What the Treasury wants

since 1997, treasury spending reviews have approved significant real funding increases for housing. By 2005-6, it will have more than doubled the real level of public investment in housing compared with 1997-8. That money has been accompanied by significant policy and structural reforms.

So, why the extra money for housing? Is the Treasury going soft? To find the answer, one must understand how housing policy and delivery can contribute to and be influenced by the Treasury's aims.

Housing, and the way we subsidise it, contributes to four objectives in particular:

• maintaining a stable macroeconomic framework with low inflation

• expanding economic and employment opportunities for all

• promoting a fair and efficient tax and benefits system with incentives to work, save and invest

• improving the quality and the cost-effectiveness of public services.

Since 1960, the UK has invested a lower proportion of its national income in housing than any other European Union country. Now we are feeling the consequences. Housebuilding is down to levels last seen in the 1920s and the UK has one of the strongest trends in real house prices in Europe. That upward trend in house prices has made the desire to get on the housing ladder even stronger. Owner-occupation is now the tenure of choice and a source of financial saving. This has profound economic implications, nationally and regionally. Our financial markets allow households to borrow on their housing gains – a factor that has helped sustain the UK economy in the global slowdown. This equity withdrawal creates a strong link between housing, consumption and the wider economy.

Yet our high level of mortgage debt is also much more reliant on variable interest rates. Other countries tend to have a greater proportion of debt at fixed rates. This greater exposure to variable rates contributes to the volatility of the UK housing market, and adds a potential volatility to the wider economy.

Access to housing affects individuals' ability to take better jobs when they come up, and its quality affects health and educational outcomes that will in turn influence future employment prospects. This means building more homes and improving the condition of the housing we have. The Treasury wants a flexible housing market that enhances opportunities.

The tax and benefit system influences the structure and operation of the housing market. Taxation can promote one tenure over another or influence investment, and policy is kept under regular review. The efficiency of the benefits system affects tenants and landlords and the Treasury is keen to see sustained improvements in delivery. We also want to change the balance of incentives to give tenants greater choice.

Social housing is a core area on which the government will be judged. It will be crucial that the sector is seen to learn from the best and improve

Reform of housing benefit will see the introduction of a flat rate and the move away from paying benefits direct to landlords. Rent restructuring and choice-based lettings are important elements in this.

Giving tenants more choice comes at a price of more uncertainty and risk for landlords. Their best defence will be to deliver excellent, customer-focused services. Social housing is a core area of public service delivery on which the government will be judged. It will be crucial, given the turnaround in investment, that the sector is seen to learn from the best and improve.

The global slowdown means the 2004 spending review will focus very hard on ensuring that taxpayers' cash is used as effectively as possible. The sector will have to demonstrate its resourcefulness in making that investment count.

The Treasury values the contribution the sector can make both directly and indirectly to many government priorities, and that is reflected both in terms of its support for investment and also our close and continuing interest in housing policy.

The chancellor asked economist Kate Barker to review the issues affecting housing supply in the UK – in particular the role of competition, capacity and finance of the housebuilding industry, possible fiscal instruments and the interaction of these with the planning system and sustainable development objectives. He also asked professor David Miles to review the supply and demand factors limiting the development of the UK fixed-rate mortgage market. Both reviews will publish interim reports this autumn. Final reports and recommendations from these reviews will be published in time to inform the next Budget.