How to Pay for it – 150,000 new council dwelling per year at social rents.
By Michal Lerner
To win the next general election, Labour must give bold answers to the question ‘How will you pay for it?’. Let us therefore imagine an interview between an interviewer (I) and a member of the Shadow Cabinet (L) and suggest how the dreaded question should be dealt with in the context of providing 150,000 new council dwelling per year with at social rents:
I: At the 2021 Labour Party conference a motion was passed, to build 150,000 dwellings with social rents per year for the next 10 years. How will Labour pay £25 billion per year to achieve this?
L: The UK is a currency issuing state and so a Labour government would pay for it the way all currency issuing governments pay for things. It will instruct the Bank of England arrange the payments to those from whom the government wishes to buy products and services.
I: But suppose there are not sufficient funds in the government account.
L: Then the Bank of England will give the government a loan. The Bank of England will increase its liabilities by putting money into the government’s account. It will then register the loan it has just given the government as an asset on the asset side of the balance sheet. This is sometimes referred to as expanding the balance sheet. It is all smoke and mirrors. The government owns the Bank of England, so it’s effectively lending to itself. Note that the ability of the Bank of England to create money came about in 1973, when the Bretton-Woods gold standard was abandoned. Before 1973, the Bank of England’s ability to create money would have been limited by the amount of gold it possessed. Nor was it needed. There was not the bitter hostility to tax-and-spend that happened later. Money for social needs was always there. And wealth creation was at least as good then, in an era where business interests were not given everything they said they needed.
I: But the Bank of England is an independent institution. It might disapprove of this expenditure and refuse to make the payments.
L: By law the Bank of England must make any payments authorised by the elected representatives of the people in Parliament. It would be strange if the Bank of England could refuse to obey decisions taken by the elected representatives of the people in Parliament.
I: So the government does not need to borrow or tax to finance its spending?
L: The government of a currency creating state never needs to borrow or tax to finance its spending. As a currency creating state it has limitless money. But it is highly likely that it will choose to issue bonds or to levy taxes for other reasons.
I: But if it has limitless funds why does it choose to issue bonds and borrow?
L: For the most part bonds are a form of welfare for those with savings who would like to put their money in a riskless asset which earn interest. So one could have some sympathy for granny bonds as a form of pensioner welfare. Another example might be war bonds which would also allow workers to earn interest on savings that they cannot spend. Which may also keep them onside for the duration of a war. Occasionally bonds might be used to regulate the interest rate on overnight borrowing between banks. But bonds are, most certainly, not used to borrow money to finance spending.
I: If a government has limitless funds why does it need to levy taxes?
L: Our individual experience of taxation is that we transfer money from our bank account into a government account at Her Majesty’s Revenue Commissioners (HMRC). From our point of view, we are giving money to the government. But a currency creating government has a limitless supply of money. Its ability to spend is not increased by our money since it can always create as much money as it needs. (Rishi Sunak increased state spending by some £400 billion without raising taxes.) Yet a government does need to levy taxes to implement its policies. Since it does not need our money, we can only conclude that it must have some other reason for levying taxes.
I: What other possible reason could it have for levying taxes if it does not need tax revenue?
L: Having to pay taxes means that you can consume less of the products and services for sale. These products and services then become available to be bought by the government so that it can implement the policies on which it was elected. A currency creating state may have limitless money, but it doesn’t have limitless resources. The purpose of taxation is to free up resources, not to raise revenues. A Labour government proposes to build 150,000 local authority dwellings per year for the next 10 years. The question that needs to be asked is, are the resources (land, workers, materials) available to do that. In 2022 the resources are most likely not available to do that. The issue of land availability is particularly complex. There’s a fixed amount of land and it’s not mobile. As regards workers, certainly the plumbers, bricklayers, roofers etc. are not available to build 150,000 homes per year. Available, in this context, means that plumbers, bricklayers, roofers etc. are looking for work. If they are currently employed by the non-government sector then they are not available for employment by the government.
I: But you said the government had limitless funds. Why doesn’t it just offer higher wages than the private sector?
