Public & private: You can be too prudential

This Budget has severely tested the chancellor's reputation for prudence. The crux of Gordon Brown's prudential framework for public spending is the notion that government income and revenue spending should balance over the economic cycle; the only structural government borrowing should be for investment in capital programmes and, even then, total public sector debt should not exceed 40% of gross domestic product.

The European Union rules embedded in the Maastricht Treaty, which have been effectively abandoned, set a rigid 3% of GDP maximum deficit in government spending in any year and a limit on total government debt of 60% of GDP.

Brown's prudential rules have the advantage of being more flexible over the economic cycle, but are tied to a more stringent limit on overall debt. This is not just a question of setting a 40% rather than 60% limit; it is how the limit is defined. The EU limit is based on government debt; Brown's rules, on public sector debt.

The difference is that public sector debt includes the debt of government-owned trading bodies. The EU rules take into account government subsidies to trading bodies, but not the borrowing of those trading bodies.

This is of particular importance for council housing, because in European accounting conventions that have been adopted by the UK this is a trading function whose expenditure counts in the public corporate sector, not the government sector. So borrowing for investment in council housing counts against the Brown rules, but not the EU rules.

In the past 15 years, UK governments have promoted housing association investment, stock transfers and the private finance initiative as a means of removing housing investment from the public sector. This has taken a curious turn with the recent (disputed) EU ruling that associations should be considered part of the public sector for the purposes of EU procurement rules.

There are clear limits on the public funds likely to be made available for housing in the post-Budget spending round

That ruling, if upheld, will raise fundamental questions about social housing finance.

Meanwhile, unless there is an unexpected willingness in Whitehall to contemplate further tax rises, the growth in public spending of recent years will need to be restrained to ensure the prudential rules continue to be observed.

The Institute for Public Policy Research has suggested that this could be bad news for housing, given the government's priority commitments to health and education and its nervousness about pensioners campaigning against council tax rises. But in the past two years the Treasury has taken an unprecedented interest in housing policy and its role in assisting or hindering economic growth.

Even if the IPPR predictions turn out to be overly pessimistic, there are clear limits to the public funds likely to be made available for housing in the spending round that will follow the Budget. There cannot be funding both for a serious step change in the provision for new affordable housing and increased funding to achieve the decent homes target for housing that remains council owned and managed.