As the coalition approaches the halfway point of the Parliament, Liberal Democrats are in search of policies that demonstrate their distinctive contribution to government – especially on the crucial issue of growth. Pre-conference briefing suggests that leading party figures see affordable house building as a leading option. They are right to do so. It would boost demand, create jobs, and meet a pressing social need. The Tories are focused on reforming the planning system, but evidence suggests this is a tough political sell. Efforts to finance house building through clever Treasury wheezes that try to circumvent borrowing constraints have so far underwhelmed. This suggests the need for a more fundamental rethinking of housing strategy, in particular the balance of public expenditure – especially given that further cuts to both Housing Benefit and housing capital are on the cards for the next spending review.

Housing policy has long been bedevilled by initiatives and short-termism because it has avoided a strategic problem built up over the last thirty years. Since the late 1970s there has been a steady but ultimately dramatic shift in public spending from building houses to subsidising rents. The drivers of this shift are complex but the result is simple: during the current spending review we will spend £95 billion on Housing Benefit and just £4.5 billion on capital grants to finance affordable house building. About 40 per cent of that benefit spend goes directly to private landlords, often at high prices, with no impact on housing supply. As housing output flatlines, fewer people are able to access homeownership (bringing them into scope for Housing Benefit) and more have to rely on the private rented sector (where rents, and benefit payments, are higher). This is seriously bad policy.

Part of the answer is to allow local councils with strong balance sheets to borrow against their housing assets to finance new affordable house building capable of generating a return. But we also need to drive a shift from current to capital spending over the medium term – reversing the shift from housing capital to housing benefit. In a recently published report, the Institute for Public Policy Research (IPPR) has suggested a way this could be done, by also embracing a radial localism. The centre-piece would be a long term strategy to decentralise power and responsibility for housing expenditure to local areas – perhaps local government – with a remit for meeting local housing need, including by increasing housing supply. This would be a bold strategy for Nick Clegg, Vince Cable and Danny Alexander to consider: creating the institutional conditions for a better use of public spending and a major act of devolution consistent with the best of Liberal traditions.

* Graeme Cooke is Associate Director at the Institute for Public Policy Research