L: The government could lure these workers from the private sector by offering them higher wages. However this would have inflationary consequences which are best avoided.
I: So the houses won’t be built?
L: We have many unemployed and underemployed workers in the UK. The government could develop a plan to turn them into the skilled workers it needs to build 150,000 dwellings per annum. Once this skilled workforce is in place, housebuilding can begin.
I: So nothing will happen for years?
L: Not if it depends on training a currently unskilled work force. However, the government could use taxation to acquire the resources it needs to build at least some of those 150,000 houses per year.
I: How specifically would taxation give the government the resources it needs?
L: Suppose the government determined that many of the skilled people it needed were employed in building hotels. It could introduce a tax on hotel building that led to a cut in hotel building. The workers previously employed in hotel building would then become unemployed and could be available for employment in the government’s house building program.
I: Would taxing hotel building release enough workers?
L: Most likely not. And you might not even want to cut hotel building. But at least now we are thinking about the problem in the right way. We are thinking about where to get the resources needed to complete the building work and not about how we pay for it. Paying for it is not a problem, if the resources (land, materials and skilled workmen) are available to be bought. As Keynes once said, “Anything we can actually do, we can afford”. By which he meant, if the resources are there to do the task, paying for it is never an issue. Keynes should have also said that the political will has to be there too.
I: Surely all governments want to see more houses being built?
L: Thatcher’s agenda in 1979 was reduction of the size of the state and development of the market and private enterprise. Local authority spending on housing was seen as competing with the private sector and therefore something to be stopped. The figures for England show how successful she was.
Successful in destroying public housing. High prices are nice for those who already own a house or flat. And for the big buy-to-rent sector. But today’s young people find it much harder to buy a home, unless their parents can afford to buy one for them. Many can’t even afford to rent, and are unable to leave home. Thatcher’s dream of a ‘property-owning democracy’ has failed. And when Jeremy Corbyn promised to be radical, young voters were strongly pro-Labour.
In 1969-70 the % of dwellings started by private enterprise, housing associations and local authorities was 51.8, 3.3, 44.9 respectively. Some 300,00 dwellings were built in total.
In 1979-80, when Thatcher came to power, the % of dwellings started by private enterprise, housing associations and local authorities was 63.6, 7.5, 29.0 respectively. Some 210,000 dwellings were built in total.
In 1997-98, when Labour returned to power, the % of dwellings started by private enterprise, housing associations and local authorities was 87.3, 12.6, 0.2 respectively. Some 150,00 dwellings were built in total. 18 years of Tory rule had resulted in local authorities building less than 1% of dwellings. Total dwellings built had declined from 210,000 in 1979 to 150,000 in 1997, compared with 300,000 in 1970.
In 1969 local authorities built some 135,700 dwellings. In 2021 they built 1,650 dwellings. Thatcher’s agenda was complete. Local authorities were building very few council houses, and very few dwellings were available to people at a social rent. Labour now proposes to reverse this. Which is to be welcomed. It will need massive planning and political will to put the resources in place to make it happen. Paying for it will not be an issue.
I: Let me summarize what you have said:
If a UK government wants to build 150,000 dwellings per year and if the resources (skilled workers, materials, land) are currently unemployed and available to be hired and bought then a currency creating government can achieve its objective by creating money to hire these workers.
L: That’s correct. Always remember Keynes. If it can be done, it can be afforded.
I: But the resources may not be available. A government has then to work out how to get those resources. If there are unemployed workers they could be trained to learn the required building skills. This will take time but it may be the only option.
Alternatively the resources may exist but are not available for hire because they are already employed by the private sector. In this situation the government could use taxation to free up those resources.
L: Yes. The purpose of the taxation is to free up resources and not to raise revenues. And increases in taxation will typically have to be argued for politically. And the vested interests of the private sector will be strongly opposed to local authorities building dwellings to be rented at a social rent. The availability of land may be the most complex issue that a Labour government, intent on building 150,000 dwellings, has to deal with.
I: So there are many obstacles to building these 150,000 dwellings?
L: True. But paying for them is not a problem.