Research and insights
A real breadwinner – how changing debt rules can help us get social housing
Published date: 24 October 2024

Charlie Trew
Head of Policy
Government investment in social homes has fallen off a cliff. In 1974, the government funded the delivery of nearly 100,000 social homes, but by 2023, that number plummeted to just 25,600, including only 3,900 social rent homes.
As a result, almost 1.3 million households now sit on the social housing waiting list and 74,000 families are homeless in temporary accommodation.
To end the housing emergency, we desperately need the government to invest in building 90,000 social homes each year for 10 years. Our economic assessment of social housebuilding shows this would not just benefit the people who will live in social homes, but drive economic growth, creating savings and increased revenue for the government.
The upcoming autumn budget and spring spending review provide a crucial opportunity for the government to commit the necessary spending. However, current fiscal rules are impinging on the amount the government is able or willing to invest. That’s why we’re calling for changes to these fiscal rules, as set out in our recent Brick by Brick report, to unlock desperately needed government funding for social housebuilding.
Knead to know: what are fiscal rules?
Fiscal rules are essentially self-imposed limits by the government on their deficit levels and debt-to-GDP ratio. ‘But what does that mean?’
When overall spending by the UK government is higher than the income it receives in tax and other revenues, the government chooses to borrow to cover the difference. This difference is known as the ‘deficit’, measured yearly. The government debt-to-GDP ratio is the total amount of money a government owes as a percentage of the overall value of our economy. Currently, the government has self-imposed ‘golden rules’ that a) require that the debt-to-GDP ratio must be projected to fall in the next 4-5 years; and b) limit the total deficit.
It also matters how you calculate debt. The current definition has come under intense scrutiny for undervaluing long-term government investment and assets, as well as unnecessarily including the debt of other public bodies.
There’s a lot of debate right now about these rules. For instance, the IFS points out the arbitrary nature of these targets and explains how they can be used for political gain. But as we’ll explain below, if limits on borrowing place excessive or poorly designed restraints on government spending, they can do far more harm than good. This could restrict investment and drive short-term cuts in government spending.
Baking a better future: the rationale for more investment
Let’s imagine I run a bakery that brings in £1 million a year in sales, but to get started I took out a loan to pay for the equipment and hire staff. Because I made some poor decisions in the past, it's now costing me £950,000 a year to pay back my debt and pay my operating costs. I might decide to put in place a ‘golden rule’ saying that whatever happens, the business is not allowed to borrow any more than we make in income as we will start losing money.
The problem is that to increase my income and expand my bakery business (e.g. open new branches) I need to borrow money, so this rule stops my business from being able to grow. One school of thought is that I could just cut costs by letting staff go and reduce the number of products I sell, and only start borrowing or investing again when I’m making enough profit.
The issue with this is that after a certain number of cuts, I start losing business. I only have one product left to sell, a stale loaf which no one wants to buy. The person behind the till is the one bakking the bread, so customers can’t get served. And because I’ve stopped spending cash on essential repairs, the toilets are now leaking into the kitchen. Naturally, I’m gobsmacked when customers stop coming to my bakery. And if the cost of rent or energy goes up unexpectedly but my income stays the same, I can fall into a negative debt spiral as there's no way I can start making more money to pay higher bills without investment.
If a government decides to use this kind of ‘golden rule’ to make savings quickly, it only has two main choices: a) cut welfare and services; or b) cut infrastructure spending (well, three really, as it could also raise taxes but let's leave that for another day). Cutting benefits or services makes many people poorer. They are less able to buy things, which affects the wider economy and can decrease the overall tax take (reducing government income further). Cutting back on infrastructure projects means private investors cut their spending too: for example, no one is going to open a new bakery in a cancelled housing development.
Another option for my bakery is to not borrow money to raise the salaries of my staff right now as we'd get into worse debt. But I should borrow to expand the business (infrastructure) as that means that I can get wider economies of scale (e.g. buying more flour at much cheaper prices, so I can make more profit per loaf) and attract more customers. Equally, I should borrow to fund a shiny new automated oven that produces 10x more bread for 50% of the cost of running the last oven. This puts my wider business on a better spring footing to service the debt. Over time, I will make more than enough to pay off my debt.
If a government does this, it unlocks private investment: a new train line to a shiny new town means that there is huge new demand for new coffee shops, supermarkets, banks, and most importantly of all, bakeries. Clever public investment can create more markets and customers for private companies too, which can be taxed to boost government income.

Let the dough grow: the sustainability of government borrowing
The bakery analogy is (hopefully) helpful to understand why it’s important to invest. However, the UK government has far stronger powers than individual businesses to create and borrow money (e.g. it can issue bonds). Unlike businesses and households, the UK government is a currency issuer, rather than a currency user, and so can never involuntarily default on its debt. This essentially guarantees interest and capital repayment to bond investors, which helps the government to borrow large sums of money at a low cost - the UK has never defaulted or delayed payment. And so, as evidence shows, a growing public debt is not on its own, a key factor influencing whether bond markets will lend to the government at a relatively cheap cost.
Instead, the ability of the government to borrow at low interest rates is mainly impacted by whether bond markets think that government policy might lead to inflation and increased interest rates. These two conditions can cause bond investors to leave the market which drives up the cost of government borrowing. Take the disastrous ‘mini-budget’ for instance. It was fear of inflation from unfunded tax cuts at a time of already high inflation and increasing interest rates, rather than concerns around growing debt per se, that ultimately proved to be its downfall.
This brings us to the difference between ‘good’ and ‘bad’ government debt. ‘Good’ debt entails a government borrowing within a sensible fiscal framework and strong strategy to deliver growth (thereby generating increased tax revenues), as well as keeping inflation under control, for instance, by helping to tackle supply-side pinch points. This is a far cry from the unfunded tax cuts in the mini-budget which gave little concrete assurance for how they would deliver growth or keep inflation in check - what we might call ‘bad’ government debt. Similarly, eyebrows might also be raised if borrowing focussed too heavily on day-to-day revenue spending with no plan for how that could generate more economic activity.
Best of both: the case for social housing investment
So where does social housing fit into all this? Well, investment in social housing is the epitome of ‘good’ government debt. Just like the bakery investing to grow, our modelling shows that building and managing 90,000 social rent homes would generate a total of £51.2 billion for the economy over 30 years through job creation, increased construction activity, and savings which include lower housing benefits bill and reducing strain on the NHS. Not only this, but the Exchequer would get its initial investment back in just over a decade.
It’s almost like investing in social housing is common sense! It’s time for the government to change the fiscal rules and fund a new generation of social homes.
This blog was co-written by Charles Trew and Sam Bloomer, Policy Officer.