It is key to any recovery from Britain's economic disaster. It would reduce spending on social security. It would create the sort of middle-income skilled jobs that have been sucked out of our economy. It would ease pressures on families, and help stop communities turning in on themselves. It would be good for the health, education and future prospects of our nation's children.

It may sound like a call for a miracle, or fantasy-land politics. But so many of our crippling social crises could be tackled with one bold but absurdly common sense idea: a council housebuilding programme. Labour should be screeching it at the top of its collective lungs; instead, other than a few vague rhetorical nods about affordable housing, it remains far from Opposition policy.

When the right tries to skewer Ed Miliband over Britain's welfare state bill, I find myself awaiting a clear, obvious response: "Taxpayers have every right to be furious at £23bn being wasted every single year on housing benefit. But it's not lining the pockets of tenants; it's increasingly subsidising landlords who charge rip-off rents knowing that you and I the taxpayer will step in and pay up. Instead, we will let local councils build housing, create jobs, stimulate the economy, and bring down the billions we spend subsidising landlords." It never comes.

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Britain is in the midst of an ever more socially destructive housing crisis. There are up to five million people stuck on social housing waiting lists. It was one of New Labour's most unforgivable domestic failures. When I asked Hazel Blears before the last general election why it had not been addressed, she said no-one was interested in housing. That's what happens when you squeeze working-class people out of the political system.

We should be building at least 230,000 homes a year to meet need; we're struggling to pull off even half that number. According to the Institute for Public Policy Research, if house-building continues at its current level, by 2025 England will build 750,000 fewer homes than are needed. A survey for Shelter last year found that nearly one in 10 people aged between 20 and 40 was forced to live with their parents for financial reasons. There are a million children living in overcrowded conditions; in London, it's an appalling one in four. Even more scandalously, the number of homeless families put up in bed and breakfasts rose by nearly half between 2011 and 2012.

As paypackets fall in real terms while energy and food bills soar, families are struggling to meet sometimes extortionate housing costs. Private rents jumped by 5.4 per cent in outer London last year; in Wales and the east of England, the increase was even higher. More than a million families have to privately rent, a number that has doubled in five years. No wonder, then, that the housing benefit bill has leapt by £2bn since the Cameron-Clegg love-in began. Indeed, most new claimants are in working households, with wages that cannot cover outrageous rents.

Britain's housing nightmare fuels a myriad of other social crises. Communities are left with sour divisions, as those who feel forced to compete for what remains of council housing end up resenting immigrants, or the supposedly "less deserving". The lives of children are disrupted by having to constantly move because of insecure tenancies. Their educational attainment and health are damaged by bad housing: there is up to a 25 per cent higher risk of severe ill-health and disability.

How did we end up in this mess? In the early 1950s – and under a Tory government – local authorities were building 200,000 homes a year. But large chunks of our stock was sold off by right-to-buy and never replaced, an act of pure social vandalism. By the mid-1980s, just 20,000 new council houses were being built and – from the 1990s on – it was all but non-existent. The market failed to fill the vacuum: even the private sector is building half as much as it did in the statist 1960s.

Here's what we have to do. Local authorities currently have a tight borrowing cap on them imposed by the Treasury. It urgently needs to be lifted, allowing them to build a new generation of high-quality homes that families can afford to live in. It's not like borrowing for, say, housing benefit or cutting taxes: it pays for itself as councils gain a new income stream from rents. Indeed, just by falling into line with the borrowing rules of other Western nations, Britain would have an extra £20bn to throw at housing. Even that notorious lefty, Philippa Roe, the Conservative leader of Westminster council, has backed the idea.

It would create desperately needed jobs, too. There are now over 6.5 million people looking for full-time work that is just not there. Middle-income, skilled jobs have been trashed since the 1980s, leaving us with an "hourglass economy" of middle-class professional jobs at the top, and low-paid, insecure, often poorly regarded service sector jobs at the bottom. A council house-building programme would create jobs, not just in construction, but in a whole range of other industries. Taking people from the dole queue not only brings down social security spending; it means you have workers with money to spend, injecting demand into our shattered economy.

It's too much common sense for those wedded to lunatic right-wing economics, of course. In March, the House of Lords threw out an effort to lift the cap, and George Osborne – whose self-defeating austerity will add up to £200bn more debt than projected over the course of this parliament – wheeled out his usual mantra about borrowing not being the solution to the deficit. His own housing measures, unveiled in March's Budget, seem almost designed to create another housing bubble.

We need to control spiralling private rents, too. But Labour must surely start by arguing for "bricks, not benefits". Lift this cap imposed by central Government, and let councils serve the housing needs of their local communities. Take thousands out of unemployment, and undermine the resentment the likes of Ukip feed off. Build strong, mixed communities, supporting children who can flourish. Here Labour can find the cornerstone of a genuine alternative to the misery of austerity. Whether Ed Miliband has the courage to embrace it remains to be seen.