By Daniel Hunter

The Chancellor could deliver a 0.6 per cent boost to GDP by allowing councils to invest in a housebuilding programme which would create up to 60,000 new homes.

Local authority leaders, through the Local Government Association (LGA), are urging the Treasury to use this month's Budget to free councils to invest in housing on a scale not seen since the early 1990s.

Research has shown that removing a Government-imposed housing borrowing cap — which means councils are more restricted on investment in housing than other areas — would help tackle the housing shortage, create jobs and inject growth into the economy.

Market analysis has shown that the investment would be very low-risk and paid many times over by future rents on new homes

The House of Lords will today, Tuesday, discuss a LGA-backed amendment to remove the cap as part of the Growth and Infrastructure Bill.

Last year 118,900 new homes were built in England. It is estimated that more than twice as many each year are needed to keep up with demand.

English local authorities have more than quadrupled the number of new houses they built over the past three years — up from 370 in 2009/10 to 1,890 in 2011/12. The increase has, in part, been driven by councils being put back in charge of their own housing finances.

However, the full scale of local authorities' house building ambitions are being held back by a Government-imposed cap on the amount each council can borrow to invest in housing

The LGA, speaking on behalf of 370 councils in England and Wales, is calling for the Chancellor to scrap the cap and instead let prudential borrowing rules regulate councils' housing investment. Sensible borrowing within these rules would enable councils to fund the construction of up to 60,000 homes over the next five years.

Previous research, commissioned by a coalition of housing organisations including the LGA, found that investing in 60,000 new homes would add 0.6 per cent to GDP. The addition of tens of thousands of properties with cheaper rents would also help drive down the benefit bill

"If Government is serious about building new homes, it should unlock the potential and willingness of councils to play their part in tackling the housing shortage," Cllr Mike Jones, Chairman of the LGA's Environment and Housing Board, said.

"Many of Government's recent attempts to breathe life into the struggling housebuilding industry have failed to recognise that the main obstacle to a recovery hasn't been a lack of willingness, but a lack of money.

"Councils are eager to kick-start the housing market into action by using their assets and good credit ratings to invest, but are being prevented from doing so by an arbitrary cap. Given the pressing need for more housing and the relative safety of the investment, it makes no sense for Government to place this extra restriction on local authorities.

"The country desperately needs more housing, developers need investment and our flatlining economy is in urgent needs of a shot in the arm. The Chancellor could deliver all three by using his Budget to give councils the financial autonomy to embark on an ambitious house building programme.

"A 0.6 per cent boost to GDP could make the difference between growth and recession."

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