Made to be broken

Posted by: Jules Birch

21/12/2009

Could the financial crisis finally pave the way for a change in the public borrowing rules that would benefit council housing?

That’s the intriguing possibility raised by Steve Wilcox in a chapter in this year’s UK Housing Review that also cuts through all those mind-boggling numbers about government debt. 

Until the crisis hit, the UK operated its own public borrowing rule - that public sector net debt should not exceed 40% of gross domestic product (GDP).Council housing was treated as public debt. 

But the rest of Europe has operated a different rule since the Maastricht Treaty - that general government (gross) financial debt (GGFD) should not exceed 60% of GDP. Under this system, council housing departments are treated as public corporations and their borrowing is not included in the total. This is the basis of the long-cherished hope that reform of the public borrowing rules could free up investment.

Since the crisis, the UK rule has been suspended and all that borrowing for the banking bail-out treated as a special case. If it adopted the same system as the rest of Europe government-owned banking interests would also be treated as public corporations - a clear incentive not to go back to the UK system as it was.

Wilcox argues that in practice the UK’s borrowing options will be ‘constrained by the “court” of international financial opinion’ and that the markets all ‘focus on internationally recognised general government financial measures’.

‘The case for a change in the UK fiscal rules is particularly pertinent to the housing sector,’ he says, ‘since, if the UK adopted EU-style general government based rules then borrowing for council housing would not count against the primary fiscal measures, and in that sense the council housing sector would be in the same position as housing associations.’

So far, so good. Except that the financial crisis has transformed the UK from being one of the EU countries with the lowest GGFD (just over 40%)  to one of the highest (91% by 2013). That still makes us better off than the Greeks and Italians but way higher than the 60% target. And while the UK’s debt servicing costs are lower now than they in the last two financial crises - the mid-1970s and early 1990s - there is still scope for them to rise if international concern grows about our levels of debt. 

Elsewhere in the review, Wilcox argues that overall investment in housing (including private finance and stock transfer proceeds) was the highest since 1980 with the single exception of 1989/90, when there were huge right to buy receipts. 

Put those two facts together it looks like the change in the rules change could finally happen amid the bleak future predicted by the Chartered Institute of Housing ahead of publication of the review.