the public corporate sector, whereas the PSND includes it. So in the UK public corporations (which include council housing) are controlled together with the rest of general government debt, whereas in other countries they are controlled separately and their borrowing is regulated by their own business plans and their own prudential borrowing rules.

More information can be found in the recently-published UK Housing Review and in a report by a number of housing organisations called Let’s Get Building published late last year.

There was a period in the 1990s when no tenant conference would be complete without demands for a change in the ‘PSBR rules’ that made it hard for councils to borrow to invest in council housing.

Before the 1997 Election there was a head of steam behind making changes to the definition, changes that many people believed could lead to a major increase in housing investment and a renaissance in council house building, with particularly influential reports from the Chartered Institute of Housing gaining widespread support.

The fact that, in the event, the rules didn’t change tells us something about the Labour Government (council housing wasn’t very New Labour) but also about the power of Treasury Conventions. The PSBR had been invented as a measure of public indebtedness during the 1976 IMF crisis when the scale of the public corporate sector was huge (due to the size of the nationalised industry sector) compared to 1997 and now. But it had become a firm part of the Treasury mindset.

This little foray into history is of relevance because ‘the rules’ are again becoming a major topic of conversation, especially in housing but also in other affected sectors like transport.

There are two parallel arguments running. First, that an increase in borrowing for housing investment is justified even under the current rules because the economy needs a boost and because it would virtually pay for itself as the effects multiply through the economy. And secondly that a permanent switch in the debt measure would enable the council housing sector to borrow to build and use the freedoms of the new self-financing housing revenue account regime to the full.

Changing the rules has a measure of support across the political spectrum. Broad support amongst Lib Dems and Labour is well known, but there have also been Conservative voices, especially in local government, calling for the greater freedoms that the change would bring – which also chimes with the localist philosophy.

The Lib Dems have recently picked up the argument, presumably encouraged by Vince Cable. In a debate in the House of Lords last week (Column 158) Lib Dem Peer Lord Shipley (former leader of Newcastle) set out the case:

Councils have the capacity to build more homes, given that council housing is now self-financing. They could raise £7 billion. This could be done if the Government removed the borrowing cap on housing revenue accounts, relying instead on a prudential borrowing code to guarantee that only sustainable investment gets the go ahead. Many councils have successfully used prudential borrowing and have shown that they can manage such borrowing without risk. The Local Government Act 2003 already empowers the Secretary of State to cap any local authority which undertakes risky borrowing. I understand the need for the Government to be careful about public borrowing levels. However, relaxing the housing borrowing cap need not be counted as public sector borrowing any longer. The UK uses a much wider measure of public debt than other countries. Council housing is a trading activity and international regulations already permit this to be discounted from government borrowing levels, although unfortunately the UK does not currently adopt such an approach and I remain puzzled as to why it does not.

The arguments against the change look increasingly weak. The Treasury maintains the line that PSND is the right measure because it enables the government to be aware of all its contingent liabilities. But, as John Perry has pointed out on his Two Worlds blog, in the last two decades there have been few failures by public corporations and many by private corporations where the government has had to step in (notably the banks) and pick up the liabilities. In practice, the government’s contingent liabilities are not restricted to the public sector.

The debate has been joined again within the Labour Party, with the Labour Housing Group taking a lead role in promoting the need for rule changes to enable a new generation of council houses to be built, adding to the success of the self-financing HRA regime.

It’s an argument that won’t go away.

Courtesy of Steve Hilditch at Red Brick, and on Twitter @stevehilditch and @labourhousing