Councils that have not used their full borrowing entitlement could be allowed to transfer the money to others to build new homes under proposals by the Liberal Democrat leadership.
The move could see authorities which did not need extra construction in their area sealing deals to allow cash-strapped councils to build homes in exchange for taking on responsibility for some of their housing waiting list.
The measure, which could result in between 15,000 and 25,000 council homes being constructed, forms part of a strategy aimed at boosting jobs and growth.
Business Secretary Vince Cable called for a “surge of housebuilding of the kind that lifted Britain out of the inter-war slump” and insisted the coalition Government had “made some real progress” at the Social Liberal Forum on Saturday.
There is an estimated £2.8 billion of headroom in councils' total ability to borrow, and allowing authorities with spare capacity to pool that with areas which had reached their limit but were eager to build would make a “modest” impact on the housing shortage without increasing overall public debt.
Mr Cable blamed the Lib Dems' Conservative coalition colleagues for blocking efforts to unlock this finance.
“Councils which want to borrow and build should be allowed to use unused borrowing limits from councils which didn't wish to utilise theirs. Lib Dem councils are pushing this idea and the party leadership will endorse it at party conference.
”What is stopping them? Frankly, Tory dogma. And the Tories are hiding behind Treasury methodology, saying that more borrowing by councils beyond permitted limits will break the fixed rules.
“So even though freeing up this borrowing space would result in tens of thousands more homes being built, and many times more jobs, they would rather start talking about the cuts they want to make, rather than the houses that we should build. That is the difference between Lib Dems and Tories on this matter.”
A senior Lib Dem source set out how councils would “trade” for extra borrowing capacity, with bargaining points potentially including housing waiting lists and social care services.
The source said: “What you would hope is councils would effectively trade with each other, you say 'you can take on some of our headroom'. What's in it for the other council? Perhaps they would be able to trade some of their social housing waiting list.
The policy could result in people being offered homes in areas many miles away built with the aid of their local council's borrowing capacity, but Lib Dem aides stressed that without the trade no houses would be built in either area.
Mr Clegg, Mr Cable and other senior ministers including Treasury Chief Secretary Danny Alexander have tabled a motion at the Lib Dem conference calling for “a bold and imaginative economic strategy to stimulate jobs, growth and investment” within current fiscal restrictions.
With less than two years left of the coalition Government, the Lib Dem leadership believes the motion will help set out the party's priorities for the remainder of this Parliament and illustrate to voters the differences between them and their Tory partners.
In a message to activists Mr Clegg said: “You are rightly looking to me, Vince and Danny to give the party strong sense of purpose and direction on the economy. So the three of us have come together over the past few months to discuss the economic choices ahead with our parliamentary colleagues, with our councillors, with our members and with our supporters.
“We are putting a motion to our party conference that will move us beyond the sterile Plan A versus Plan B debate and on to distinct liberal territory.
“Not abandoning for a moment our commitment to fiscal discipline. But not wavering either, in our determination to find new ways to support growth and jobs.”
Other measures in the motion which will be voted on at the conference in Glasgow include a call for “radical action to tackle stubbornly high youth unemployment” by developing a strategy for young people aged 16-24.
The motion also calls on ministers to examine whether the liabilities of council housing operations could be taken off the balance sheet, potentially providing a further boost to housebuilding.
The motion calls for the Business Bank to be expanded to boost lending, for the continued state ownership of RBS to be used to increase support for firms and the Green Investment Bank to be made a fully independent institution that can borrow without impacting on Government fiscal totals.
Additional reporting by PA
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